Ad-supported TV is looking for a short-term fix to a long-term problem.
On Monday, AT&T announced it would sell a 29% stake in WarnerMedia to Discovery for $43 billion, creating a combined entity to be managed by Discovery CEO David Zaslav that puts brands ranging from CNN, to HBO, to HGTV and Food Network under the same portfolio.
On paper, the deal makes sense. Discovery establishes its scale as a prominent media partner in a rapidly consolidating landscape that’s shifting to streaming. AT&T has found a way out the side door following its $85 billion acquisition of Time Warner in 2018, which fell short of grand ambitions to transform the TV marketplace.
That’s great for both companies. But what about for advertisers and, probably even less considered in this transaction, consumers?
Fewer choices in an already heavily consolidated market will likely push up pricing and create less flexibility for advertisers, David Campanelli, EVP, co-chief investment officer at Horizon Media, told me.
The market has already contracted rapidly: Discovery purchased Scripps in 2018; Viacom merged with CBS in 2019; and Disney acquired 21st Century Fox and gained majority ownership of Hulu that same year.
Discovery and WarnerMedia’s cable networks brought in almost $16 billion in combined revenue in 2020 and accounted for nearly 25% of the overall market, according to Kagan, the media research unit of S&P Global Market Intelligence. According to iSpotTV, Discovery and WarnerMedia accounted for almost 16% of linear TV ad spend, or $2.3 billion, in the first four months of 2021.
“Having fewer options and places to put our money is not necessarily a good thing,” Campanelli said. “When we have less competitors to play off each other, there's less places to move money and drive pricing down.”
He added that the fact that two of the top TV networks in the country needed to combine in order to compete for scale “sends a scary signal” to smaller networks in the market. “I don't know when or if this ends,” he said.
I don’t either, especially for all of those minority-owned media companies that advertisers are pledging to invest in this year, which are often smaller entities and have a hard time even getting a seat at the table with brands.
In the medium term, however, less fragmentation in the market makes it easier for ad buyers to broker advanced, data-driven ad deals that are more efficient and effective at reaching audiences across previously siloed platforms and networks. That is, of course, if and when WarnerMedia and Discovery implement a roadmap for consolidating their data assets and various ad tech and buying tools.
And if speculation that WarnerMedia CEO Jason Kilar will exit is true — he was apparently blindsided by yesterday’s deal — advertisers may find themselves working with an organization more focused on ad sales than driving subscriptions, argued Brian Wieser, global president of business intelligence at GroupM.
“The status quo is likely to exist [under Discovery],” Wieser said. “They will probably care more about advertising in the near term.”
But that might be exactly why the merger favors a short-term gain over embracing a secular shift in the market.
Kilar, who oversaw a strategic reorganization at WarnerMedia to put streaming at the heart of the business, was much less concerned with “conventions of the business” and more focused on operating “consumer-first,” Wieser explained.
But if the focus shifts toward advertising under Discovery, “that focus on advertising in the short term is the same focus that gets us 15 minutes of ads an hour,” Wieser said. While a return to the status quo and more ads are good for media owners and ad buyers, if the experience isn’t good for consumers, “that's not good for anyone in the long run,” Wieser said.
Despite a $20 billion content budget and a balanced programming slate across Discovery and WarnerMedia, Discovery Plus hasn’t focused much on investing in original content. And while originals were a huge focus for WarnerMedia under Kilar, any major investments or strategic decisions about content and streaming are likely to be put on ice until the transaction closes.
No plans have been proposed yet for the future of HBO Max, launched a year ago, and Discovery Plus, which debuted in the U.S. at the start of 2021. But consumers may lose their minds if they have to subscribe to yet another streaming service for the content they want to watch.
So yes, the industry can toast to a lucrative short-term solution. But, long term, Discovery and WarnerMedia are making a bet on the industry status quo when there’s a much thornier issue to address: consumers have no tolerance for interruptive TV ads, and they’re voting with their dollars for something new.
Netflix, Amazon and Apple are already offering what they want. Will Discovery and WarnerMedia?