Breaking Down The Discovery-Warner Deal: Winner, Losers, Pros and Cons

Probably the most surprising thing about the Discovery-Warner merger is that it didn’t seem obvious to more people. Though that’s often the way it is with genius ideas, they’re so simple you can’t believe no one had actually thought of them before.

What Dave Zaslav has created out of Randall Stephenson’s mess is an entity that is likely to be one of the two or three services on viewer's must-have lists along with Disney and Netflix. 

And that's internationally. Not just in the U.S.

One key piece that’s been overlooked is that the new service will have CNN. AT&T had been trying to unload CNN and so hadn’t really done much with it in terms of streaming, other than throw some documentaries onto Max.

But news, or access to it, is one of the key reasons why viewers are still clinging to their pay TV subscriptions. If “DiscoWarner” as my friend Sahil Patel dubbed it, has CNN’s live feed as part of its offering, then I suspect many more people will feel good about giving up their pay TV subscription in favor of a couple of Flixes and all the FASTs they can handle.

Another piece that is commonly underestimated, especially by people in the industry, is the appeal of Discovery’s programming, the HGTV shows in particular. 

One easy barometer is the frequency with which they now show up in places where the news is considered too controversial--doctor’s waiting rooms, pizza parlors, gyms. 

Another is their longevity. My son is graduating from college this week, yet I remember that back when he was a baby and I’d have to get up in the middle of the night, I used to watch House Hunters to get myself back to sleep. The show, which is still on the air, was not new back then either.

Not only do people love HGTV shows and their stars, but those stars are able to spin their fame out to retail endeavors, whether it’s branded sauces or branded towels, which gives the new service yet another revenue stream.

There’s also the cost factor: at just $4 or $7/month, Discovery+ was an easy add on for many people, especially given that no one else was successfully producing this type of programming and so there was no alternative. 

It was also successful from a financial POV too—earlier last week Zaslav told the MoffettNathanson conference that Discovery’s ARPU from DIscovery+ was higher than it was from cable, and that they’d only need 650K Discovery+ subscribers to replace each million cable subscribers they lost.

Discovery programming offers an excellent illustration of a somewhat logical suggestion I’ve heard from a number of people in the industry over the years--the advertising that runs on a show should feel like it's a part of the show, to the point where showrunners should be able to specify the brands or type of brands they wanted as advertisers so it all feels relatively seamless.

That actually happens on Discovery, where home and garden brands make up the bulk of advertisers on HGTV’s home improvement shows. The theory is correct too--it all really does feel seamless, though I’m not sure that experience could be recreated outside of well defined categories like food and home improvement.

There’s also the sheer volume of it--the HGTV and Food Network shows are relatively cheap to produce and can be cranked out at high volume, a marked contract the the 10 or 12 episode dramas that are so popular on Netflix. Which is why Discovery's upfront pitch this year is focused on the volume of original programming it has on offer.

One more giant plus that Discovery and Warner have going for them, is that both have a strong international presence, Warner through HBO and CNN and Discovery through prescient early investments in overseas markets and a European portfolio that includes Eurosport. Discovery has a great advantage overseas in that many of their science and nature shows don't feature on-camera talent, and thus dubbing a documentary about sea anemones into Romanian can make it seem like local programming, rather than American.

So if Discovery is the winner here, who are the losers?

ViacomCBS and NBCU, to begin with, both of which had been mentioned as possible merger candidates, VCBS for Discovery and NBCU for Warner. Now both are stuck in the second tier of Flixes, not quite big enough or international enough to take on Netflix, Disney and DiscoWarner, and so trapped in a netherland of sorts.

Both could be rescued by the one player people tend to forget about: Apple. 

Apple is sitting on over $250 billion in cash and has all the pieces for a great streaming service in place, but at present, Apple TV looks like one of those trendy SoHo boutiques with nothing but six white linen blouses artfully arrayed on a single metal rod. Meaning once you’ve watched Ted Lasso, there’s not much else there.

