Two major entertainment companies soon will combine forces to better compete with Netflix, Walt Disney and Amazon in the high-stakes, direct-to-consumer streaming video market. AT&T's WarnerMedia division and Discovery are merging to form Warner Bros. Discovery, which will trade as WBD stock.
Warner Bros. Discovery is expected to start trading early in the second quarter, likely in April. AT&T shareholders will own 71% of the new company and Discovery shareholders will own 29%.
The new company will include streaming video services HBO Max, Discovery+ and CNN+. But it also will have a host of legacy pay-TV channels and production studios. Included are such brands as HBO, Warner Bros., Discovery, DC Comics, CNN, Cartoon Network, HGTV, Food Network, TNT, TBS, Eurosport, Magnolia, TLC and Animal Planet.
With all those assets under one roof, investors are wondering if Warner Bros. Discovery will be a giant in streaming video. And if so, will WBD stock benefit?
Possible Streaming Video Powerhouse
"It creates a potential powerhouse," Phillip Swann, editor and publisher of TVAnswerMan.com, told Investor's Business Daily. "And it very well might lead to another joining in the industry."
Swann predicts more consolidation ahead in the streaming video business. He thinks Netflix could potentially hook up with Disney.
"The competition right now is fierce, not just in the United States but around the world," Swann said.
HBO Max had 73.8 million global subscribers at the end of 2021, making it the third-biggest streaming service overall. Netflix leads with 221.8 million subscribers, followed by Disney+ at 129.8 million.
Discovery+ had 22 million worldwide customers at the end of last year. And news-focused CNN+ just launched on March 29.
Meanwhile, Amazon Prime has more than 200 million subscribers worldwide. But many of those customers signed up for perks other than the Prime Video service, such as free shipping from the e-commerce firm.
Other competitors in the streaming video market include Disney-controlled Hulu, Comcast-owned Peacock, Paramount Global service Paramount+ and Apple's Apple TV+.
Tough Sledding Ahead For Warner Bros. Discovery
Analysts say Warner Bros. Discovery will face major challenges right from the get-go.
For starters, the company will begin with a heavy debt load. The new firm will have about $58 billion in gross debt at the time of the merger. It must pay down that debt while also funding content to keep up with streaming video rivals, Morgan Stanley analyst Benjamin Swinburne said in a recent note to clients.
Warner Bros. Discovery also is trying to pivot from its linear TV channel business to a direct-to-consumer streaming video business. But with pay-TV services like cable and satellite losing subscribers, WBD faces a reduced cash flow from those legacy operations.
In mid-March, Discovery Chief Financial Officer Gunnar Wiedenfels said the new company plans to combine its Discovery+ and HBO Max services into one service. Wiedenfels is set to become the CFO of Warner Bros. Discovery.
"We believe in a combined product as opposed to a bundle," Wiedenfels said at Deutsche Bank's Media, Internet & Telecom Conference. "The breadth and depth of this content offering is going to be a phenomenal consumer value proposition."
The combination of the two services is likely to happen within months of the merger, Wiedenfels said.
Surprising Decision Called Bold Move
He added the united service will be a more broadly appealing consumer product, with HBO Max's more "male skewing" scripted series complementing Discovery's reality shows, with their heavily female viewership.
Alan Wolk, lead analyst at TVRev, said the disclosure of a combined service was unexpected.
"It was a move that took most of the industry by surprise, as the assumption was that Discovery would create a Disney-like bundle out of the two services and CNN+," he said in a newsletter.
Swann called the combination of Discovery+ and HBO Max "a pure power play by the managements of both companies."
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
