By all accounts, David Zaslav was truly living his best life at the Paris Olympics. Ten full days at the beautiful Hôtel de Crillon; parties and pics with Tom Cruise and Margot Robbie; a tennis match with John Travolta and some Food Network chefs; a nice Natalie Portman post about his lavish event at the Louvre; and, perhaps most important to Zaslav, the opportunity to butter up the Warner Bros. Discovery board members who paid him nearly $50 million last year, even as the stock tanked. “A private tour of the @museelouvre is the best!” Debra Lee, an independent director—and, yes, a member of the compensation committee—posted on Instagram. “Thank you #WBD!!”
No, Debra, thank YOU, Zaslav must have thought when he saw that post. Sure, WBD’s Eurosport airs the Olympics overseas, and leveraging the Games to roll out Max is a big initiative for Zaslav. But man, the eight-figure T&E bill, and Zaz’s over-the-top presence—including crashing the Comcast party during the Opening Ceremony, and dangling Cruise and Robbie as bait for attendees to come to his party with a thirst that one attendee characterized to me, with apologies to Taylor Swift, as “so high school”—seemed pathetic, especially knowing very well that back home, his house was kinda on fire.
I’m sure you’ve seen the numbers. Zaslav hopped a P.J. to New York on Monday, and on Wednesday he admitted to Wall Street that his television networks—which contribute the entirety of his company’s profits, and which formed the basis of the transaction that elevated him from second-tier media executive to Hollywood mogul—are worth about $9 billion less than he thought. $9 billion. That’s on top of a 6.2 percent drop this quarter in overall revenue at the company. Ouch.
Given the worsening ad market and audience shifts, we pretty much already knew the networks were way less valuable. But the public reveal was basically an admission that Zaslav, John Malone, and other investors had vastly overpaid for the company in 2022, and that the entire premise behind combining WarnerMedia with Discovery was, maybe… probably… okay, it was wrong. Or at least wrong right now. Zaslav insisted that the future is still bright for Max, which added 3.6 million subscribers this quarter. And there’s a path to survival, he insists, despite the fact that he all but begged the government while at Sun Valley to allow him to sell or merge the company. “We feel very good about where we are,” Zaslav said during the earnings call.
And if he was wrong, he wasn’t wrong alone. Today, on the eve of its fire sale to David Ellison’s Skydance, Paramount revealed its own massive TV write-down of $6 billion, even as its streaming business became profitable for the first time. Paramount’s answer: cutting another 15 percent of U.S. workers, and waiting for the sale to close so Ellison can cut more. Yesterday Disney also said it had reached profitability in streaming ahead of schedule—turns out cost cuts and price hikes work, at least in the short term—yet its stock dropped because of weaknesses at the parks division and, yes, those troubling television assets.
The entire media sector now seems to be entering a new, more sinister stage of the Cable-pocalypse, where investors just don’t believe things are gonna get better. Yet Warner Discovery’s situation is perhaps the most concerning. With a stock price down to $7, the company has a market cap of about $17 billion (and, with debt, a total enterprise value of about $55 billion). That’s down about 70 percent from when the transaction closed in April 2022, and it’s comically lower than the effective $100 billion price that AT&T paid for just Time Warner in 2018 (including debt)—and that didn’t even include the value of the Discovery networks.
Worse, analysts and investors have stopped giving Zaslav the benefit of the doubt. (He lost the creative community long ago, thanks in part to bad optics like those on display in Paris.) Guggenheim lowered its price target by $3, from $12 to $9, as did many others. “We fear EBITDA will decline indefinitely,” wrote Peter Supino of Wolfe Research. Jessica Reif Ehrlich at BofA Securities wants Zaslav to consider a breakup, and a new Financial Times story was very specific about Polish broadcaster TVN and a stake in WB’s games business being on the table. Remember, this is a company that owns the best brand in television (HBO), a huge film and TV library (Warner Bros.), and a growing streamer with more than 100 million subscribers (Max). Despite all that, it’s now worth less than 1/16 of Netflix, where the current No. 1 movie is Saving Bikini Bottom: The Sandy Cheeks Movie.
And no, that’s not just because Zaslav failed to secure NBA rights, though Warner Discovery blamed the writedown in part on “uncertainty related to affiliate and sports rights renewals, including the NBA.” Certainly, losing the NBA is hugely embarrassing, and some of the replacement sports—Mountain West college football? Savannah Bananas?—are more embarrassing, even if it’s fun to envision Charles Barkley calling a fake baseball game. But if WBD can maintain carriage fees of about $3 for TNT in upcoming negotiations without spending $1.8 billion a year on the NBA, that’s actually a win. Problem is, that’s highly doubtful; Comcast bid so high for the NBA in part to save money in carriage deals with Turner. Plus, Zaslav is in a tough spot because he can’t downplay the NBA loss, which might have backed investors off the ledge and prevented a sell-off. After all, he just filed a lawsuit against the NBA claiming the loss will cause “irreparable harm” to the company.
