Why AT&T and Discovery Think Bigger is Better for Streaming

Heading into this week, the big media story looked to be the long list of shows that the major networks and ad-supported streamers would announce in their upfront presentations to advertisers. By Monday afternoon, though, the story had flipped on its head to who would own the big networks and ad-supported streamers by this time next year.

The ripples began on Sunday afternoon when news that AT&T would spin off WarnerMedia into a $43 billion merger with Discovery, bringing together Game of Thrones and Friends with House Hunters and 90 Day Fiancé; the official announcement came on Monday morning. And just like that, reporting on other possible mergers kicked off speculation that the media business was about to enter a new wave of consolidation that would tilt streaming into a new era dominated by a half-dozen or so global streamers.

“I think this will set something off in the media landscape,” Moody’s Investors Service analyst Neil Begley told the Wall Street Journal. “There’s companies out there without a dance partner and don’t have enough scale.”

The Hollywood Reporter‘s Kim Masters reported Sunday night that Comcast’s NBCUniversal, which had been the leading contender to acquire AT&T’s WarnerMedia assets, will now shift its sights to acquiring ViacomCBS. Monday afternoon, The Information and Variety both reported that Amazon was angling to buy MGM, which operates the Epix premium channel and is the studio for the James Bond movies, NBC’s The Voice, and Hulu’s The Handmaid’s Tale. Lionsgate and AMC Networks are also potential targets.

That said, the AT&T and Discovery merger was born of very different motivations — AT&T to reduce debt and focus on 5G wireless, Discovery to add content brands and distribution scale — but the deal is unmistakably driven by Wall Street’s notion that five or six streamers will amass global subscriber bases in the hundreds of millions of households with big, noisy originals.

“This is a streaming arms race, and AT&T is making an offensive strategic move to further bulk up its content in the battle vs. Netflix, Disney, and Amazon,” Wedbush Securities Dan Ives told the Washington Post. ““This was a now or never type of acquisition, with content king in the streaming wars.”

Global Scale Means Big Cost Savings

Streaming has plenty of room to grow. Netflix is currently the biggest streamer with 209 million subscriber households globally, and Bernstein media analyst Todd Juenger forecasts that will grow to 327 million subscriber households in 2025. The bigger a streamer gets, the more it can economize on streaming technology, product innovation, content production, personnel, etc.

AT&T and Discovery estimate that the new company will have annual revenues of $41 billion — the second-largest media company after Disney — and result in cost savings of $3 billion a year. WarnerMedia and Discovery will spend a combined $20 billion on content this year across theatrical, scripted, unscripted, news, and sports programming.

“The playbook at a high level is clear: remove redundant costs and reinvest those savings in content and marketing aimed at building streaming scale,” Morgan Stanley media analyst Benjamin Swinburne wrote Monday about the proposed merger in a research note to clients. “The greater audience share on linear TV along with unique sports IP [from TNT and TBS] would be a key benefit of the combination.”

AT&T and Discovery execs did not say Monday whether HBO Max and Discovery+ would be combined into a single service or marketed together like the Disney bundle — Hulu, Disney+ and ESPN+ for $13.99 a month — but I could imagine a unified service re-launching in mid-2022 around the premiere of Game of Thrones spinoff House of the Dragon. As a global competitor for Apple, Amazon, Disney+, Netflix, and YouTube, a combined HBO Max and Discovery+ would be formidable.

Streamers Make Noise to Get Noticed

Over the last several months, the top streamers have been showing their ambition with shock-and-awe spending commitments:

• Disney announced an $8 billion annual budget for Disney+ to ramp up a slate of 50 film and TV titles from Marvel, Lucasfilm, Pixar and Disney over the next few years.
• Amazon and the parent companies of NBC, CBS, ABC and FOX committed more than $100 billion over 11 years for games that will be available on streaming outlets Prime Video, Peacock, Paramount+, ESPN+ and likely a new Fox Sports streamer.
• Netflix said it will spend $17 billion this year on original and licensed content. That will rise to $26 billion a year by 2026, according to projections by BMO Capital Markets analyst Dan Salmon.
• Several enormous projects are in the works at various streamers, including Apple’s Martin Scorsese drama Killers of the Flower Moon ($200 million production budget); Netflix’s two Knives Out sequels ($450 million rights deal); and Amazon’s Lord of the Rings series ($650 million for the first season).

Streamers attract subscribers with big franchises and big stars and keep them with deep catalogs and intuitive user interfaces. For HBO Max, that could mean signing up to watch the Friends reunion and then diving back into the original episodes. For Discovery+, maybe Queen of Meth gets you — she’s Tom Arnold’s sister! — and then you go down the Fixer Upper rabbit hole.

A global streamer with 200 million subscriber households is significantly better positioned to compete for big, noisy projects than a U.S. streamer with 20 million subscriber households. Scale becomes a feedback loop where big titles bring in more subscribers and better efficiencies that the streamer can reinvest in more big titles to bring in more subscribers and even better efficiencies.

WarnerMedia’s HBO Max already has the programming mix and the big titles to reach 200 million households, but owner AT&T decided to get out of the streaming business. Discovery likely didn’t have the programming mix or the range of big titles to reach 200 million households, and now — if the deal is completed next year as expected — it will.

Scott Porch writes about the TV business for Decider. He is a contributing writer for The Daily Beast and a podcast producer for Starburns Audio. Follow him on Twitter @ScottPorch.