Warner Brothers Discovery ushers in a new era of “Content Kings”
Just some of the content the Warner Brothers Discovery (WBD) owns.
One of the recurring themes of the Elevation Capital Global Shares Fund is IP (intellectual property). We love it. In our previous post, Content is King (and Undervalued) we wrote:
…the comparatively outsized impact legacy media has on popular culture and the zeitgeist (AT&T subsidiary HBO produced the show of last year, Succession; whilst ViacomCBS owned subsidiary Paramount produces arguably the second most important television show, Yellowstone; also consider the sheer amount of IP legacy media owns – everything from Mickey Mouse (Disney) to Star Trek (ViacomCBS) to The Wire (AT&T).
We love IP because it’s endlessly reusable; the value of Mickey Mouse is incalculable. The value of a library of content is also almost always underestimated – consider a movie like Ocean's Eleven. The 2001 Ocean’s Eleven reboot made US$450 million at the box office - but - like they say on the Shopping Network - “...and that’s not all”: the entire franchise has made US$1.4 billion at the box office (and even that’s not all – consider the streaming royalties ad perpetuum as a whole new generation discover the franchise years after it was produced). Warner Brothers Discovery, incidentally, owns the IP to Ocean’s Eleven and thousands of other movies, television shows, and related ephemera.
Children’s IP is even better. Consider Harry Potter. Harry Potter is one of the top grossing franchises of all time – grossing US$7.8 billion at the box office. Yet consider the new crop of children who are introduced to Harry Potter every seven years or so; that’s a whole new revenue stream. Or consider the limitless merchandising rights afforded by such valuable IP – the Wizarding World of Harry Potter (Orlando, Florida) is only the beginning. There’s trading cards, lollies, video games, clothing. You name it; someone has monetised it. In effect “evergreen” IP like this actually generates streams of recurring revenue, despite the initial investment often being made many years ago.
Our renewed focus on IP at present is because on Friday, 8 April 2022, the merger between Discovery Communications and the spun-off media unit of AT&T, Warner Brothers, took effect. We have owned fractional interests in both AT&T and Discovery in the Elevation Capital Global Shares Fund (“the Fund”) for this very reason – as of today investors in the Fund now own an interest in the new company: Warner Brothers Discovery.
This means investors in the Fund are now the proud owners of a global content behemoth. Warner Brothers Discovery (WBD) owns a lot of IP – from Ice Road Truckers to the hit TV series Succession to the DC Comics Franchise. It places WBD nearly on par with Disney, as illustrated in the graphic below:
We referenced in “Content is King (and Undervalued)” how consolidation is the likely, and perhaps inevitable outcome for studios. The cost of creating content simply keeps scaling, and to compete effectively (with pricing power) one’s studio needs to be a colossus. The resulting company is just this - WBD becomes a powerhouse of content (especially in terms of library) that can compete in today’s incredibly competitive media landscape. Investors in the Fund also own fractional interests in Paramount and Disney; if we were to own each company “whole” this would represent a ~51% interest in the total annual content consumed in the US alone.
The challenge now for WBD is to enhance its streaming platform to compete with that of Disney+ and Netflix (this is also the challenge which Paramount faces). The challenge is highlighted in the chart below – which details the demand shares for streaming catalogs – here WBD sits in third place; which illustrates just how effectively Netflix and Hulu (owned by Disney and NBC) have rolled out their platforms.
Despite its scale, Netflix is still at a disadvantage – early in its transition to a streaming platform it licensed shows from studios (Warner and Discovery among them) when the studios did not realise the value of their catalogs. Now the studios do, and they are pulling their content from Netflix as their license agreements expire; Netflix is disadvantaged in an “arms race” for content, unlike studios with a large library of valuable IP. Without a doubt there is an “arms race” for content — WBD is set to outpace Netflix’s content spend in aggregate, coming in second to only Disney. The difference between Netflix and WBD is IP — WBD has a vast library of hundreds of thousands of hours of content and incredibly strong franchises. Netflix is still building their IP library — it is an uphill battle in our view.
Source: Purely Streamonomics
Whilst there is an “arms race” between every major studio, the real challenge for WBD is to leverage their immense content library and render it to a streaming platform which provides access to all of WBD’s stellar content. The goal is conversion of audiences to an on-demand platform. We can’t help but feel WBD has been dealt a “royal flush” — with content from the likes of HBO, Discovery and the DC Franchise WBD has a veritable goldmine of IP — and content remains King. We are watching how CEO David Zaslav steers this incredibly exciting new company – and we can’t wait to see the new season of Succession (an HBO production, as it happens).