Of the two, ViacomCBS seems to be better suited for Apple. The Tiffany Network of yore still has the sort of class that Apple gravitates to, plus it has a wide array of popular programming, including the entire MTV, VH1, BET, Comedy Central and Nickelodeon catalogs, along with Showtime, all of which gives it an edge over NBCU in terms of quality, breadth and general desirability.

Another potential loser is Netflix itself.

As all of the networks pull their content out, Netflix is left with less and less unique programming in its library. Yes, it’s cranking out originals as fast as it can, but for every Bridgerton, there are a half dozen shows that slip through the cracks and while Netflix is trying to expand the audience for its shows by hiring more mainstream-focused talent like Shonda Rhymes and Ryan Murphy, it still has a reputation for producing the sorts of shows that appeal to the educated coastal HBO audience.

Which brings up another issue: HBO Max has been struggling to create an identity for itself separate from HBO, and the Discovery deal makes it easy for them to do so. That’s critical because while in its heyday, HBO’s only real competitor was Showtime, today its competitors include Netflix, Amazon, Hulu, AppleTV+, Peacock and Paramount+, all of which produce shows that would be at home on HBO, which in turn greatly diminishes HBO's value proposition as the only place to get Really Good Television.

Netflix, meanwhile, is trapped in that Quality Television box and has struggled to produce the sort of programming that would give it other options: its HGTV-like Marie Kondo show was a flop, it hasn’t been vying for sports rights, it has no news service, and its kids programming is okay, but hasn’t really made much of a dent in Nickelodeon or Disney’s armor.

Which is not to say that Netflix will soon implode or even be forced to run advertising--nothing happens very quickly in the TV industry. But it may find itself relegated to being many viewer’s third option, behind WarnerDiscovery and Disney, and from there it’s a quick drop to Churn City, where viewers subscribe to see a specific series (easier on Netflix, which drops entire series at once) and then drop the service when they’re done.

Final note on the deal is that it will hopefully cure the industry of the Vertical Integration Fallacy, the notion that controlling production and distribution is somehow a good thing. 

Randall Stephenson, the former AT&T CEO, and longtime telephone company executive, had a dream whereby he’d be able to take the data he collected from DirecTV, Uverse and a host of newly launched and confusingly priced vMVPDs, mix it with AT&T’s mobile data and HBO Max’s viewer data, run the whole thing through Xandr and spin cloth into gold. That’s not how the TV industry rolls though, and as the various fragments of that dream came crashing down, his successor, John Stankey, was fortunate to have attracted Dave Zaslav’s attention, thus saving AT&T, and by extension, Warner, from even greater disaster.

A Few Things To Watch

How will the new service be positioned for consumers and advertisers? Will it be a single app, a bundle, or something different? One frequently discussed option is that Discovery programming will be available on the HBO Max app, but that the current Discovery+ app will remain and viewers will have the option to subscribe to both along with CNN at a discount--something akin to what Disney is doing with Disney+, Hulu and EPSN+. The theory being that there’s not much overlap between Discovery+ and HBO Max viewers, those $4/month and $7/month price points are very appealing to many viewers and the company can likely get viewers to pay extra for a CNN live feed.

Similarly, advertisers will be able to buy just one of the various services, but will have the option to buy across both (all three, if you include CNN), which will be appealing as a way for national brands to achieve broader reach. 

What will the combined company or service be called? Clearly not DiscoWarner, but will they keep “HBO” in the title or decide that there’s too much baggage in the name, especially among all those viewers who've long felt that HBO’s programming was not for them.

What happens to Xandr? This was going to be the jewel in the crown of the AT&T empire, but didn’t even make it into the deal. Conventional wisdom seems to be that A&T will try and sell it off for parts.

Will there be any crossover between the two networks? Will we soon see Jonathan and Drew Scott starring in a dark comedy about twin brothers who secretly loathe each other and use their successful home renovation show as a front for an international arms smuggling ring? (Probably not, but since we’re talking about TV, I thought we should end this opus off on a lighter note.)