In the narrow hallways where media moguls trade in brutal trash talk, David Zaslav’s move to split Warner Bros. Discovery into two companies — studio and streaming on one side and Turner-Discovery cable channels on the other — is being judged particularly harshly.
Sure, say Zaslav’s peers, decoupling the streaming and content-producing side from the declining linear world makes sense now. NBCUniversal just did the same, spinning off its cable channels into a new entity, Versant. Lionsgate has just separated streamer Starz from its studio.
But Zaslav only arrived in Hollywood a hot minute ago, bringing a vision of creating a 21st-century Hollywood studio with barely enough time to buy the Beverly Hills digs of producer Robert Evans, get a convertible Rolls-Royce and hang out at the Polo Lounge.
What was the point, after all, of combining Warner Bros. with Discovery in order to create streaming scale to compete with Netflix and Disney+ in 2022, if only to unwind the whole thing three years later with a 60% drop in the Warner share price?
“This whole thing was a waste of time,” said one openly-disgusted media executive, one of several who spoke to WaxWord. “They lost tremendous shareholder value. It was a failure.” This executive added: “It’s a deal that never had a shot and shouldn’t have been done. But they’ve also done a terrible job running the company.”
“The cable bundle has been rotting the business for the past eight years,” said another top media executive, who also declined to be named. “For him [Zaslav] and [shareholder John] Malone — as much Malone as Zaslav — they were trying to exit Discovery.”
And doing so bought more time, at the expense of WBD employees, who have already experienced several rounds of layoffs and face heightened uncertainty now.
Spinning out the cable channels “is a huge problem off his plate. It gives it to Gunnar [Wiedenfels, WBD’s CFO],” said yet a third top media executive. “Everyone is doing it — Lionsgate, Comcast, now Warner Bros. and the last person who’ll figure it out is [Disney CEO] Bob Iger.”
Doing the AT&T deal in 2022 may not have helped Warner, but it helped Zaslav. “He’s still at the table. If he hadn’t done the deal, he’d own Scripps and Discovery, and those things are the great disappearing act,” said this executive. “So he paid way too much, but he’s still at the table. In the end, for him, it was great. For the shareholders, it’s a disaster.”
The overpayment is what has made Zaslav’s challenge particularly daunting, saddling the company with a stunning amount of debt that is now down to $37 billion for a company with a $26 billion market cap. The spinoff will require another $17.5 billion loan.
But Warner executives, not surprisingly, see it differently. In his call with analysts on Monday, Zaslav observed that he’d grown the Max streaming service – despite renaming it three different times – to a global content force.
“When we formed WBD, HBO Max was largely a domestic streaming service that lacked scale, basic technological proficiencies and a differentiated content strategy, as well as losing more than $2 billion,” he said. “We remain on track to surpass 150 million subscribers by the end of 2026 and to deliver at least $1.3 billion in Adjusted EBITDA this year.”
The company reported 122 million streaming subscribers in Q1, including 57 million domestically.
But Zaslav’s missteps have been well documented: renaming HBO Max to Max (they’ve reverted); betting that HBO Max and Discovery+ subscribers would cross over and enjoy each other’s content (they didn’t); figuring that no one would really care if he shelved a couple of completed movies (the creative community had a new Big Bad at the studios).
And one former HBO executive reflected the concern among those who toiled at the premium network: “It is another (sad) attempt to salvage a sinking ship,” said this individual. “I have spoken with a few of my former surviving colleagues from the ‘glory’ days and they are quite concerned that this is another nothing-burger that gets press and does not move the needle as a long-term strategy. They are concerned about cuts and the devaluation of their work.”
But perhaps the most salient outcome of the split announced on Monday is the likelihood that both Warner Bros. and the Turner cable properties will become targets for M&A, as each becomes small enough to attract an acquirer once the split happens next year.
“Anyone who thinks that Warner-HBO thing is going to continue as an independent company is missing what’s going on here,” said the second executive. “That thing is extremely attractive. It’s small enough in net value for any of those [streamers] – Netflix, Amazon, Disney – to buy it. Which they will.”
The third executive agreed. “This is just setting everyone up for the next M&A dance,” he said. “We know these things trade for 12-15x EBITDA, and they get sold 15-30x. That’s what Amazon paid for MGM. But none of that is going to happen when you’re dragging along a dead body. How do you get ‘Weekend at Bernie’s’ and cut the dead corpse loose?”
This executive argued that ultimately Disney will need to do the same with its linear properties, including ABC and ESPN.
Merging Warner with Discovery “was a huge miscalculation, but was it any more a miscalculation than Iger made in buying Fox? He spent $71 billion for a bunch of cable assets. Both these guys thought they were buying a studio with a bunch of IP and linear was coming along. But it turned out the linear fell off a cliff.”
Warner vehemently disputed that its version of SpinCo would be a “dead body,” and said that Wiedenfels was committed to investing further.
“There is a misperception that our Global Networks is the same bad bank as Versant is,” said a Warner executive. “It’s definitively different and set up to have a chance to do well, stretch its wings, see what it can do. It’s global. It has digital assets. We didn’t cleave off a favorite network like Bravo – they’re all going. And it will have up to a 20% stake in the streaming and studios.”
The first executive strongly disagreed, arguing that CNN faces a particularly dire future. “It’s a really bad day for CNN. The two biggest brands on that side of the equation are TNT and CNN. [TNT] now goes forward without the NBA. And CNN has been incredibly diminished.”
Historians will argue over whether the pivotal moment for a glorious legacy brand like Warner Bros. was the $85 billion sale to AT&T in 2018. It took only three years for AT&T to then pivot and spin out that asset in the merger with Discovery led by Zaslav.
All three top executives said that move merely staved off the inevitable outcome on Monday, resulting from the linear decline that most Hollywood legacy studios failed to predict.
“All of them together missed the one fact, which is obvious here: The white walkers were coming,” said the second executive. “The fact that you’re following the Starks, the Lanisters, whoever – who cares? That was all going to happen.”
WBD stock closed down 29 cents on Monday, to $9.53.
Lucas Manfredi contributed to this article.
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