Warner Bros. Discovery Exec Explains Decision to Unite HBO Max, discovery+; Discusses Pricing Plans for Unified Service

Ever since Discovery acquired WarnerMedia, the combined Warner Bros. Discovery has been at the center of nearly every discussion about the future of the streaming and larger entertainment industries. On Tuesday, WBD CFO Gunnar Wiedenfels joined the Goldman Sachs Communacopia + Technology Conference to discuss the company’s multi-platform plans and how the disparate properties are working to support each other as discovery+ and HBO Max move towards a planned integration in summer 2023.

Despite the fact that the merger between the two entertainment brands was completed in April, WBD is taking its time to launch a singular streaming platform, despite Wiedenfels confirming that a unified service was the plan even before Discovery and WM were officially combined.

The CFO said that there are a number of things that WBD is focusing on before bringing the service to market.

“What’s guiding our decision-making is that we want to get it right the first time, right out of the gate, an amazing consumer experience,” he said. “We had that focus on the Discovery side when we launched discovery+ … And if you look at the two products, unfortunately, both are not perfect right now. As many people know, HBO has that amazing content offering, has a lot more of the must-have features, but some technical debt in the technology setup and some of the implications for the user experience as well … And on the Discovery side, I think a cleaner user experience, but some features that we would like to see [added]. So long story short is we have to rebuild with taking the best parts of both platforms and rebuild a new state-of-the-art structure, and that’s going to take a little while.”

There are obvious differences between WBD’s two streaming services that go far beyond the technical aspects of their individual platforms. In a much-memed slide presented as part of the company’s second-quarter earnings release, WBD painted very different pictures about who the target audiences were for discovery+ and HBO Max.

Warner Bros. Discovery posited that HBO Max skewed more male, while discovery+ was more female-centric, despite the fact that the former platform had consciously worked to counter its premium cable counterpart with hit shows “And Just Like That,” “Sex Lives of College Girls,” and “The Gildead Age.” Additionally, WBD differentiated the services by maintaining that HBO Max was the “Home of ‘Fandoms’” while discovery+ was the “Home of ‘Genredoms’,” but never truly elaborating as to what those terms meant.

During their Q2 reporting, the company’s execs reported that in total, the streamers accounted for over 92.1 million subscribers, but that there were only 4 million customers who overlap between the two. So the question becomes, why combine the services if their individual subscribers are not interested in the other content?

“The fundamental thesis here … is [that] these [services are] perfect complements, right?” Wiedenfels said. “HBO Max can drive millions of people onto the platform, but the flip side of this kind of content is that it also drives higher churn rates. And because people come in and if you can’t convince people to then sort of get into that daily viewing habit, then some of them are going to leave again. Discovery is on the other side of the spectrum, lowest churn rates or among the lowest churn rates in the industry. A lot of daily, very long viewing time kind of engagement. But traditionally, with the Discovery brands, it’s a lot harder to get this extreme buzz that drives hundreds of thousands and millions of people onto the platform.”

The company’s idea is that by combining the two services, it creates an indispensable entertainment package that can appeal to all of a viewer’s interests, and — perhaps more importantly — all of the interests across an entire household. Also, by creating a one-stop shop for all different types of entertainment, WBD will have a single home to continue to broaden its content categories in the future, keeping viewers more and more engaged with the platform.

“Over time, we can talk about news, sports, etc.,” Wiedenfels said. “So it’s a very, very compelling and complete offering that we’re able to bring to the market. And again, churn is one of the most important metrics here for the sustainability of this model, and I’m confident that we’re going to be able to significantly bring that down.”

discovery+ launched a CNN Originals hub in August, the first of perhaps many new synergies within the WBD corporate apparatus.

While the merger of the two platforms is still nearly a year away, one of the main questions that consumers have is what price points the combined streamer will have. Currently, HBO Max is one of the more expensive services on the market, with its ad-free option coming in at $14.99 per month, while the ad-supported tier carrys a $9.99 monthly price tag. Conversely, discovery+ has a much more budget-friendly pricing structure at $6.99 per month for ad-free and $4.99 per month for ad-supported.

The challenge for WBD will be how to convince subscribers to pay more for added content that their own internal numbers suggest that current customers are not particularly interested in; especially in the case of discovery+ consumers who will likely have to pay significantly more. Until now, WBD has declined to discuss what the potential pricing structure for the unified service would look like, and Wiedenfels maintains that there is a very good reason for that, especially given all of the recently announces price hikes and new ad-supported options being introduced across the industry in the coming months.

