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AT&T’s WarnerMedia Group to Merge With Discovery

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It’s as if Logan Roy, the fictional patriarch of the Waystar Royco media empire on HBO’s popular series “Succession,” masterminded the deal himself: AT&T has thrown in the towel on its media business and decided to spin it off into a new company that will merge with Discovery Inc.

The transaction will combine HBO, Warner Bros. studios, CNN, TNT, TBS and several other cable networks with a host of reality-based cable channels from Discovery such as Oprah Winfrey’s OWN, HGTV, the Food Network and Animal Planet.

But it raises numerous questions about what that will mean for popular shows and streaming platforms, whether entertainment bills will go up or down, or what will happen to the people working at WarnerMedia and Discovery.

WarnerMedia is known for producing some of the industry’s biggest theatrical and television hits.

HBO last year captured more Emmys than any other network, studio or platform, and its hit shows include “Succession,” “Curb Your Enthusiasm” and “Last Week Tonight With John Oliver.” It also has a huge library that includes “The Sopranos,” “Game of Thrones” and “Sex and the City.”

The Warner Bros. TV studio has produced successful shows for both its parent company, WarnerMedia, and others with series like “Ted Lasso” (Apple TV+), “Riverdale” (CW) and “The Bachelor” (ABC), and the Warner Bros. movie studio recently released movies like “Godzilla vs. Kong” and “Mortal Kombat.” It also owns DC Comics and has invested heavily in creating superhero films to rival Disney’s Marvel franchise.

Discovery’s most popular shows include “90 Day Fiancé,” “Flip or Flop” and “Property Brothers,” and it also owns Oprah Winfrey’s cable network OWN and has commissioned a special show with Ms. Winfrey just for the Discovery+ platform.

The big endgame in media today is streaming. Netflix, the industry leader, has over 200 million subscribers, and everyone else is far behind.

Both WarnerMedia and Discovery have invested heavily in streaming. WarnerMedia has spent billions building HBO Max, which together with the HBO cable network has about 44 million customers. Discovery has 15 million global streaming subscribers, most of them for its Discovery+ app.

The companies plan to invest more in both services to get those numbers much higher. David Zaslav, the chief executive of Discovery, who will run the new business, said on Monday that he envisioned hundreds of millions of subscribers around the world, but that will be tough as Netflix and Disney invest in new shows of their own to keep a grip on the market.

It’s likely the new company will take a page from Disney’s playbook and offer a bundle of streaming services at a discount. WarnerMedia is also still planning to launch an ad-supported streaming service sometime this year.

But streaming is still a money-losing game, and traditional cable networks continue to generate billions in profits even as fewer people are tuning in every day.

The new company expects to generate $52 billion in sales and $14 billion in pretax profit by 2023. Streaming will be a big driver of that growth and is estimated to bring in $15 billion in revenue.

But the company will also be saddled with $58 billion of debt. The combined business could spend as much as $20 billion a year on developing content, but it’s unclear how much of that money will be allocated to streaming versus traditional cable.

“Our No. 1 priority is to broaden our reach around the world,” Mr. Zaslav said in an interview. But he added that the traditional cable business was still very lucrative.

That’s what one Wall Street analyst suggested on Monday morning.

“One is left wondering whether there is more of the story yet to come,” Craig Moffett, co-founder of the Wall Street research firm MoffettNathanson, wrote, speculating whether Comcast’s NBCUniversal could be an interested suitor for HBO. Comcast is unlikely to make a play for CNN or the Warner Bros. studio, he wrote, “but one could argue that HBO is a must-have.”

AT&T’s chief executive, John Stankey, played down the idea that HBO could be yanked away from Discovery if an interested buyer suddenly emerged.

“If you step back and think about what holds this transaction together, it’s not just one or two pieces,” he said in an interview. “It’s the whole thing together.”

Mr. Stankey added that “to kind of mix and match things and thinking about ripping stuff out and putting one asset somewhere else, your overall financial equation, a value proposition out to the market, kind of falls apart.”

Mr. Zaslav, a veteran media executive who has spent most of his career at NBC, will run the new business.

Mr. Zaslav represents the last of the old guard in media, a hobnobbing mogul known for hosting lavish get-togethers at his house in the Hamptons.

In fact, Mr. Zaslav was hoping to initiate deal talks with Mr. Stankey at the Pebble Beach Pro-Am golf tournament in February. The pandemic kept them at home. Mr. Zaslav sent Mr. Stankey an email instead.

“You around?” Mr. Zaslav wrote. “I have an idea.” He signed off with several 🏌🏻emojis and one 😎.

Few people at either company were aware talks about a deal were underway, which could also mean there will be a restructuring at both companies after the deal closes.

Jason Kilar, who was hired to run AT&T’s media group only last year, is most likely on his way out. He was kept in the dark about the deal until a few days ago, and he has hired a legal team to negotiate his departure, according to two people briefed on the matter.

But it could mean the elevation of other executives within WarnerMedia. On Monday, Mr. Zaslav praised Toby Emmerich, the head of the film division, Casey Bloys, who runs HBO, and Jeff Zucker, the leader of CNN. Mr. Zucker and Mr. Zaslav are also longtime golfing buddies.

When asked about his plan for the management team, Mr. Zaslav said he would not favor Discovery executives.

“Philosophically, our view is we don’t know better,” he said. “There’s a reason WarnerMedia is where it is today.”

The companies expect the deal to be finalized in the middle of next year, and they anticipate annual cost savings of $3 billion. That usually means layoffs are coming.

WarnerMedia already went through several rounds of deep staff cuts after AT&T’s purchase of the company in 2018 as Mr. Stankey, who led the unit for a time, slimmed down the operations. Executives and managers were let go as he combined HBO, Warner Bros., CNN and the other cable networks under a single management team.

When Mr. Kilar came aboard last year, he cut further. Over 2,000 employees were laid off in the process.

To realize $3 billion in cost savings will inevitably mean more layoffs — at both WarnerMedia and Discovery. Mr. Zaslav said there was “a treasure trove of talent” at WarnerMedia, and emphasized the fact that Discovery doesn’t make scripted shows.

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