David Zaslav Chases the One Metric to Rule Them All: Streaming Profits

Hollywood is still pursuing Netflix, but instead of subs, it’s about cash — and Warner Bros. Discovery is in strong position to turn its streaming division around.

If the past five years were about chasing Netflix’s up-and-to-the-right trajectory for streaming subscribers, this year begins a pivot in that approach for its rivals. While adding subscribers is still important, now the likes of Disney, Warner Bros. Discovery, Paramount and NBCUniversal find themselves envious of something else Netflix has in spades: Streaming profits.

Like Gollum and The One Ring to Rule Them All, or Thanos and the Infinity Stones, streaming profits have become the entertainment industry’s ultimate MacGuffin, always seemingly out of reach. Netflix now finds itself atop the subscription streaming heap, ending 2022 with 231 million paid subscribers and $5.6 billion in profits. Next quarter the company projects $1.6 billion in profit, and for 2023, it expects to have operating margins of 21 to 22 percent, up from 18 to 20 percent in 2022.

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The rest of the business, meanwhile, is looking at 2024. That’s when Disney, NBCU, Paramount and WBD all say they expect — or at least hope — to swing to a profit in their streaming businesses. But even among those legacy entertainment players, not every company finds itself in the same situation. Nowhere is that more apparent than at WBD, led by David Zaslav, which was on the receiving end of a barrage of criticism from Hollywood as it took up to $3.5 billion in content write-downs, including some projects that were effectively completed.

Another part of Zaslav’s strategy has been aggressively licensing the Warners library. Ahead of the debut of Amazon’s Rings of Power series last year, the tech giant struck a deal with WBD to license the original Peter Jackson trilogy, as well as the Hobbit films, making them available on the Prime Video platform. “We have a ton of content that has been sitting idly for just purely principle reasons,” WBD CFO Gunnar Wiedenfels said at a Bank of America event last September. “It is a nonexclusive window [and] we look at it as what we are giving up versus what additional revenue we are generating.”

Those moves, however, now seem prescient, with almost every other player in the space making similar adjustments. “There’s no doubt the worst is behind WBD following a challenging merger integration period,” Wells Fargo analyst Steven Cahall wrote in a post-earnings take.

Executives at WBD, led by CFO Wiedenfels, signaled on their Feb. 23 earnings call that its DTC division would be about break even this quarter, before the combined HBO Max/Discovery+ streaming launch (which will be unveiled April 12) likely requires additional marketing and technology investments next quarter. Cowen analyst Doug Creutz wrote a day later that profit at its DTC business “is improving far more quickly than we expected.”

The other companies investing in streaming haven’t been so fortunate. At both Paramount, led by Bob Bakish, and NBCU, led by Jeff Shell, streaming losses widened last quarter to $978 million and $575 million, respectively. Executives at both companies say they expect streaming losses to peak this year (Peacock is expected to lose $3 billion in 2023).

At the Bob Iger-run Disney, things are trending in the right direction, but the losses remain steep, with Disney losing $1.1 billion in its direct-to-consumer segment last quarter. That’s better than it projected, and down from the $1.5 billion in the previous quarter, but remains a deep hole that the company needs to climb out of in order to become profitable in 2024. Indeed, MoffettNathanson analyst Michael Nathanson argued after Disney’s last earnings call that “for us, the investment case for Disney is all about the potential for fiscal year 2025 earnings,” when he thinks Disney can deliver $2 billion in profits.

But before it can do that, it needs to keep cutting down those losses. WBD, Disney and Paramount are all telling investors that their plans involve cutting back on spend but leaning into franchises (like WBD’s The Lord of the Rings). That would see content investment stabilize or decline, and with more of that spend going toward marquee properties and IP, potentially leaving riskier original concepts off the table.

At Comcast, Wells Fargo’s Cahall wrote in January that “we don’t doubt that Peacock’s $3 billion ’23 losses will be the peak, but media earnings power may never return to ’21’s $4.6 billion.” In other words, streaming won’t quite return NBCU to cable TV’s heyday.

Meanwhile, Paramount also recently merged Showtime and Paramount+, significantly cutting down on costs, and focusing on franchises like Billions and Dexter. “We expect to return the company to earnings growth in 2024,” CEO Bakish said on a Feb. 16 earnings call.

But when taking stock of the streaming giants in their chase for Netflix-like subscribers and margins, WBD appears to have put itself in pole position. While the combined service will bring with it some investment (JPMorgan’s Phil Cusick estimates the company will pour $400 million into the launch through both marketing and tech), the dramatic cost-cutting, price-raising and new launch put it in a place where it may be the first of the legacy streamers to forge a path to profitability. Whether it’s good enough to replace the ATM machine that is the cable TV bundle is a whole other story. 

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In Q4 of 2022, only Netflix was able to hit profitability from streaming. Source: Company reports

A version of this story first appeared in the March 1 issue of The Hollywood Reporter magazine. Click here to subscribe.