On Monday, AT&T and Discovery reached a $43 billion deal to create a hybrid streaming service. The negotiation will merge Discovery+’s catalog with AT&T’s WarnerMedia to create a comprehensive library with 200,000 hours of content.
The all-stock agreement is a Reverse Morris Trust transaction where AT&T is granting Discovery ownership to WarnerMedia while bypassing taxes. In return, AT&T will receive cash and bonds that could help rid the company of its $170+ billion debt.
Read on to understand the industry-transforming negotiation and how it can impact the streaming market in the near future.
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A New Streaming Platform Benefits Users & Shareholders
While AT&T and Discovery representatives have already agreed, the deal is expected to close in mid-2022. Until then, each company will be working to pair WarnerMedia’s sports, news, and entertainment programming (including HBO, Warner Bros, DC, CNN, TNT, TBS) with Discovery’s lifestyle and animated channels (including Cartoon Network, HGTV, Food Network, TLC).
Discovery’s CEO David Zaslav will lead the project. “It is super exciting to combine such historic brands, world class journalism and iconic franchises under one roof and unlock so much value and opportunity,” Zaslav said in the news release.
A combination of these assets would create one of the most diverse streaming portfolios in the world. Industry experts predict this will greatly appeal to users, who tend to prefer “a broad range of shows and movies, and new and original content unavailable on other services” when seeking out a streaming platform.
Both companies believe the future service could reach 1 in 5 American customers every day and achieve 80 million subscribers in its early stages.
“This agreement unites two entertainment leaders with complementary content strengths and positions the new company to be one of the leading global direct-to-consumer streaming platforms,” said AT&T CEO John Stankey in the news release.
WarnerMedia’s HBO Max surpassed 44 million users this year, with subscription-driven revenue up 35% from last year. Additionally, Discovery+ reached 13 million subscribers since its initial launch in 2020 and U.S. launch in 2021.
Both WarnerMedia and Discovery+ are looking to continue their recent success through a hybrid streaming platform, which is projected to generate a $52 billion revenue stream in 2023, according to AT&T’s press release.
The deal will also benefit each company’s shareholders. It was agreed that AT&T shareholders will own 71% of the new streaming company and Discovery shareholders will own the rest.
A board of directors will eventually guide the streaming company’s decisions, composed of seven AT&T-appointed members and six members appointed by Discovery.
“[Through this deal] we believe everyone wins…consumers with more diverse choices, talent and storytellers with more resources and compelling pathways to larger audiences, and shareholders with a globally scaled growth company committed to a strong balance sheet that is better positioned to compete with the world’s largest streamers,” said Zaslav in the news release.
Keeping Pace With the Streaming Industry
This merger could allow each company to further its footprint in the direct-to-consumer streaming market. Moreover, it’s a timely initiative to keep pace with the current industry leaders: Disney+ and Netflix.
Disney+recently surpassed 100 million subscribers and is predicting to acquire 230-260 million subscribers by 2024. Following its own landmark deal with 21st Century Fox in 2019, Disney has since surpassed the halfway point to Netflix’s subscriber tally in just under two years.
On the other hand, Netflix has seen fluctuations in its growth. The company added 16 million users during Q1 2020, yet only 4 million subscribers during Q1 2021. This could be attributed to a 12% decrease in Netflix originals released this year, as well as a readjustment from the hypergrowth experienced in the pandemic.
Customer acquisition and retention will remain a battleground for streaming companies. Currently, there is a 37% churn rate amongst streaming subscribers, and Discovery and AT&T are looking for ways to minimize this. According to LA Times, the tax-less deal could save $3 billion annually, which the companies will reinvest in content creation and digital innovation. This will allow them to keep up with competition while also working to keep users engaged.
“We will build a new chapter together with the creative and talented WarnerMedia team and these incredible assets built on a nearly 100-year legacy of the most wonderful storytelling in the world. That will be our singular mission: to focus on telling the most amazing stories and have a ton of fun doing it,” added Zaslav in the news release.
HBO Max witnessed its highest rate of growth in March 2021 when binge-viewing increased by 65% and movie viewership increased by 70%. Discovery may look to benefit from WarnerMedia’s recent success and vice versa.
“[This agreement] will support the fantastic growth and international launch of HBO Max with Discovery’s global footprint and create efficiencies which can be re-invested in producing more great content to give consumers what they want,” said Stankey in the news release.
- On Monday, AT&T and Discovery agreed on a $43 billion deal to create a hybrid streaming company with nearly 200,000 hours of content.
- AT&T shareholders will own 71% of the new streaming company and Discovery shareholders will own the rest.
- Discovery and AT&T are investing $3 billion annually in content creation and digital innovation.
- Following a similar landmark deal with 21st Century Fox in 2019, Disney+ has since surpassed the halfway point to Netflix’s subscriber tally in just under two years.