David Zaslav
Olivia Michael | CNBC
A couple of months in the past, after a prolonged and sobering assessment of Warner Bros. Discovery‘s enterprise, Chief Executive David Zaslav gave his division heads a cutthroat mission.
Pretend your models are household companies, Zaslav stated. Start from scratch and prioritize free money stream, he added, in line with folks acquainted with the matter. Then, Zaslav stated, come again to me with a brand new strategic plan in your unit.
Zaslav’s directive has led to what’s going to quantity to 1000’s of layoffs on the firm by the center of this month, stated the folks, together with substantial strategic modifications at CNN, the Warner Bros. movie studio and different divisions.
The CEO shaped his plan after he took a tough take a look at the funds of the mixed WarnerMedia-Discovery, a deal that closed in April. Zaslav decided the corporate was a multitude. AT&T mismanaged WarnerMedia via neglect and profligate spending, he’d determined, in line with folks acquainted with his discussions. The folks requested to not be recognized as a result of the talks had been non-public.
Warner Bros. Discovery’s whole debt of about $50 billion was tens of billions greater than the corporate’s market capitalization. About $5 billion of that debt is due by the tip of 2024 after paying off $6 billion because the shut of the merger. The firm might push again the maturity on some bonds if obligatory, however rates of interest have risen dramatically, making refinancing a lot costlier.
To pay down debt, any firm wants money — ideally, from operations. But the near-term developments urged Warner Bros. Discovery’s enterprise was getting worse, not higher. The firm introduced free money stream for the third quarter was detrimental $192 million, in comparison with $705 million a yr earlier. Cash from working actions was $1.5 billion for the primary 9 months of 2022, down from $1.9 billion a yr earlier.
Along with the rise in charges, Netflix‘s world income and subscriber development had slowed, prompting traders to bail on peer shares — together with Warner Bros. Discovery, which had spent the previous three years creating streaming providers HBO Max and Discovery+. Moreover, the promoting market was collapsing as company valuations flagged. Zaslav stated final month the advert market has been weaker than at any level through the 2020 pandemic.
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Warner Bros. Discovery shares have fallen greater than 50% since WarnerMedia and Discovery closed the deal in April. Its market worth stands at about $26 billion.
In addition to job cuts, Zaslav’s directive spurred the elimination of content material throughout the corporate, together with scrapping CNN unique documentaries, Warner Bros. killing off “Batgirl” and “Scoob 2: Holiday Haunt,” and HBO Max eliminating dozens of little-watched TV collection and flicks, together with about 200 previous episodes of “Sesame Street.”
The speedy selections allowed Zaslav to make the most of tax efficiencies that include modifications in technique after a merger. Warner Bros. Discovery expects to take as much as $2.5 billion in content material impairment and growth write-offs by 2024. The firm, which has about 40,000 workers, has booked $2 billion in synergies for 2023. Overall, Zaslav has promised $3.5 billion in price cuts to traders — up from an preliminary promise of $3 billion.
The underlying rationale behind Zaslav’s cost-cutting technique centered on turning Warner Bros. Discovery right into a money stream generator. Not solely would money be wanted to repay debt, however Zaslav’s pitch to traders can be to view his firm as a shining gentle within the altering leisure world — a legacy media firm that really makes actual cash.
“You should be measuring us in free cash flow and EBITDA [earnings before interest, taxes, depreciation and amortization],” Zaslav stated an investor convention run by RBC Capital Markets final month. “We’re driving for free cash flow.”
Zaslav is making an attempt to present Warner Bros. Discovery a head begin on what could also be a yr of downsizing amongst giant media and leisure firms. His technique seems clear: Cash era will coax Wall Street into seeing his firm as an trade outperformer. But he’ll must preserve collectively an organization made up of tens of 1000’s of ex-Time Warner after which ex-WarnerMedia workers who’ve been via spherical after spherical of reorganizations and layoffs.
“It isn’t going to be overnight, and there’s going to be a lot of grumbling because you don’t generate $3.5 billion of operating synergies without, you know, breaking a few eggs today,” Warner Bros. Discovery board member and media mogul John Malone instructed CNBC in an interview final month.
Cash guidelines every part
Malone has co-strategized and cheered Zaslav’s effort to focus the corporate on maximizing free money stream, which is outlined as internet earnings plus depreciation and amortization minus capital expenditures.
