The Discovery-WarnerMedia union has been touted as yet another confirmation that the TV industry is rapidly moving toward full-streaming distribution. But some analysts see the merger as benefiting the companies’ respective linear networks most, at least initially.
WarnerMedia parent AT&T will receive $43 billion in cash and debt securities in exchange for contributing its content assets to an as-yet-unnamed spinoff, which will also include Discovery’s programming businesses. The combined entity would seem to have both feet planted firmly in the linear and streaming TV camps, combining iconic networks like CNN, TBS, TNT, HGTV and Food Network with streaming assets HBO Max and Discovery Plus.
While a lot of the hype surrounding the merger focused on the streaming aspects -- Discovery Plus has about 15 million customers and HBO Max has about 20 million -- some analysts see the deal as more of a boon for the old school cable networks.
“Isn't it ironic that once again, just like with Disney/Fox, in pursuit of trying to create a collection of assets formidable enough to successfully compete in the streaming future, we find two companies mainly combining linear TV networks?” Bernstein media analyst Todd Juenger noted. “This combination wouldn't result in a much bigger streaming business. It would result in a much bigger linear TV business.”
Discovery’s 19 linear networks -- including Discovery Channel, OWN, Animal Planet, HGTV, Food and Investigation Discovery -- generated about $2.9 billion last year in affiliate fees. WarnerMedia’s Turner Networks -- including HBO, TBS, TNT, CNN, TCM and Cartoon Network -- don’t break out affiliate fee revenue, but Kagan, a unit of S&P Global Market Intelligence, estimated they were about $5.9 billion in 2020. Those numbers are likely to rise significantly.
“The Discovery networks are unique in that their group of 19 networks generate more revenue from advertising than subscription fees,” Kagan analyst Scott Robson said in an e-mail message. “By combining with WarnerMedia those networks have the opportunity to leverage scale to negotiate higher license fees. The newly formed company will still not have a major broadcast network in the mix which has helped the Disney, Fox and NBCU cable nets negotiate more favorable carriage deals, but the added scale is positive for the affiliate revenue outlook for Discovery and WarnerMedia.”
In a research note, MoffettNathanson media analyst Michael Nathanson wrote that Discovery has historically had difficulty monetizing its networks correctly -- its programming accounts for 16% of viewership but just 6% of affiliate revenue. WarnerMedia has fared better -- 12% of viewership and 14% of total fees, according to Nathanson. Together, the analyst estimated the channels would attract 29% of viewership and 20% of affiliate fees.
“No other company will have as much national viewing share as Discovery/WarnerMedia which should give them greater leverage to drive affiliate fees in negotiations with distributors going forward,” Nathanson wrote.
For WarnerMedia, the chance to grow its international presence is a big motivator. According to Nathanson, Discovery generates about $2 billion in international affiliate fees annually, while Turner captures about $900 million. Together they would generate at least $2.9 billion. Tack on an estimated $2.1 billion in international ad revenue ($1.6 billion from Discovery and $500 million from WarnerMedia) and the international take rises to $5 billion, the same level that Disney generates outside of the U.S., according to the analyst.
The deal also should help Discovery capture a greater slice of the domestic linear TV ad market. According to Nathanson, Discovery had one of the lowest CPMs, or cost per thousand impressions, in the industry in 2019 (around $2.68) while Turner had the highest at more than $4. The ability to negotiate ad deals with Turner, which also has a heavy sports programming component, should help Discovery get higher CPMs for its channels.
On the downside, continued cord-cutting could depress the total revenue from linear affiliate fees, and its streaming offerings could lead to some cannibalization. But Discovery’s experience in selling targeted ads via its streaming offering -- Nathanson estimated Discovery Plus gets more than three times the CPMs its linear networks receive -- should benefit HBO Max, particularly as it intends to release an ad-supported version in June.
Discovery shares were trading at about $33.70 each in afternoon trading Tuesday, down 11 cents each, a day after the deal was unveiled. AT&T shares were taking a bigger hit: they were down by 5% each ($1.82) to $29.56 each in afternoon trading.
Other programmers saw gains as speculation continued to swirl that other companies would follow Discovery-WarnerMedia’s lead, possibly further consolidating the content business. ViacomCBS was up 4.8% ($1.75) to $40.15; AMC Networks was up about 2% (72 cents) to $48.25; Fox was up 2% (66 cents) to $37.43; and Comcast (parent of NBCUniversal) and Disney were about even at $55.42 and $170.68, respectively, on Tuesday afternoon.
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