Warner Bros Discovery (WBD) management bets that old-fashioned advertising can save their media giant.
To explain, Warner Brothers is moving its video content from the HBOMax subscription service to FAST channels. To explain, FAST stands for Free-ad supported Television. A FAST channel is a streaming service with ads.
A FAST gives viewers access to hundreds or thousands of hours of free programming. In exchange, viewers have to sit through ads like the ones on broadcast or cable TV.
The Rise of the FASTs
FAST viewership is growing dramatically. The Vulture estimates the most popular FAST Paramount Global’s (PARA) Pluto had 70 million monthly active viewers in August 2022.
FAST Channels are popular because they offer an incredible variety and amount of programming. Pluto, for example, offers hundreds of old movies and thousands of episodes of classic TV shows such as Star Trek and the Andy Griffith Show. It also offers CBS soap operas, game shows, and some sports. I have found everything from Breaking Bad to old Impact Wrestling pay-per-views on Pluto.
I think one reason for FAST popularity is that their offerings are closer to popular tastes than the programming on outlets such as Netflix (NFLX). Pluto, for example, offers reruns of Walker Texas Ranger and Married With Children instead of The Boyz or Wednesday.
Another reason for FAST success is that they are cheaper and easier to access than DVDs. You don’t have to spend hundreds of dollars on DVDs you may never watch.
The Warner Bros Content Purge Explained
Warner Bros Discovery (WBD) management thinks FASTs are the future of streaming.
For example, Warner Bros is purging enormous amounts of content from its paid streamer HBOMax. For instance, they will pull Westworld, Raised by Wolves, and the popular DC Comics animated superhero shows Justice League and Justice League Unlimited from HBOMax.
Warner Bros Discovery will license those shows to FAST services such as Pluto and Tubi, Comicbook reports. Management hopes to make money from licensing those shows. The FAST market is growing. S&P Global Market Intelligence projects US FAST ad revenues could rise from $4 billion in 2022 to $9 billion in 2026.
Moreover, Warner Bros Discovery could create its own FAST featuring its programming to cash in on this growth, Comicbook speculates. I think Warner Bros Discovery has the ingredients for a successful FAST. For example, all the Hanna Barbera cartoons (including Scooby Doo and The Flintstones), DC superheros, the Turner Classic Movies library of old movies, the Arrowverse, Supernatural, and Discovery reality shows such as Mythbusters, and AEW pro wrestling which airs on Warners’ TV networks TBS and TNT.
In particular, I think Warner Bros’ Lois and Superman CW series could be a perfect flagship show for a FAST. Warner Bros’ Titans show based on the Teen Titans comic books, could also be a great FAST offering. I think a smart move Warner Bros is to revive the CW shows Stargirl and The Flash as FAST offerings.
Why Warner Bros needs a FAST
It is easy to see why Warner Bros Discovery (NASDAQ: WBD) is purging content and moving into FASTs. Warner Bros is experiencing enormous losses.
For example, Warner Bros Discovery reported a -$2.19 billion quarterly operating loss on 30 September 2022. The quarterly operating loss shrank from -$3.639 billion on 30 June 2022.
The enormous losses come from WarnerMedia’s merger with Discovery Inc. which created Warner Brothers Discovery in April 2022. The merger is the reason WarnerBros Discovery’s revenues grew by 220.90% in the quarter ending on 30 June 2022 and 211.84% in the quarter ending on 30 September 2022.
Warner Bros Discovery’s quarterly revenues grew from $3.159 billion on 31 March 2022 to $9.827 billion on 30 June 2022 and $9.823 billion on 30 September 2022. Similarly, the quarterly gross profit grew from $1.923 billion on 31 March 2022 to $4.196 billion on 30 September 2022.
In contrast, the Quarterly Operating income fell from $353 million on 31 March 2022 to -$2.19 billion on 30 September 2022. Thus, the merger gave Warner Bros Discovery more resources and bigger losses.
I think Warner Bros discovery is desperate to cover those losses. For example, CBR alleges Warner Bros Discovery is removing content to get tax write offs. The content purge generated $2.8 billion and $3.5 billion in tax write offs for Warner Bros Discovery, CBR estimates.
However, United Talent Agency CEO Jeremy Zimmer thinks the damage the purge is doing to the franchises and Warner Bros relationship with fans and creative talent will hurt the company. “It takes years to build the trust of artists, the brand of Warner Bros., and it doesn’t take long to destroy that,” Zimmer told Puck.
I think Warner Bros’ Discovery’s content purge is justified by the losses.
How Much Cash is Warner Bros Discovery Generating?
I think Warner Bros’ Discovery’s content purge is justified because the company is not generating cash.
For example, the quarterly operating cash flow fell from $1.011 billion on 30 June 2022 to $124 million on 30 September 2022. Similarly, the quarterly ending cash flow fell from $4.165 billion on 31 March 2022 to -$1.383 billion on 30 September 2022.
Warner Bros Discovery (WBD) is generating some cash, but the cash flow is falling. For example, the company reported a quarterly investing cash flow of $2.351 billion on 30 June 2022.The quarterly investing cash flow fell to $862 million on 30 September 2022.
Enormous Debt and Less Cash
More importantly, WBD reports negative quarterly financing cash flows. That shows the company is paying off debts despite the merger. For example, there was a quarterly financing cash flow of -$3.57 billion on 30 June 2022 to -$2.313 billion on 30 September 2022.
Unfortunately, the merger saddled the company with enormous debt. Warner Bros Discovery’s total debt grew from $14.399 billion on 31 March 2022 to $52.485 billion on 30 June 2022 but fell to $49.869 billion on 30 September 2022. So the debt is shrinking.
Conversely, Warner Bros Discovery’s cash and short-term investments fell from $4.162 billion on 31 March 2022 to $2.575 billion on 30 June 2022 and $2.422 billion on 30 September 2022.
What Value Does Warner Bros Discovery Offer?
I think Warner Bros Discovery (WBD) has some tremendous value potential because of its vast library of content and streaming experience.
For example, viewers surveyed by Hub Entertainment Research gave the company’s Discovery+ and HBOMax high marks for reasonable numbers of ads in shows, Fierce Video reports. In detail, 61% of viewers though Discover+ had a reasonable level of ads while 53% thought HBOMax had a reasonable number of ads.
In contrast, only 43% of viewers, thought Paramount+ had a reasonable number of ads and 37% of viewers think FASTs have reasonable ad levels. Although FASTs had a better reputation than live TV. Only 22% of viewers think the number of ads on live TV (broadcast and cable) is reasonable. Hence, 88% of viewers think live TV has too many ads which could give FASTs an advantage in the video wars.
Although, Warner Bros Discovery’s value is falling. The Total Current assets fell from $15.449 billion on 30 June 2022 to $12.672 billion on 30 September 2022. The total assets grew from $7.123 billion before the merger.
Is Warner Bros Discovery a Value Investment?
Many people will wonder if Warner Bros Discovery (WBD) is a value investment because of its share price.
Mr. Market paid $9.17 for WBD on 23 December 2022. In contrast, Mr. Market paid $294.96 for Netflix (NFLX), $16.676 for Paramount Global (PARA), and $88.01 for Disney (DIS) on the same day.
Warner Bros Discovery has lost stock value. It started trading at $25.50 on 4 April 2022.
If you are looking for a bargain stock in the streaming video realm. I think Warner Bros Discovery is worth examining. This stock is cheap and I think the company could make money from FAST with some clever management and marketing.
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