“Whenever I talk to David, the first thing I say is manage your cash,” Malone said last month. “Cash generation will ultimately be the metric that David’s success or failure will be judged on.”
Even before Zaslav gave his directive to all of the division heads, the new CEO was already thinking about how to boost cash flow. That was at least part of the motivation to eliminate CNN+ just weeks after it launched, which had a spending budget of about $165 million in 2022 and an eventual $350 million, according to people familiar with the matter.
Warner Bros. Discovery owns streaming services, linear cable networks, a movie studio, a TV production studio and digital properties. It owns DC Comics, HBO, CNN, Bleacher Report, and oodles of reality TV programming. It has sports rights both internationally and domestically, including the NBA on TNT.
Zaslav hopes his reconstruction of Warner Bros. Discovery will deliver two results. First, it will showcase the company as a fully diversified content machine, featuring top brands and intellectual property in prestige TV (HBO), movies (Warner Bros.), reality TV (Discovery), kids and superheroes (Looney Tunes, DC), news (CNN) and sports (NBA, NCAA March Madness).
Liberty Media’s John Malone
Michael Kovac | Getty Images
Second, he wants it to prove that a modern media company that’s spending billions on streaming video can also generate billions in cash flow. The company has estimated 2023 EBITDA will be $12 billion. Warner Bros. Discovery will generate more than $3 billion in free cash flow this year, about $4 billion next year and close to $6 billion in free cash flow in 2024, according to company forecasts.
That would give Zaslav a selling point to investors compared to other legacy media companies. Disney has generated just $1 billion of free cash flow over the past 12 months and analysts estimate the company will have about $2 billion in 2023. That’s despite growing Disney+, its flagship streaming service, by 46 million subscribers during the period and owning a theme park business that generated $28.7 billion in revenue for the fiscal year — up 73% from a year earlier.
The low free cash flow relates largely to the money drain from streaming services and Disney’s large investments in theme parks. Over the past 12 months, Disney had $4.2 billion in operating income from its media properties, down 42% from a year ago. Returning Disney CEO Bob Iger said in a town hall last month he will prioritize profitability over streaming growth — a change from when he left the post in 2020. Outgoing boss Bob Chapek put into place a Dec. 8 price hike for Disney+ and other streaming services to accelerate cash flow.
“Discovery was a free cash flow machine,” Zaslav said earlier this year of his former company, which he ran for more than 15 years before merging it with WarnerMedia. “We were generating over $3 billion in free cash flow for a long time. Now, we look at Warner generating $40 billion of revenue and almost no free cash flow, with all of the great IP that they have.”
Wall Street vs. Sunset Boulevard
When AT&T announced it was merging WarnerMedia with Discovery Communications last year, Zaslav immediately went on a Hollywood “listening tour,” sensing an opportunity to become the new king of Tinseltown. Many Hollywood power players thought Zaslav would dedicate his first year as CEO to currying favor with the industry given his lack of history with scripted TV or movies. He even bought producer Bob Evans’ house for $16 million in Beverly Hills, a sign some thought meant he wanted to be Hollywood’s next mogul.
A year later, Zaslav isn’t the king. In fact, many consider him a villain.
It turned out Zaslav’s top priority as CEO of a large public company wasn’t to win over Hollywood. Rather, it was to convince investors his company could survive and flourish as a relative minnow against much larger sharks, including Apple, Amazon, Disney and Netflix, in an entertainment world that’s quickly moving to digital distribution.
Zaslav’s focus on investors before Hollywood makes business sense. The company must be financially sound before it can make big investments. But he’s taken a hit, reputationally, with some in the creative community.
“HBO Max is widely acknowledged to be the best streaming service. And now the execs who bought it are on the verge of dismantling it, simply because they feel like it,” tweeted Adam Conover, the creator and host of “The G Word” on Netflix and “Adam Ruins Everything” on HBO Max, in August. “Mergers give just a few wealthy people MASSIVE control over what we watch, with disastrous results.”
One Hollywood insider who met with Zaslav to present him recommendation earlier than he stepped into the job stated the Warner Bros. Discovery CEO has ignored 90% of his recommendation on learn how to handle the enterprise.
Time will inform whether or not Zaslav’s year-one selections have lasting ramifications with a spurned Hollywood neighborhood. Critics of Iger at Disney initially stated he lacked “creative vision” when he first took over as chief govt almost 20 years in the past.
