Last week, with NewFronts staged ahead of virtual Upfront presentations scheduled for this week, Discovery Inc. CEO David Zaslav and WarnerMedia CEO Jason Kilar spoke at the eighth annual MoffettNathanson Media & Communications Summit.
What timing! With the May 17 pre-market confirmation that WarnerMedia and Discovery Inc. will merge via a tax-free Reverse Morris Trust-engineered merger, the Wall Street firm’s leaders believe that “the rationale for today’s monumental news that
WarnerMedia will be merging with Discovery can be plainly found in our Q&As.”
Craig Moffett and Michael Nathanson, each of whom are Senior Analysts at MoffettNathanson, write in an investor note that the news of AT&T “resizing” their dividend was not foreshadowed in its question-and-answer session with the leaders.
But, they say, “surely it is not a surprise.”
For Zaslav, the vision of the future was clear. One, they note, the linear bundle will evolve to where the core foundation is simply “News, Sports and Discovery.”
Two, “the shift in advertising from linear cable networks, which are relatively underpriced on CPMs relative to broadcast, to a fully-advanced AVOD/SVOD hybrid, is materially
accretive.”
That is perhaps the biggest win for Discovery shareholders, as DISCA was up 6% just after Monday’s Opening Bell on Nasdaq but within the last 40 minutes of trading was down 5.1% to $33.83. In pre-market trading, the company’s shares had surpassed the $39 mark.
Third, the analysts at MoffettNathanson note, “the opportunity to create global media brands at scale is tangible in a direct-to-consumer world, because of a larger available TAM that is not restrained by the much lower Pay TV penetration outside the U.S.”
For Kilar, “having learned first-hand by the failure of the corporate owners at Hulu to
expand globally in 2008, he clearly explained why he was pushing HBO Max to
accelerate their international footprint,” Moffett and Nathanson said. “Given the high fixed costs of the SVOD model, it is entirely logical to seek a larger subscriber footprint over which to amortize content costs.’
The analysts also concluded that Kilar “understands that HBO’s high premium subscription price is a limiting factor in growing his domestic subscriber base. Thus, the upcoming introduction of a lower priced HBO ad-supported tier could unlock more revenue than what would otherwise be HBO’s subscription ceiling. Kilar believes that there is a much greater
revenue TAM at HBO Max than legacy HBO/TWX was able to generate, and as such,
there is a much larger profit pool ahead. Kilar was much less definitive on the path
ahead for Turner’s cable networks, except to say that they were going to continue to
invest behind them.’
Combining these two strategies, math aside, “it is abundantly clear why this deal makes
strategic sense for each side,” Moffett and Nathanson add.
Discovery’s linear networks are helped by the inclusion of CNN and by the inclusion of TV rights to the NBA, NFL, MLB and NCAA collegiate basketball for sports. “By our math, the new company will instantly become the largest home of linear impressions, sourcing 28% of the 2020 U.S. viewing time and 24% of U.S. national advertising.”
Better still, Moffett and Nathanson noted, “it will be under-monetized, as it will generate only 20% of national affiliate fees. While we rightly worry about the long-term health of TBS and TNT, we would assume that Discovery will move key Turner sports and news
content to Discovery+, to make it a broader and more attractive offering which will help
their ability to grow those more valuable impressions.”
“By our math, the new company will instantly become the largest home of linear impressions, sourcing 28% of the 2020 U.S. viewing time and 24% of U.S. national advertising.” — Craig Moffett and Michael Nathanson
Simply put, the analysts concluded, “Discovery+ becomes a more relevant service for a wider group of people in the world.”
Meanwhile, the big question for AT&T, MoffettNathanson says, is this — will a dividend cut and the WarnerMedia spin be enough to get the company to get long-term growth projections to a favorable level?
Moffett and Nathanson said, “[A]ll will still depend on whether they can grow their mobility business. We have our doubts.”
