March 12, 2019

WarnerMedia – Too Big to Succeed?

With the stated goal of being properly structured to better compete with its deep-pocketed streaming rivals, WarnerMedia announced its new organizational plan last week. In explaining the new arrangements, CEO John Stankey went out of his way to emphasize that the restructuring was not about layoffs and cost-cutting, but about breaking down silos and getting the company properly configured to invest in content and deploy it across a variety of distribution platforms.

Taken on its surface, Mr. Stankey’s restructuring plan is logical, thoughtful, and reassuring to its employees and shareholders, but are his words and plans utopian or achievable?

Specifics of the Reset
The new corporate structure will contain three divisions that will all report to Mr. Stankey. Robert Greenblatt, former Chairman of NBC Entertainment, will become chairman of WarnerMedia’s Entertainment (HBO, TNT, TBS, and truTV), and also run WarnerMedia’s direct-to-consumer (DTC) business. Jeff Zucker will add sports to his current responsibilities at CNN and run all live TV programming. Kevin Tsujihara, Chairman and CEO of Warner Bros. Studios, will oversee the global kids and young adult business, in addition to running the studio business.

Starting Off on the Wrong Foot

“Netflix doesn’t have a brand….”
Just two days after taking over as WarnerMedia Chairman, Bob Greenblatt, the man in charge of developing a streaming service to challenge Netflix, told NBC News that “Netflix doesn’t have a brand” and is “just a place you go to get anything.”

As much as I tried to make sense of the quote, I could not. His statement came off as arrogant and misguided, and shows a lack of understanding of the SVOD business. Netflix is the #1 streaming service by a fairly wide margin. It is valuable to consumers because it aggregates a significant amount of varied content (licensed and original) under a single service. By allocating 85% of new spending to originals, Netflix is well-structured to compete in an environment where less content will available for licensing due to the emerging media tribalism characteristic of DTC brands (e.g., pending Disney and WarnerMedia offerings). That sounds like a brand to me.

Allegations of Sexual Impropriety
A mere 48 hours after announcing its corporate restructuring and being promoted, The Hollywood Reporter published a detailed report about Warner Bros. Entertainment Chief Kevin Tsujihara involvement in sexual quid pro quo. Although the issue was investigated during the fall of 2017 and found no wrongdoing or abuse of power by Tsujihara, WarnerMedia will address the issue again, hoping to fend off allegations of a whitewashed investigation.

Loss of Key Personnel and Mixed Messaging
Days before the announced restructuring, Richard Plepler, the popular head of HBO and Turner Broadcasting President, David Levy, announced that they will leave the WarnerMedia organization. Plepler was highly regarded in the creative community and the integration of HBO into the WarnerMedia fold is a clear sign that HBO will lose its creative autonomy. Casey Bloys, HBO programming chief, has been assuring the creative community that HBO will continue on its established course and is open for business. However, his messaging suggests that HBO will find a way to do some things differently to take the brand and content to a new level. In other words, HBO will not be the same, and likely the creative community will remain uncertain as to its direction.

Fake News
Reading through the press releases and interviews about the restructuring, Mr. Stankey consistently committed to the idea that the restructuring was not about cost cutting and layoffs, but about removing silos and improving competitive structure. The Wall Street Journal, however, reported through its sources that “significant layoffs” are expected as part of the reorganization. Should these occur, it would be another negative blow to the credibility to the new WarnerMedia executive team.

Numbers Matter
AT&T will begin 2019 with $180 billion in debt and has committed to reducing that figure by $20 billion this year. While AT&T is looking to sell certain nonessential entertainment assets (e.g., Hulu) to lower debt, the reality is that it is leveraged to such a point that an economic downturn or poor ratings performance will greatly hinder its ability to spend on content. Also, regardless of what it says publicly, there is little doubt that significant layoffs are in its future.

The Proposed New Streaming Service
As previously mentioned, WarnerMedia has committed to launching a new streaming service to rival Netflix in late 2019. The new product will include three tiers of service: an entry-level movie service; a mid-tier service that will contain premium content; and a top-tier service that will include licensed content. The company is hoping to attract enough new subscribers to offset the loss of linear subscribers leaving DirecTV satellite and moving to streaming services such as Netflix.

After taking a public swipe at Netflix, Mr. Greenblatt tried to explain how the WarnerMedia service would challenge the streaming behemoth. While WarnerMedia has a robust portfolio of content, it currently offers HBO GO (a TVE streaming service) and HBO Now (a DTC SVOD streaming service), and there is a great risk of cannibalization if not planned carefully.

As well, the competitive context is becoming more complex day by day. A wide variety of streaming brands are already in market and doing relatively well, and Disney is set to launch its own streaming service (Disney+) later this year. In other words, WarnerMedia’s DTC services will enter a crowded marketplace with many deep-pocketed competitors.

Conclusion
The reasoning behind the $85 billion acquisition of Time Warner by AT&T was to enable AT&T, a leader in the mobile and (shrinking) pay-TV space, to better compete with streaming rivals such as Netflix, Hulu, Amazon, etc. Unfortunately for AT&T (in addition to paying a high price for Time Warner), the US government tried to prevent the merger on antitrust issues. In order to win the antitrust case, AT&T had to spend precious resources, but the victory may be pyrrhic. AT&T’s $180 billion in debt could hamper its ability to spend on great content.

It has been less than two weeks since the AT&T/Time Warner merger was approved. In this short amount of time, the missteps by WarnerMedia have been numerous and significant. Poorly-conceived statements by top management; sexual misconduct allegations; misleading statements about layoffs; a lack of understanding of the competitive streaming environment; and the cumbersome debt burden leads me to believe that the merger of Time Warner and AT&T may already be in trouble.

Epilogue
The restructuring of WarnerMedia into three core groups will result in the end of the Turner Brand. Ted Turner built an empire that revolutionized TV, helped build the cable industry, and created 24-hour news programming. It’s always a sad day to see such an iconic brand go, but in order to succeed in today’s business environment, it is important to spend wisely and not be too sentimental on brands that have had their time in the sun.

 

A 20-year veteran media executive, Rob Silvershein’s success in today’s competitive media environment is a direct result of his unique experiences spanning traditional, emerging, and startup media platforms. He is an accomplished strategist and spends most of his time advising media companies on how to structure themselves for long term success. He currently lives in Manhattan Beach, CA.

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