Warner Bros. lost 2.5 million subscribers over the last six months as its rivals, notably Netflix, show no signs of slowing.
Warner Bros. Discovery (WBD) shocked the market by reporting a loss of 700,000 subscribers in its direct-to-consumer (DTC) division in the third quarter, which includes HBO cable subscriptions and the Max and Discovery+ streaming services.
WBD reported a third-quarter net loss of $417 million, immediately sending the company’s stock spiraling down 18%.
Surprising Streaming Subscriber Losses and Murky Financial Future
Despite subscriber losses, the DTC segment shows some signs of a positive trajectory. Revenue in the DTC segment grew 5% year-over-year to reach $2.43 billion, including a 6% increase in distribution revenue.
Likewise, advertising revenue for this segment rose 30%, primarily due to higher engagement for Max’s ad-lite platform in the U.S. However, this impressive growth does very little to offset the massive loss in advertising revenue for linear television, which still keeps the lights on at many studios.
According to company executives, WBD’s DTC segment is slated to break even or become profitable soon. Furthermore, WBD executives blame 2.5 million lost subscribers on a light content slate and overlap in Discovery+ and Max subscribers. Certainly, WBD has been producing far fewer noteworthy shows and movies than in its heyday, but any overlap between Discovery+ and Max subscribers is overstated.
Currently, Warner Bros. has 53.6 million domestic and 41.4 million international subscribers across all DTC platforms. The average revenue per user (ARPU) in the third quarter was $10.66 domestically and only $3.37 internationally. Such a wide margin highlights the importance of retaining valuable domestic subscribers as the company tries to expand its streaming service globally, which is highly cost-intensive, as Netflix has learned.
Warner Quietly Reverses Content Exclusivity
A significant feature of the Streaming Wars was studios removing content from Netflix and other streamers to make it exclusive to their burgeoning streaming platforms. By sacrificing massive licensing fees from Netflix and others, the studios quickly learned the difficulties of abandoning their age-old licensing practice. The high cost of exclusivity is illustrated by WBD’s 17% decline in content distribution revenue due to falling third-party licensing fees.
At the beginning of the year, Warner opened negotiations with Netflix to offer some of its popular films and shows. After just a short time apart, Warner is embracing Netflix as a valued licensing partner. Modern blockbusters like “Dune” are streaming once again on Netflix, and popular HBO shows are also starting to stream, despite their prior exclusivity or close association with Max.
Given Netflix’s enormous reach some HBO shows are having a bigger second life on Netflix than when originally airing. Netflix’s recent refocus on third-party licensing, exemplified by the resurgence of middle-of-the-road shows like “Suits” and “Lucifer,” highlights a strategic pivot.
The licensing reunion is far from the only deal between WBD and Netflix in the works. Earlier this month, the telco Verizon would offer a bundle of ad-supported Netflix and Max for just $10. Bundling and advertising partnerships will define the next phase of media re-consolidation.
Add real-world pricing context to this film and television market analysis.
FilmTake’s Global Rights Suite combines both the Film Licensing Index and Film Advance Index into one rights-pricing package for film and television executives evaluating licensing and streaming values, Pay-1 economics, minimum guarantees, presales, and international advance structures.
Runaway Debt Threatens Warner and Other Studios
As debt costs skyrocket, WBD is racing against the clock to deleverage its operations before the advertising armageddon in linear television risks sinking the ship. Executives credited the company’s cost-cutting efforts as a primary factor in this financial improvement. The impact of strikes also helped preserve cash, illustrating that its business outlook is bleak next year.
In late 2022, the company laid off 125 positions, or 26%, in its television division, with many more cuts expected before the end of the year and going into 2024. WBD’s network television division saw an 8% decline in total revenue. The studio division, however, reported a 4% increase in total revenue to $3.23 billion, buoyed by solid theatrical releases and game releases.
Advertising Market Flips From Linear to Online
As linear television advertising is imploding, streaming advertising is exploding. This timing spells more success for Netflix, which has avoided expensive legacy costs and is entering the advertising market at an opportune time.
Netflix’s introduction of an ad-supported tier marks a significant shift in its business model. This shift aims to broaden its subscriber base and diversify revenue streams. It also reflects a pragmatic response to the evolving demands of content consumers and advertisers.
Netflix’s ad-supported tier has seen a nearly 70% increase in membership quarter-over-quarter, accounting for about 30% of all new sign-ups. This growth indicates a shift towards diversifying revenue streams and meeting various consumer preferences in a dynamic and complex market.
However, to fully realize advertising success, Netflix must follow through on its recent pledge to provide greater transparency in viewership data. By offering more detailed viewership insights, Netflix addresses the demands of creators, advertisers, and investors for more accurate and accessible data.
FilmTake Away: Warner Chooses Financial Maneuvers to Fix Systemic Problems
Warner’s recent financials reflect the broader challenges in the media industry, particularly the uncertain advertising market, which has buoyed many bloated studios for decades.
WBD’s gross leverage currently stands at $43.5 billion, well above the target of 2.5x to 3x its adjusted earnings (which hover around $10 billion annually). The company is starting to gut several struggling divisions to improve profitability.
WBD’s deleveraging strategy comes as competitors face stability challenges associated with advertising losses and DTC profitability. Next year, at least one major studio will fight to stay afloat, possibly leading to another mega-merger like Disney and Fox.
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