Friday Mailing: Why Warner Bros. Discovery May See Hollywood's Future Better Than Hollywood
Warner Bros. Discovery CEO David Zaslav is the “new media mogul who is tearing up Hollywood”, according to an article this week from The Wall Street Journal's Joe Flint.
It’s the latest take on what former WarnerMedia CEO Jason Kilar told The Wrap is “a smaller fish consuming a much larger fish.” And that was effectively the gist of Flint’s story: the cost-conscious, cash flow-obsessed small fish of Discovery management who “isn’t afraid to ruffle the industry’s elite” as they rein in spending.
Flint highlights the strengths of Zaslav’s focus on financial discipline and how he is “a master communicator when it comes to talent”. But, he also highlights its downsides: Zaslav and his team are aggressively pursuing financial discipline while still on a learning curve about the business and the culture of the scripted world.
I think the not-so-implicit angle of the piece is that by focusing so relentlessly on cost-cutting - and by taking a scorched earth approach to what Kilar and his team built before - Zaslav may already be making the types of mistakes that will sink his Hollywood ambitions early.
There may be truth to that, but it has only been one month since the deal officially closed.
A more favorable angle to Zaslav’s ruthless cost-cutting back can be found in my essay Why YouTube Sees Hollywood’s Future in the Creator Economy: Are Zaslav and his team solving for economics, or are they solving for the more existential challenge of Warner Bros. Discovery's competition increasingly coming from YouTube creators?
Zaslav *is* right, it’s about unit economics
In February, I wrote If Investors AND A-List Talent Foresee Declining Returns from Streaming, Then What Happens Next?
I asked at the end: “what happens when inelastic demand suddenly displays elasticity because investors no longer buy into the premise that streaming no longer drives shareholder value?”
I was focused on the emerging contrast between the market signals of near-inelastic demand for more content for streaming, and the simultaneous market signals of declining economics for A-List talent. I added:
The more likely reality is all these A-list stars and their management are foreseeing signals of what producer Jason Blum predicted last summer: because the unit economics of streaming are bad for legacy media companies already, that poses a risk to talent of declining upfront payments. And, if both Disney's and [Paramount’s] declining ARPU are bellwethers, the challenge after Q4 2021 earnings will be whether that risk is now escalating.
All indications suggest that Zaslav and his team have these dynamics in mind. As I argued before in The Vibe Shift… “It’s All Happening”, CNN+ was not the kind of experiment that incoming Warner Bros. Discovery management was ready to stomach. Moreover, Zaslav avoided any discussion of streaming at Upfronts this week (though management promised an “awesome” merged product of HBO Max and discovery+).
The bigger reality: YouTube as a competitor
I wrote in Amazon, MGM, and How Lina Khan's FTC Misunderstands the Value of IP in Streaming, the value of discovery+ and Discovery’s unscripted content library now “stands in a David vs. Goliath competition with YouTube's growing library of creator economy unscripted content.”
Last November, YouTube’s top-earning creator, Jimmy Donaldson, aka MrBeast, posted a real-life version of Netflix’s “Squid Game,” which he produced on a $3.5 million budget but released for free. That now has over 250MM views and counting (NOTE: it is up by 46MM views or 22% since I wrote Why YouTube Sees Hollywood’s Future in the Creator Economy in January).
Of course, Zaslav’s challenge is in scripted content, too, and this is what makes MrBeast and content creators such a unique competitive threat: MrBeast was able to leverage Netflix’s scripted IP to achieve extraordinary scale for an unscripted production on YouTube. But not only that, he was able to turn around a massive international hit faster (less than two months after “Squid Game” was released on Netflix) and cheaper ($3.5MM, or the cost of one episode of scripted TV) and distribute it for free.
So, in this light, when Joe Flint reports that David Zaslav canceled “The Wonder Twins” - a live-action film based on the Warner Bros.-owned DC Comics superhero duo - “because he though its estimated $75 million-plus budget too high and its return too limited for a made-for-streaming movie”, the reasonable question is, “is he wrong?”
And the answer is probably not, assuming we believe MrBeast and 2MM other content creators in YouTube's Partner Program worldwide (and growing) are competing for the same audiences as Warner Bros. Discovery across Connected TVs and smartphone screens worldwide. And, they are finding wins with an approach of faster and cheaper productions that also are high quality.
The deeper issue
My own reaction to the Flint story on David Zaslav was this tongue-in-cheek tweet: “The greatest trick the Devil ever pulled was convincing David Zaslav that Jason Kilar got it wrong.” Because Flint implies Zaslav is taking a General Sherman-esque, scorched earth approach to the legacies of Kilar and his management team, and other senior WarnerMedia management who opted not to leave last month.
That approach involves undermining the story of Kilar’s financial management of WarnerMeda (CFO Gunnar Weidenfels told investors, “Q1 operating profit and cash flow for WarnerMedia were clearly below my expectations” and because of that “our profit baseline for 2022 will be around $500 million lower than what I had anticipated”), and tearing down the fan-first approach with which Kilar launched his day-and-date Project Popcorn strategy.
It’s the familiar story of the outsiders proving themselves with Hollywood insiders, one that Kilar navigated well but also with turbulence. But, Zaslav’s background in unscripted and struggles to scale discovery+ while competing with YouTube means he is an outsider who may appreciate the competitive threat from YouTube and the Creator Economy better than Hollywood talent does.
Hollywood’s concerns about his focus on ruthless cost-cutting may be more a reflection of its collective blind spot than Zaslav making the types of mistakes that will sink his Hollywood ambitions early. And, as the saying goes, "In the land of the blind, the one eyed man is king.”