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Discovery Inc Series A(WBD-Q)

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Warner Bros. Discovery Says It's Done Cutting Your Favorite Shows and Movies

Motley Fool - Sun Jan 15, 8:00AM CST

Warner Bros Discovery(NASDAQ: WBD) is ready to turn the page on its content-slashing ways.

Following the merger, the company went to work right-sizing the content strategy. It canned big films and HBO Max originals like Batgirl before they saw the light of day. On top of that it cancelled popular shows like Westworld and removed them from HBO Max. Management was able to take write-downs on the costs of that content as part of its "merger-related expenses."

But management says it's not going to keep removing content from its streaming service. "I think we've come to great solutions and most importantly, we're done with that chapter," CFO Gunnar Wiedenfels said at a recent investor conference.

Turning the page

Warner Bros. Discovery isn't exactly a frugal spender when it comes to its content budget. In fact, it's going to spend a lot next year.

The only company expected to spend more than Warner Bros. Discovery on original content in 2023 is Walt Disney, according to estimates from Ampere Analysis. The research group expects Warner Bros. to spend $9.5 billion on content this year. Disney will spend $10.5 billion.

A lot of that spending will go toward theatrical releases. Wiedenfels points out that theatrical releases from Warner Bros. will double this year compared to last year. The company has rededicated itself to theatrical releases and making the most of distribution across all platforms.

That said, there will also be a lot of focus on its direct-to-consumer platform. The company plans to merge HBO Max and Discovery+ this spring. The idea is that the new service will be able to offer a breadth of content -- from everyday viewing in the Discovery catalog to "appointment viewing" of special programs from HBO -- and Warner Bros. won't have to spend as much overall on its content catalog.

Navigating the transition will be tricky. It'll likely come with a price increase for at least some existing subscribers, if not all of them, and Warner Bros. Discovery will need to manage churn effectively to appease investors.

Ahead of the industry

The decision by Warner Bros. to start cutting back its content spending, particularly around streaming, is proving prescient. Many media companies are starting to focus more on profits, and that means cutting back going forward.

"We're coming from an irrational time of overspending with very limited focus on return on investment, and I think others are going to have to make some adjustments that we frankly ... have behind us now," Wiedenfels said.

Disney's stock got slammed by investors after it posted a massive loss on its direct-to-consumer business in 2022, fueled by surging content spending. It's expected the company will move back toward moderate investments in content while pursuing growth in revenue per user. It aims to make Disney+ profitable by the end of 2024.

But it's not just Disney that could be cutting back. Total spend on streaming content is expected to grow at just 8%, according to Ampere's estimates. That's a slowdown from 25% in 2022.

Wiedenfels reiterated management's expectations that its direct-to-consumer business will break even in 2024 and generate $1 billion in profits by 2025. "If anything, I mean, we're doing a little better than what we had modeled out," he added.

With the cost-cutting behind it, management can focus on efficient spending for growth and merging its two streaming services. With the stock trading at valuations well below many of its peers in the media industry, it could be worth adding to your portfolio.

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Adam Levy has positions in Walt Disney. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool recommends Warner Bros. Discovery and recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.

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