“One of the reasons why we have decided not to talk about pricing more specifically yet is that there is so much dynamic change going on,” he said. “We’ll say more about that at the right time, but I do want to reiterate that we like the segmenting of a higher-priced ad-free offering [and] a discounted ad-lite offering where we’re experiencing that — with much lower ad loads than in the linear space — we’re able to get 2.5, 3x, and potentially in the future even more than that [in terms of] the CPM. So we’re actually making more money on each subscriber in the ad-lite space than on the ad-free version.”

While it appears that WBD will continue to offer both ad-free and ad-supported options on the eventually unified service, it does make sense for them to wait to announce pricing for each tier until closer to the launch date as there will undoubtedly be further price fluctuations before the merged streamer rolls out.

However, the HBO Max-discovery+ combined platform is not the only revenue-generating option that WBD has, either inside or outside of the streaming landscape. As recently as last week, Wiedenfels provided a vague update on the potential for the company to launch free ad-supported TV (FAST) channels potentially on its combined platform, or in other existing streaming hubs.

On Tuesday, the WBD CFO again mentioned the option as a way to reach consumers who might not be willing to pay for the singular streamer next summer.

“As David [Zaslav, WBD CEO] pointed out when we spoke about second-quarter earnings,” Wiedenfels said, “there is a sweet spot here, a perfect product-market combination because you have these segments of viewership in almost every market that are not going to be willing to pay at all. And we have one of the deepest content libraries in the world, so we’re also going to look hard at how to serve that FAST segment.”

Due to Warner Bros.’s nearly 100-year history and multiple IP brands, there are options to launch FAST channels featuring the studio’s classic films; Looney Tunes and Hannah-Barbera cartoons; DC Comics films, series, and animated shows; classic HBO series; and more. Additionally, from the Discovery side of the company, WBD could launch channels focused on the most popular franchises from HGTV, the Food Network, Investigation Discovery, and more.

The potential expansion into FAST channels, especially if they were to live on non-WBD platforms, would fit into the company’s vision to be more than just a streaming-first content creator. In addition to refocusing on theatrical releases, Wiedenfels championed the fact that at the Emmy Awards the previous night, not only did HBO and HBO Max lead all networks in nominations and wins, but WBD also produced winners for other networks including “Ted Lasso” for Apple TV+ and “Abbott Elementary” for ABC.

“I find it a weird idea that everything needs to be collapsed into just one platform, one window,” he said. “We’re open to be in business with B2B (business-to-business) partners and the consumer wherever they want to be in business with us … We also obviously have a great competitive position to do just that; we are looking at, as we saw last night, the greatest creative output in the world, a massive library, a global footprint across all distribution platforms, and that’s obviously a competitive advantage that we’re going to leverage.”

One of the significant assets that the company has yet to leverage in the United States has been its live sports rights. While Discovery is a major player in European sports broadcasting, it has never dabbled in domestic rights. Now, combined with the live sports deals owned by TNT and TBS, it has the opportunity to branch out even more in the U.S., if the price is right.

“Sports is an absolutely important part of our strategy. It’s, as everybody knows, one of the drivers of emotional engagement, live viewership,” Wiedenfels said. “I think we bring something very unique to the table here. Yes, maybe a slightly smaller footprint in the U.S., but we’ve got the complete global coverage, a very strong position in LatAm, driven by Turner, very strong position in Europe with Eurosport, and then a very healthy position with Turner here in the U.S. as well. So that is something that I think we might be able to leverage. It’s an asset … There is a risk of overpaying and it’s incredibly important to know exactly what we’re playing for, to know exactly what we think the value is and draw a very clear line, and have the courage to walk in those situations where you’re at risk of paying more than that value.”

Live sports rights have become the major anchor for consumers who have resisted cutting the cord, and while it is obvious that the industry is continuing its march to streaming dominance, Wiedenfels doesn’t see the end of linear broadcasting happening anytime soon, if ever.

“I happen to believe that the linear business is going to be here for a very long time, and it’s going to continue contributing healthy cash flows,’ he said. “I don’t want to make predictions about whether these rates are accelerating, slowing; whether there’s a bottom, a floor at some point; when we’re going to hit that, etc. I think everybody can sort of make their own assumptions and model that out. What I have conviction in, though, is that we have an ability to extract a lot of on-top value relative to this ecosystem and this segment that certainly isn’t a growth driver in and of itself from an underlying viewership and revenue perspective.”

Despite all of the changes that Warner Bros. Discovery has already engaged in to refashion the company’s priorities, it is clear that more are coming as the entertainment industry evolves. While the changes that Zaslav, Wiedenfels, and company have already implemented are designed to appease Wall Street investors, they also have had a chilling impact on the creative community.

WBD has increasingly important decisions to make with its streaming, theatrical, and linear businesses, and while the company is taking its time in hopes of getting them right, there appears to be a very thin margin of error as consumers reevaluate how they want to spend their money and consume their content.