The Lifeline
There’s so much laughably revisionist history on these earnings calls. “It’s fair to say that even two years ago, market valuations and prevailing conditions for legacy media companies were quite different than they are today,” Zaslav told analysts yesterday. “Quite different”? Really?
Yes, the valuations were different, but here’s the thing: The current predicament was 100 percent predictable. Back in early 2021, when Zaslav sent that first, fateful golf emoji email to AT&T C.E.O. John Stankey, they were both very aware that linear TV was effed. You knew it, I knew it, your mom binging Grace and Frankie on Netflix knew it. Even as Zaslav and Stankey talked, S&P put out a report saying video services would lose 8.2 percent of their subscribers that year, followed by another 10.3 percent of subscribers in 2022, and so on. Growth in virtual distributors was slowing, and AT&T had itself presided over huge value destruction at DirecTV, which Stankey had just agreed to spin off to TPG. “The outlook for pay TV sub declines is as cloudy as ever,” Wells Fargo analyst Steven Cahall wrote in a report right around then.
In fact, that rapid decline in the TV business was the precise reason Zaslav and his benefactor Malone were searching for a big deal in the first place. Discovery Communications, which was a B-level TV player despite regularly paying Zaslav an A+ salary, feared for its future. WarnerMedia might have been stuck on the same linear Titanic, but it had a fancy movie studio, an I.P. trove, and prestige brands like HBO and CNN plus premium sports. With a little luck and a dead cat bounce in the ad market, those assets could all be combined into a streamer that might eventually generate enough revenue to replace TV.
Or something. A cynic might argue that Zaslav and his cohorts simply wanted to maintain the salary gravy train a bit longer, even if they knew the chances of success were small and thousands of people would lose their jobs. Regardless, Malone and Zaslav pounced, even though the transaction meant doubling down on linear TV, the exact business they were trying to escape. It wasn’t a great option, but it was better, in their minds, than resigning themselves (and their egos) to a future as a niche TV operator, like AMC Networks or A+E Networks, or as a content provider for the other distributors that would own the next 20 years of media. Who wants that? For Discovery and Zaslav, the WarnerMedia deal wasn’t a strategic merger, it was a lifeline.
Or so they hoped. Then came the $50 billion in debt, which has now been whittled to just $38 billion. Then the mass layoffs, which gutted the creative engines and starved those prestige brands. And the decision to lowball the NBA at a time when sports rights are worth more than ever. Not to mention all the scrapped movies and botched talent relations and P.R. flubs that have marred the Zaz era.
Here’s one that hasn’t even been reported. A few years ago, Warners greenlit an R-rated animated comedy from Hotel Transylvania filmmaker Genndy Tartakovsky called Fixed, about a dog’s wild last night before being neutered. The project, a co-production of Warners’ New Line and Sony Pictures, was finished last year, with a voice cast including Adam Devine and Kathryn Hahn. But Warners has decided not to release it. Instead, it has given the movie back to Sony, which is now trying to sell it to a streamer or another distributor. Without a buyer, Fixed will probably meet the same fate as Batgirl or Coyote vs. ACME.
It’s strange to me how many people in town seem to think Zaslav is about to be fired. He’s not. First, Malone doesn’t really have a history of terminating his top executives in hard times. Rather, he tends to overpay them for middling performance. (Related: John, buddy, can we talk about a job?)
Second, what good would firing Zaz do? These issues would remain, and the widespread speculation is that Malone has been puppeteering Zaslav anyway. Plus, Zaz’s lawyer Allen Grubman has likely worked into his deal such onerous go-away terms that it would cost the company dearly to switch horses.
Third, Zaslav has definitely made mistakes, but it’s not clear whether any executive could have threaded this needle. Yes, Discovery didn’t have to do this Warner deal. Unlike Bob Iger at Disney or Shari Redstone at Paramount, Zaslav chose to double down on cable TV at the exact moment it imploded. But once he did, his doom may have been foretold when the ad market never recovered. Now it’s a matter of whether Zaslav, his C.F.O. Gunnar Wiedenfels, and the brain trust can dealmake their way out of this situation. Something’s gotta happen. The next three to five months should be interesting.
