Five years almost to the day after it began, Hollywood’s evangelistic fervor for streaming has been extinguished this week by the “Batgirl” imbroglio. 

Warner Bros. Discovery’s decision to scrap the completed DC Comics film that was bound for HBO Max marks the boldest example of Old Media economic rigor being applied to contemporary content spending. 

David Zaslav, CEO of the newly reconfigured media conglomerate, didn’t even mask his bewilderment at the decision-making process and optimistic profit projections made by the previous WarnerMedia regime. Zaslav and other executives spoke Aug. 4 during WB Discovery’s second-quarter earnings conference call with Wall Street analysts that ran 95 minutes as executives spoke with candor about the new world order. 

Zaslav and WB Discovery chief financial officer Gunnar Wiedenfels said more than once, with palpable exasperation, that there was simply no business case to be made for spending $90 million on a DC Comics movie designed to skip theaters and go straight to HBO Max.   

“We’ve looked hard at the direct-to-streaming business,” Zaslav said. “And our conclusion is that expensive direct-to-streaming movies in terms of how people are consuming them on the platform, how often people go there or buy it or buy a service for it and how it gets nourished over time is no comparison to what happens when you launch a film in the theaters. And so this idea of expensive films going direct-to-streaming, we cannot find an economic case for it. We can’t find an economic value for it.” 

The emphasis on how “Batgirl” could – or could not – possibly recoup its costs was the equivalent of a bucket of ice water being thrown on the media and entertainment sector. Zaslav has already vowed that he’s not trying to “win the spending wars” as he made the pre- and post-merger rounds around the AT&T spinoff transaction with Discovery.

But the granular financial detail and significant strategy shifts outlined by Zaslav and Wiedenfels brought the curtain down on a period of irrational exuberance in Hollywood that began on Aug. 8, 2017 – the day former Disney CEO Robert Iger surprised many of those same Wall Street analysts by announcing plans to launch the streaming platforms that became Disney+ and ESPN+. 

“I would characterize this as an extremely important, very, very significant strategic shift for us,” Iger said at the time. 

That was the cap gun going off. From that day on, Disney outmaneuvered to Comcast buy 20th Century Fox, AT&T went after what was then Time Warner and Paramount Global chair Shari Redstone redoubled her efforts to reunite Viacom and CBS under one roof in a deal completed in December 2019. 

Disney’s strategy pivot toward a direct-to-consumer business model for most of its content – following the path blazed by Netflix as a platform with global reach – also crystallized the industry focus on content spending as measured in double-digit billions. Netflix drew talent like moths to a flame with its regular reveals of eye-popping content spending numbers. The traditional TV industry was already feeling the strain of Peak TV production levels, but Disney’s big move in 2017 set most of its Hollywood peers on a mission to further grow the volume of content production. 

Five years later, there’s more content available than ever before but the path to seeing a return on movies and TV shows that are less than “Top Gun: Maverick” and “Stranger Things”-level smash hits is murkier than ever. It’s no secret that executives at Netflix, Amazon, Disney+ and others are looking at the worst-performing shows in their vast streaming libraries. There’s growing realization that there’s a financial imperative to consider some form of syndication licensing for little-watched shows in the hopes of seeing some kind of return by selling it to an outside buyer.

Paramount Global CEO Bob Bakish has been a proponent of taking a diversified approach to streaming. He has championed the company’s investment in free ad-supported TV (FAST) channels on its wholly owned Pluto TV platform, which is built on a revenue-share model with outside content providers, mixed with the premium subscription content offered by Paramount+ and the standalone Showtime streaming app.

“We believe our streaming business can get to TV Media-like margins (of 20%-25%) over time,” Bakish told Variety. “We’ve only been in streaming for a short time. It’s going to take a little while and that’s why we say our model has some real advantages.” 

Heretofore, the major TV networks have never had to grapple with juggling so much movie and TV inventory – all of which comes with some level of residual fees due to creative partners. That’s another cold, hard financial reason why it made more sense for WB Discovery to ground “Batgirl” and take a big tax write-off on the movie rather than spend more money on a property that  Zaslav made clear was not up to snuff for the valuable “Batman” franchise. 

Wiendenfels acknowledged that WB Discovery’s thinking on content spending for its soon-to-merge streaming platforms – HBO Max and Discovery Plus – has changed over the 16 months since Discovery and AT&T first reached a deal on the spinoff transaction that created WB Discovery. Those changes were also surely accelerated by the volatility in equities markets and the plunge in WB Discovery stock price over the past few months. On Friday, the market cap of the company that is home to two of Hollywood’s glossiest brands — HBO and Warner Bros. — fell to $35.4 billion as the stock price sank 16% following the after-market earnings report. 

Direct to consumer streaming is “one platform in a larger portfolio of assets and in a larger lineup of distribution outlets. We are not going to be religious about driving hard to fuel just one platform,” Wiedenfels said on the call. “DTC has its space and Warner Bros. Discovery is uniquely positioned with the enormous surface area with our customers to service them and to tell great stories for decades to come.” 

Zaslav went further, saying that WB Discovery will return to pursuing international sales of content in select cases. Under the previous WarnerMedia regime led by Jason Kilar, the studio made the hard choice to forgo that third-party revenue in favor of stocking up titles that could only be found on HBO Max. 

“Anything that’s important to us to growing HBO and HBO Max … we are going to keep that exclusively,” Zaslav said. “What kind of content could be non-exclusive and have no impact on us (that’s what) we want to monetize to drive economic value. And then there’s content that we are not even using right now — massive amounts of TV and motion picture content that we are not using.” 

The steepness of the climb that Team Zaslav has ahead was underscored by a question from Morgan Stanley media analyst Ben Swinburne, who gently reminded the new owners that HBO not long ago was delivering about $2.5 billion in earnings (before interest, taxes, depreciation and amortization) a year as a linear cable offering. 

But therein also lies the dilemma for Big Media. There’s no going back to the linear era of fat profit margins from traditional cable. The explosion of free and lower-cost options has led to a steady shrinkage of high-paying subscribers to linear MVPD providers like Comcast, Charter and DirecTV. The customer exodus is tallied every quarter, because of pay-TV’s importance to Hollywood earnings.

WB Discovery is mulling a FAST channel iteration of HBO Max and Discovery+ to serve as a kind of barker service to lure paying subscribers. The exploding popularity of FAST channels has industry veterans clucking that consumers now have the means to recreate the traditional cable bundle but on economic terms that are far worse for content providers.

All of this volatility, coupled with the gathering macroeconomic headwinds, explain why media stocks have been pummeled so far this year. Once Netflix’s aura of invincibility came down with its Q1 surprise of subscriber losses ahead, the gospel of spend-at-all-cost to build platforms and gain market share has lost some of its hold on CEOs and CFOs.  

The health of the subscription streaming market will get an important temperature check next week when Disney reports its fiscal Q3 earnings on Aug. 10. 

Paramount’s Bakish has been gratified to see that the strategy he set off on in 2019 of assembling a mixed portfolio of FAST and pay channels is being embraced by Paramount’s larger rivals. With the road ahead more unclear than ever, Bakish said it’s the kind of business environment that creates its own opportunities, for companies that aren’t paralyzed by fear and second-guessing.

“You make your own decisions about what to do and then get on about doing it,” Bakish said. 

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