Led by Discovery CEO David Zaslav as CEO, who unveiled his top execs on April 8, the new conglomerate plans to take on the likes of Netflix and Walt Disney in the streaming space, betting on a broad portfolio of scripted and unscripted content.

Wall Street observers had doubts about the combination. The new sector powerhouse “will have substantial content production and distribution capabilities that can be utilized for a compelling direct-to-consumer offering targeting a variety of demos,” Barrington Research analyst Jim Goss wrote in a March 7 report.

Peter Csathy, chair of advisory firm CreaTV Media, similarly touts the potential for the new content behemoth.

“Netflix, Amazon Prime Video and Disney+ are the ‘big three’ streamers vying for our eyeballs,” Csathy says. “But WarnerMedia/HBO Max was a contender, even before merger with Discovery. HBO Max features perhaps THE top ‘brand’ (other than Disney itself) with HBO.”

For Discovery, its biggest merger ever means change of strategy, moving beyond its traditional focus on unscripted content, which Zaslav in the past described as advantage.

But amid the streaming revolution and competition for a big, global streaming subscriber pool, Zaslav and team have changed focus and are now betting on providing a broad-based mix of various forms of content.

The companies with the “most appealing and complete” content offerings will win in the streaming age, so Warner Bros. Discovery will benefit from its “broad menu of content to super-serve every demo and every family member.” Zaslav added that “we have a content library as big as Netflix’s,” concluding his take on the appeal of the merged content offerings for consumers by asking: “Who would ever want to leave?”

Management priorities

To ensure a successful integration, management has signaled that its first focus, once getting full access to and control over the WarnerMedia businesses after the deal close, will be on fully assessing operations and business trends and having executives from both sides really get to know each other and work together.

For former WarnerMedia staff, observers predict a culture change from the AT&T days. While driven and results-focused, Zaslav has a reputation for a less formal and more collaborative management approach than AT&T top executives, which sees him calling or talking to executives quite regularly.

In his new management set-up, he has done away with some extra management layers. On April 5, WarnerMedia CEO Jason Kilar left the company upon the deal close, as did Ann Sarnoff, chair and CEO of WarnerMedia Studios and Networks Group.

Zaslav revealed he would relocate to Los Angeles to play hands-on role in running the content powerhouse created by Discovery’s biggest deal ever.

He said that his “number one priority” would be building “relationships with the creative community.”

Setting combined streaming offerings of the merged firm with growing global subscribers will be core goal.

The new Warner Bros. Discovery would look to reach “200, 300, 400 million” subscribers at some point in the future.

Discovery ended 2021 with 22 million streaming subscribers, while HBO and HBO Max closed the year with nearly 74 million worldwide.

In comparison, Netflix ended 2021 with nearly 222 million, Disney+ with nearly 130 million.

Discovery CFO, now Warner Bros. Discovery CFO, Gunnar Wiedenfels said that combining HBO Max and Discovery+ would bring together the subscriber acquisition power of the former with the customer retention power of the latter, creating “a blowout (direct-to-consumer) product and that should certainly drive very healthy revenue growth for years to come.” But Zaslav emphasized in February that his team would focus on competing in streaming, but not overspend to do so.

“We have yet to see evidence of any media company being able to compete with Netflix and the other major streaming services without spending a lot more on content,” MoffettNathanson analyst Michael Nathanson noted in a Feb. 24 report in response to Zaslav’s comment. “Warner Bros. Discovery will likely look at re-allocating some of their combined content spend, which in addition to cost synergies, should provide the company with more to invest in HBO Max going forward.”

AT&T has forecast 2022 revenue for WarnerMedia of about $36.7 billion, while Discovery has projected its revenue to hit $13.1 billion. On a combined basis, that would add up to $49.8 billion.

For comparison, the Walt Disney Co. reported $67.4 billion in revenue for its most recent fiscal year, while Paramount Global reported $28.6 billion.

For 2022 adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), the companies have predicted $6.8 billion and $3.6 billion (after stock-based compensation), respectively, for a combined $10.4 billion.

Cost synergies

Delivering on promised cost savings, in this case $3 billion-plus, will be important for investors and analysts, while also affecting executives and their decisions. Zaslav, Wiedenfels and teams are planning to closely assess latest business trends now that the marriage is completed.

Barrington Research analyst Goss called the synergy goals “achievable,” explaining: “The company’s synergy target is about 20 percent of non-programming expenses for the combined entity. Both companies have meaningful overlapping spending on technology and marketing for their respective services, which creates a significant opportunity for synergies.”

Cowen analyst Doug Creutz similarly wrote in a report: “Much of the cost synergies is expected to be driven by cost savings from consolidating the two separate direct-to-consumer technology and marketing platforms, in addition to efficiencies expected from combining their linear portfolios.”

Reif Ehrlich sees “several areas for potential revenue and cost synergies,” including opportunity for “significant cost avoidance,” noting: “Discovery management has a track record of acquisition acumen and most recently outperformed the synergy targets from their 2017 Scripps acquisition, but the success of this transition is largely contingent on management’s ability to execute on multiple levels (reviving film and TV production while harnessing cash flow of traditional cable networks and driving a global direct-to-consumer service).”

Reif Ehrlich called management’s $3 billion cost synergies target “highly achievable” and drew up various scenarios, including a bull case scenario, in which the merged firm reaches “$1.1 billion in additional synergies, both revenue and cost” on the legacy business in such areas as advertising and “additional cost rationalization.”

Under the banner of “other non-corporate overhead-selling, general and administrative” expenses, she says Warner Bros. Discovery “could improve its marketing cost structures across U.S., foreign operations and particularly direct-to-consumer via better pricing and/or more consolidated marketing activity,” along with possible savings from changes to corporate offices, which could yield savings of around $1 billion.

Zaslav has emphasized the success of pulling off the $14.6 billion takeover of Scripps Networks Interactive, while acknowledging that the WarnerMedia combination is Discovery’s biggest deal ever. “We are fully aware of the fact that this is much larger, and it is going to be much more complicated and complex than what we dealt with when we brought Scripps and Discovery together,” he said in late February.

Discovery shareholders had formally approved the mega-combination of the factual and lifestyle media powerhouse with AT&T’s entertainment arm WarnerMedia on March 11.