AT&T just sold WarnerMedia to Discovery for $43 billion, after acquiring it for $85 billion just a few years ago. We discuss why AT&T needs to refocus on its wireless business and stop buying media assets, Jason Kilar's exit and why traditional Hollywood leadership is coming out on top, and the right strategies for disruptive streamer roll-outs while managing core legacy media models.

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EPISODE TRANSCRIPT:

Chris Erwin:

All right. So Andrew, this week, a big deal in the media mix. AT&T agrees to sell WarnerMedia to Discovery for 43 billion. Now this one hits particularly close to home because we've written about Jason Kilar in the past, signaling a new hiring strategy for new Hollywood. And that doesn't seem to be the case, which we'll dive into shortly.

Andrew Cohen:

Not in the prediction business.

Chris Erwin:

No. So, selling WarnerMedia for 43 billion. Of note, AT&T had just bought it a few years ago for 85 billion, right? So a near 50% reduction in value. And Jason, who's going to be the new former CEO of WarnerMedia, is negotiating his exit package, and supposedly was not even aware of the deal. The deal was done direct between John Stankey of AT&T and David Zaslav of Discovery, pretty wild stuff.

Andrew Cohen:

Yeah. New former CEO. That's really nice way to put it.

Chris Erwin:

Yes, yes. True. All right, so let's dive into why this is happening, and there's some bigger implications here. So overall, AT&T has made it very clear that they're refocusing on their core wireless business, right? So they're focusing all their capital and all their team on buying spectrum and investing in base stations and antenna system support distribution, and their 5G rollout.

Andrew Cohen:

Yeah. I think it was 23 billion at just for buying spectrum alone.

Chris Erwin:

Yes. Which then adds to its already increased debt load, but yeah, that's a big number. So, we've talked about that this is a symptom of a larger trend that, when combining into big media businesses doesn't necessarily make sense. And specifically for AT&T, yeah, these assets like DirecTV, which it just had bought, I think, back in 2005 for 67 billion, it just sold to TPG for 16 billion back in February. So clearly, AT&T is getting out of the media business and it makes sense, right? They need to focus on their exclusive wireless services business, which has fixed distribution, and WarnerMedia did not enhance their wireless offering whatsoever. And clearly the combination with AT&T didn't meaningfully improve the distribution of HBO Max, right? It only got around 10 million subs over the past year. So the synergies didn't really exist at all.

Andrew Cohen:

No, and this isn't the first time we've seen this. I mean, Verizon recently made a similar kind of final exit, selling off Yahoo and AOL to Apollo for five billion this past month. I think they recently bought that for around nine billion. We've seen it with other Verizon misfires in the media space from go90, and even with Complex. There just isn't really that kind of unified synergistic vision, whereas compared to a Barstool and Penn National Gaming or Ringer and Spotify where that media is top-of-funnel for kind of a compatible core business model has been really successful. Just the telco and media synergy doesn't really make sense at any level. If you look at kind of the lower level of the spectrum, like a Complex and Verizon, and now at the higher end of the spectrum with an HBO Max and an AT&T, they're kind of just incompatible business models.

Andrew Cohen:

And I think what really stands out at this more premium end of the spectrum, like you said, it's kind of all of these costs that are now being juggled. So for a cable or telecommunications giant like AT&T are massive, we already mentioned 23 billion that they had to spend on spectrum, or their existing $170 billion debt load. Now on the side, as kind of a side hustle, to then be trying to win the streaming wars just seems unsustainable, especially when you look at the amount of capital needed to compete in the stream wars in a meaningful way. I mean, Netflix is paying 17 billion on content this year, 2 billion on marketing. Disney spends 24 billion on content. Reminds me of a quote from the great Ron Swanson from Parks and Recreation, where he says, “Don't half-ass two things, whole-ass one thing.” And the stream wars is definitely something that takes a whole-ass to compete in.

Andrew Cohen:

And now, Warner and Discovery are well positioned. Them as a combined entity now have the second largest content spend in the mix with 20 billion, behind Disney's 24 billion. So, interesting to see how that'll set them up going forward. And then also what are the implications for NBCU and Comcast, where I think that there's a kind of a similar incompatibility between these two models. We're seeing Peacock is kind of having a tough time compete. They have 14 million subscribers, which is even less than what Discovery Plus has. So are we going to have to see an exit there, maybe another merger with Viacom and CBS, and is this kind of the end of the telco-media pipe dream chapter of immediate history, as we know it?

Chris Erwin:

To talk about subs, I think Discovery has achieved 15 million subs in just a few months since launch, which is really noteworthy, considering how much in terms of smaller capital spend and overall IP library, relative to a Peacock and relative to the WarnerMedia-backed HBO Max, which has 10 million new subs with over 12 months of launch.

Andrew Cohen:

And also, when you consider the fact that Discovery Plus' library is largely non-exclusive, non-first window. Largely content that has already aired on their cable networks and then have a second window on OTT, which then speaks to this kind of greater point and theme that we're seeing here, which is this kind of clash between old Hollywood and new Hollywood. And it seems like in this case, old Hollywood has prevailed, really. Kilar came in with the exact opposite of approach, of having Warner Brothers movies debut on HBO Max, which we know kind of disrupted and ruffled the feathers of the legacy film studio Hollywood system, whereas Zaslav and Discovery Plus took almost the exact opposite approach, making Discovery Plus kind of compatible and complimentary, non-competitive to their existing cable partners.

Chris Erwin:

I think that's right. Look, Kilar is known as the Hollywood disruptor, right? So he was an early executive and CEO and one of the co-founders of Hulu, which kind of defined the new streaming landscape and business model. We wrote an article about how Kilar signals the new hiring strategy and the right characteristics for the new Hollywood executive. And he was a unifier. He was getting all the different film studios and TV networks onboard to this single streaming service, not easy to do when you're wrangling those big egos and those different alliances. And he made it happen. And then he was also someone who took an extreme focus to content and fan sensibility, and had incredible product chops. So he really thought about, what is the product experience? What is the distribution experience? How is a consumer receiving and experiencing content in a new direct-to-consumer digital stream?

Chris Erwin:

And it seemed like, is that going to be the new differentiator in the streaming wars? But I think what's very clear about him being pushed out and these traditional, old school Hollywood executives like David Zaslav and John Malone on the rise is, maybe the product is a bit of a commodified offering and it really comes down to, what is your IP portfolio? Do you have content that's going to get consumers to climb the paywall, and are you going to be able to develop a real breadth of a catalog that's going to get consumers to stay there once they climb that wall? And I think that's really contingent on this, how do you navigate the political realms of Hollywood, your strategic content partners, and getting them excited to work with you. Where you respect them, you don't go scorched earth, you don't blow up that first theatrical window, but you probably ease into this direct-to-consumer business over time. And it seems like the old Hollywood guard is winning out.

Andrew Cohen:

It raises a larger point. And this is something that we kind of think through in our business every day, of how you respect kind of your core legacy business, while also being future focused and trying to kind of navigate a very rapidly evolving landscape. And it's easy for Netflix, who doesn't have this legacy infrastructure to balance, to just go pure play OTT. But for a company like WarnerMedia, where its traditional cable film studio infrastructure can be a big asset, but it's also incumbent on them to kind of figure out that right balance between past, present and future. I think Disney has done a really good job with it, unifying kind of all of their assets in kind of one combined entity. But I don't know, Chris, what do you think that this says for, going forward, how companies that are navigating disruption, innovation, do they lean a bit more towards a slow and steady approach when weaning themselves off of traditional models?

Chris Erwin: