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“One of the biggest streaming players said to me recently, ‘If I had you, my churn would be zero,’ ” Discovery CEO David Zaslav told Wall Street on May 17 about streamer Discovery+’s ability to retain subscribers with popular reality shows like 90 Day Fiancé and Deadliest Catch. Active Discovery+ users spend “over three hours with us” each day, the exec noted.
The planned $43 billion merger with WarnerMedia — with its scripted TV crown jewel HBO and historic Warner Bros. film studio — will only further boost consumer appeal, Zaslav crowed: “You add to that Batman, Wonder Woman, King Kong, Sex and the City, Friends. It’s an unrivaled combination.” Zaslav, who will lead the merged giant, told CNBC it could ultimately reach “two-, three-, 400 million homes” worldwide with its streaming offerings.
So, how exactly will the company drive growth to such lofty heights? Will it take a page from the playbook of The Walt Disney Co., which is selling Disney+, ESPN+ and Hulu as differentiated products in the U.S., as well as in a discounted bundle? Or will Discovery-WarnerMedia combine its 200,000-hour trove of content — from movies and series to sports and news — to create a super-service à la Netflix?
“Discovery takes on Netflix,” was Credit Suisse analyst Douglas Mitchelson’s takeaway from the merger announcement, calling the combined company “a full media conglomerate trying to take on Netflix in the race to global subscription streaming.” But among a list of open questions for the new giant, he listed: “what the operating strategy will be for the combined company — HBO Max and Discovery+ remaining separate, or combined, at what price point(s) will they be merged or bundled.”
The new Discovery-WarnerMedia, the companies expect the merger to close in mid-2022 pending U.S. regulatory approval, has some catching up to do with bigger streaming rivals. Netflix, which disclosed that it will spend $17 billion on content alone in 2021 to keep bulking up its library, leads all streamers with north of 207 million global subscribers, while closest rival Amazon Prime disclosed that 175 million members streamed film and TV shows in 2020, and Disney+ amassed 103 million subscribers in less than two years thanks to the strength of its Marvel, Star Wars, Pixar and National Geographic brands.
In contrast, WarnerMedia’s HBO and HBO Max, combined, have 61 million global subscribers, as of the end of March, while Discovery Inc.’s streaming services, led by Discovery+ (which launched in the U.S. on Jan. 4), have found 15 million subscribers.
Zaslav and his team are keeping all options open. “We will have enormous flexibility in how we package our streaming services,” Zaslav told investors. “We will look at the range of options to unlock value.”
In Europe, where Discovery has sports rights deals, the company is offering soccer matches as part of Discovery+ subscriptions in some markets, while “in others, you get into Discovery+ for a cheaper price and then you buy” sports as an add-on, he told analysts. “Bundling has been a big advantage and provided growth and stickiness.”
Some on Wall Street took Zaslav’s early comments as a sign that a portfolio of services strategy — with different prices for different brand packages — was also a likely approach for the U.S. “We’ll figure out exactly how to do it in each market, and we’ll probably experiment a lot,” Zaslav said.
Discovery CFO Gunnar Wiedenfels emphasized that financial analysis of options for how to package streaming services was “one of the key focus areas for our diligence” before agreeing to the deal. “If you look at the models that have been successful in the market, I guess the book ends are sort of one fully integrated product versus sort of a bundled approach,” he said, adding: “We’ll work hard over the next few months here to determine the final go-to-market approach.”
Several finance analysts backed a bundling strategy in the U.S. “The market for streaming services has become especially crowded in the U.S.,” MoffettNathanson analyst Michael Nathanson highlighted in a report. “In order to stand out, we have seen successful distribution strategies from Disney bundling Disney+, Hulu and ESPN+ together.”
Brendan Brady, a content strategy associate at analytics startup Antenna, notes that Disney has had success with investors by detailing subscriber gains of separate streaming products. “A positive consequence of the Disney bundle, for example, is that one bundle subscriber is considered a paid subscriber for each service included in the bundle — that helps with scale,” Brady notes.
It’s worth noting that a Disney+, Hulu (ad-supported) and ESPN bundle costs $14 a month — a dollar less than the ad-free version of WarnerMedia’s HBO Max alone. Together, as of now, subscribing to an ad-free HBO Max and Discovery+ would cost $22 in the U.S.
WarnerMedia, in a bid to appeal to consumers who find the $15 monthly price point of HBO Max too costly, is launching a $10 a month version, with ads, beginning in the first week of June. Discovery+ offers a $5-a-month option with ads, an offering that Zaslav is bullish on. “We thought it was going to be mostly subscription” customers for Discovery+ but found the ad-supported product “had unbelievable average revenue per user,” Zaslav said. “We charge $5, we make over $6 [in advertising], and we’re making $11 a subscriber, 50 percent more what we were making on a cable sub.”
CFRA Research analyst Tuna Amobi says he expects “some variation of a bundling strategy in the U.S.” from DiscoveryWarnerMedia and suggests “an all-encompassing but customizable ‘house of brands’ streaming offering, which includes the best of Discovery+ and HBO Max at a discounted price that will be comparable to the rival offerings.”
This story appeared in the May 26 issue of The Hollywood Reporter magazine. Click here to subscribe.
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