What Warner Bros. Games Must Get Right Under WBD

Photo illustration of a video game
Illustration: VIP+: Adobe Stock

Warner Bros. Discovery’s second-quarter earnings call last week was one of the more significant events of the overall earnings season.

A spate of dramatic strategic changes at HBO Max that included the shelving of Max original film “Batgirl” preceded the call and were justified by WBD CEO David Zaslav as the best way to reverse the prior streaming strategy under WarnerMedia management as WBD aims to combine HBO Max with Discovery+ in 2023 and decreases its massive inherited debt.

With significant layoffs expected at the company amid aggressive goals to hit 130 million streaming subscribers and $1 billion in profits by 2025, what does this mean for Warner Bros. Games?

Per WBD’s earnings, the division’s outlook looks good — at least in the short term.

While WBD’s earnings release cited higher game development costs as one contributor to the year-over-year 4% increase in combined operating expenses for the studios segment in Q2, games were also listed as “a strong contributor” to the 3% increase in in combined content revenue, mainly due to the release of “LEGO Star Wars: The Skywalker Saga.”

WBD did show a loss in operating income for the overall quarter, but direct-to-consumer operations remain the main cause for the loss as opposed to studios, in which WB Games is nested under.

For now, dramatic changes in WBD’s strategy are very clearly needed on the streaming end, while studio output is best kept oriented around the strong IP Warner Bros. commands. With Zaslav highlighting the importance of such IP being distributed in a more traditional manner (i.e. not on streaming), Warner Bros. Games’ near-unanimous focus on the same IP means the publisher is already in alignment with Zaslav’s current vision.

Because Warner Bros.’ direct competitors are only in gaming from a pure licensing standpoint, maintaining an active suite of development studios is certainly risky for a company whose principal focus is not games, which obviously isn’t the case for Sony and its PlayStation brand.

However, WB Games is on the verge of a fruitful period of releases tied to strong IP following a tumultuous year of delays for games like “Suicide Squad: Kill the Justice League” and “MultiVersus,” plus alterations to the release strategy for October’s “Gotham Knights,” which dropped plans for last-gen PlayStation and Xbox versions to focus solely on the console brands’ newer systems and PC.

Quarterly revenue for WB Games has been trending downward year-over-year amid a slower pipeline of major releases, though “Back 4 Blood,” a spiritual sequel to the popular “Left 4 Dead” games, helped deliver a fourth quarter in 2021 that surpassed $600 million in revenue, a better outcome than what had been seen in years for the earnings category housing WB Games revenue.

All eyes are now on “Hogwarts Legacy” to deliver an even better holiday quarter than last year. Set in the “Harry Potter” universe, the game serves as a prequel to the timelines of both the main “Harry Potter” film series and its own prequel series, “Fantastic Beasts.”

The game’s showcase earlier in 2022 was met with positive reception, offering another chance for “Harry Potter” to maintain relevance after the third “Fantastic Beasts” was met with more muted box office gross and critical reception than prior films received.

The public image of franchise creator J.K. Rowling, who has been embroiled in controversy for years now over frequent transphobic remarks that earned the author a shout-out in Dave Chappelle’s much-maligned Netflix special “The Closer,” remains an ongoing issue for the “Harry Potter” franchise as well. An official league of real-life Quidditch players elected to rename the Potter-themed sport to “Quadball” as a means of building distance from the game’s originator and to also open up the opportunity for sponsorships and other expansions, as "Quidditch" is trademarked by Warner Bros.

This puts all the pressure on “Hogwarts Legacy” to sell well off the strength of its gameplay and ability to immerse fans into the universe further than Universal Studios’ theme parks have managed.

A 2020 report that Microsoft was interested in acquiring WB Games never led to a deal, and more recent rumors that a sale of the gaming unit was again being entertained have yet to materialize into anything substantial amid a hectic year for M&A in the gaming space.

Sony has seen great success from PlayStation’s exclusive “Spider-Man” games and is continuing to license IP via “Marvel’s Wolverine,” so it’s not difficult to imagine why an entity would be interested in nabbing studios that specialize in DC Entertainment IP, but the immediate concern for any buyer would be what WBD expects in licensing fees.

If Zaslav wants to get Warner Bros. firing on all cylinders when it comes to its IP to better counteract the hole that streaming spend bore into the company’s financials, then it seems clear WB Games must remain part of that goal in the company’s near-term future by delivering sales strong enough to keep key properties front-of-mind and justify increased development costs.

Otherwise, a licensing pivot awaits.