WarnerMedia and Discovery Mega-Deal Leaves Rival Studios Scrambling to Get Bigger

WarnerMedia Discovery AT&T Merger
Cheyne Gateley for Variety

Bankers are already starting to salivate over what other megadeals could be in the offing following this week’s surprise pair-up of WarnerMedia and Discovery.

AT&T’s desperation to drop a company that it spent $85.4 billion and a year and half in legal fights to acquire raises the immediate question of what else might be possible in an era when Wall Street is pressuring big media conglomerates to keep generating content for audiences hungry to stream their favorite dramas and comedies.

Sure, smaller entertainment companies like Lionsgate and AMC Networks have long been seen as potential acquisition targets — and Amazon just offered a reported $9 billion to buy MGM for its vast library — but financial minds are starting to indulge their greatest scenarios. What if Apple swooped in and picked up a big media name? Do NBCUniversal and ViacomCBS need to add more heft even though they are both products of sizable mergers?

“We believe that NBC Universal and ViacomCBS are now at an even greater disadvantage in the sector, as they are stuck in no-man’s land without the domestic scale and international roadmap to keep up with the now-‘Big Four’ streaming companies,” said Michael Nathanson, a media-industry analyst, in a May 18 research note.

More activity seems probable. Comcast is said to have at least explored the idea of pairing up with WarnerMedia at some point in the recent past, according to people familiar with the matter. It is not inconceivable that the cable giant would jump into the fray and make a competing bid for WarnerMedia, some insiders are speculating. Comcast declined to make executives available for comment.

One thing seems clear: No one can ignore any potential step for growth. “Netflix is so far ahead of the game and so far ahead on the spending that it’s like the anchor tenant,” says Schuyler Moore, an entertainment industry lawyer with Greenberg Glusker. “All the rest are add-ons. The problem is that most customers only want to buy a second or a third premium channel.”

The critical need for content is what drove AT&T to part ways with a company it once considered a new jewel in its crown. “Five years from now people will be consuming more premium content than they are now, not less,” said former AT&T chief Randall Stephenson while speaking to investors in 2018. “The demand seems insatiable.”

But in the end, noted Stephenson’s successor John Stankey in announcing the WarnerMedia spinoff, that proved overwhelming. “We’re now at that point where that scale is growing pretty rapidly, and the capital demands associated with that, and the content demands to get the right kind of differentiated offer in these markets will increase and be more competitive,” Stankey explained this week while describing his rationale for shedding WarnerMedia. Keeping the company, he explained, would also mean having less capital available to move AT&T forward in telecom frontiers like 5G and fiber.

“It was a failed experiment,” says Hal Vogel, a media-industry analyst. “It was ill-conceived right from the start. If you do an acquisition of this size and importance, it has to be a high-growth vehicle. This one took AT&T too far afield from its area of competence, and it forced the company to stretch the balance sheet to the point where it imperiled its core business.”

WarnerMedia has been here before. As Time Warner, the company merged with internet wunderkind AOL in 2001, but quickly had to grapple with an advertising downturn that affected the new-tech portion of the business. By the middle of 2003, Time Warner dropped the “AOL” from its name. “WarnerMedia, or Time Warner, or whatever you want to call it, has been involved with two of the worst business decisions in the history of modern American communication,” says Peter Newman, the head of the MBA/MFA program at Tisch School of the Arts at New York University.

AT&T’s decision to part ways with WarnerMedia doesn’t elim­inate the entertainment compa­ny’s challenges. Staffers are said to be exhausted by the tumult of the past five years, a period that has seen them endure the 2016 announcement of the sale to AT&T followed by a long reg­ulatory slog that didn’t end until the deal was approved in 2018. AT&T’s management of the com­pany has been marked by layoffs and forced departures of respec­ted senior executives including former HBO chief Richard Plepler, former Turner president David Levy and former ad sales chief Donna Speciale. There have also been rounds of succession in the top ranks and, of course, the debilitating effects of the corona­virus pandemic.

Discovery CEO David Zaslav, who will have operational control of a combined WarnerMedia and Discovery, won’t be able to put his mark on the company imme­diately. The new deal won’t close until the middle of 2022, leav­ing WarnerMedia “kind of frozen for at minimum a year,” says Brian Wieser, global president of busi­ness intelligence at GroupM, the large media-­buying firm. That could leave WarnerMedia faced with skeptical filmmakers and showrunners who may be skit­tish to set up projects until they know what the new owners have planned. The future of War­nerMedia’s current CEO, Jason Kilar, appears bleak. He was not named to a role in the new com­bined organization and is be­lieved to be seeking an exit after he was given very little advance notice about AT&T’s plans.

Some of WarnerMedia’s primary relationships have already been frayed. Hollywood execu­tives were less than thrilled when current leadership, under Kilar, opted to ship Warner Bros.’ en­tire theatrical film slate to HBO Max for simultaneous release, without first consulting directors and producers. And after the WarnerMedia­Discovery deal is completed, the new company will be saddled with $55 billion in debt, which could place pressure on its ability to operate.

By the middle of next year, in his role atop WarnerMedia and Discovery, Zaslav will have the chance to compete more directly with similar giants like Netflix, Walt Disney and Comcast. “We want our company to be the place” for creative storytell­ers, Zaslav said May 17 in announc­ing the new agreement. “If we are successful with that, the free cash flow is going to grow.”

Rivals may have some time to consider their options. NBCUni­versal and ViacomCBS, for exam­ple, get a year to see if they can generate the subscriber base their new streaming venues, Pea­cock and Paramount Plus, need to thrive. ViacomCBS recently raised $2.7 billion in capital it intends to deploy into content ventures. Ex­ecutives from NBCUniversal and ViacomCBS declined to comment.

Both companies are said to believe a proposed merger with WarnerMedia would spark a long quest for uncertain regulatory approval that would crimp their ability to maneuver in a critical moment. Comcast is believed to find the Discovery media outlets, focused on reality, documentaries and nonfiction programming, to be an awkward fit. NBCU has in recent years shut down cable net­ works like Esquire, Cloo and Style that relied on similar concepts.

The need for size and scale could prompt even reluctant executives to change their think­ing. The average American wal­let isn’t going to expand to give families the wherewithal to pay for two handfuls of streaming subscriptions. So each streamer needs to take the biggest swing possible to keep subscribers. “The streaming wars have to sort themselves out,” says Vogel. “In three years or so, when this all shakes out, not everyone will have survived this.”