Zaslav can counter that Warner Bros. Discovery hasn’t decreased content material spending. The firm spent about $22 billion on programming in 2022. But he is additionally made price consciousness a degree of satisfaction.
“We’re going to spend more on content — but you’re not going to see us come in and go, ‘Alright, we’re going to spend $5 billion more,'” Zaslav stated in February. “We’re going to be measured, we’re going to be smart and we’re going to be careful.”
The firm’s content material selections have been primarily based on strategic corrections, akin to eliminating made-for-streaming films and chopping again on children and household programming that do not materially entice new subscribers or maintain present ones, executives decided. Warner Bros. Discovery’s HBO continues to churn out hits, together with “White Lotus,” “Euphoria,” “House of the Dragon” and “Succession,” beneath the management of Casey Bloys.
V Anderson | WireImage | Getty Images
‘We do not must have the NBA’
Perhaps Zaslav’s greatest dilemma is what to do with the NBA.
Like different media firms, Warner Bros. Discovery rents the rights to hold video games and pays billions to leagues for the privilege. Warner Bros. Discovery at present pays round $1.2 billion per yr to place NBA video games on TNT. In 2014, the final time the league struck a take care of TNT and Disney’s ESPN, carriage rights rose from $930 million to $2.6 billion per yr.
Negotiations to resume TNT’s NBA rights will start in earnest subsequent yr. Zaslav has stated he has little curiosity in paying an enormous improve simply to hold video games once more on cable networks — a platform that loses thousands and thousands of subscribers every year.
“We don’t have to have the NBA,” Zaslav stated Nov. 15 at an investor convention. “With sport, we’re a renter. That’s not as good of a business.”
The downside for Zaslav is preserving legacy pay TV afloat could also be his greatest strategy to preserve money stream coming, and placing NBA video games on TNT could also be his greatest likelihood to do this. In the third quarter, Warner Bros. Discovery’s cable community enterprise had adjusted EBITDA of $2.6 billion on $5.2 billion of income. That’s in contrast with a direct-to-consumer enterprise that misplaced $634 million.
If Warner Bros. Discovery goes to pay billions of {dollars} a yr for the NBA, Zaslav desires a deal to be future-focused. He has the posh of getting NBA Commissioner Adam Silver’s ear for the subsequent three years as a result of the NBA will likely be on TNT via the tip of the 2024-25 season.
“If we do a deal on the NBA, it’s going to look a lot different,” Zaslav stated.
Charles Barkley on Inside the NBA
Source: NBA on TNT
Warner Bros. Discovery is aware of learn how to produce NBA video games and airs a studio present, “Inside the NBA,” which is extensively thought to be one of the best in skilled sports activities. It’s doable Zaslav might strike a take care of one other bidder, akin to Amazon or Apple, which can enable Warner Bros. Discovery to provide their video games whereas giving him a bundle of video games that got here with a cheaper price tag.
Ideally, Zaslav wish to do sports activities offers that embody possession of mental property. This can be interesting to Netflix, The Wall Street Journal reported final month. Acquiring leagues will get Zaslav out of the rental enterprise. But whereas smaller skilled sports activities leagues, akin to Formula One and UFC, are owned by media firms (Malone’s Liberty Media and Ari Emanuel’s Endeavor, respectively), it appears unlikely NBA house owners would conform to promote Warner Bros. Discovery a stake within the league.
Silver stated final month on the SBJ Dealmakers Conference he was open to rights offers structured in novel methods.
“We’re in the enviable position right now of letting the marketplace work its magic a little bit, you know, to see where the best ideas are going to come from, what’s going to drive the best value,” Silver stated.
It’s additionally doable Zaslav might stroll away from the NBA fully. While “Inside the NBA” co-host Charles Barkley not too long ago signed a 10-year contract to stick with Warner Bros. Discovery, it consists of an out clause if Zaslav would not re-up the NBA, in line with The New York Post.
Live sports activities aren’t essentially important to most streaming providers’ success. Netflix, Disney+ and HBO Max all have zero stay sports activities — at the very least for now.
The one certainty is Zaslav’s choice will likely be squarely primarily based on how a deal impacts the corporate’s free money stream.
“It’s how much do we make on the sport?” Zaslav stated. “When I was at NBC, when we lost football [in 1998], we lost the promotion of the NFL, which was a huge issue. Then you have the overall asset value without the sport. So you have to evaluate all that.”
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