October 7, 2022


Discovery by Warner Bros Inc.

WBD 4.61%

is exploring the launch of a free ad-supported streaming service, its CEO said, the latest effort by a streaming giant to reach a wider audience as competition for users intensifies.

The new company, the result of Discovery’s merger with AT&T Inc.’s WarnerMedia. earlier this year, will focus first on The previously announced plan to combine the two main streaming services, HBO Max and Discovery+, executives said during a call with investors. The combined subscription platform will launch in the US next summer, said JB Perrette, the company’s CEO of global streaming.

Once that service launches, the company sees potential for a free, ad-supported offering, said CEO David Zaslav. The free service would cater to cost-conscious consumers and serve “as an entry point to our premium service,” he said.

The announcement came as Warner Bros. Discovery reported its first quarterly earnings as a combined entity, with a loss due to merger-related charges and warning investors that a slowdown in advertising led it to cut its outlook for this year and next.

The company’s shares fell 12% in after-hours trading.

As the number of streaming options has exploded over the past three years, many companies are trying to offer lower-cost versions of their services in an effort to boost their user base. The two biggest players in the industry, Netflix Inc. and Walt Disney Co.

Disney+ are both working to launch lower-priced, ad-supported versions of their platforms.

The exploration of a free streaming service is the latest example that the new management – led by Mr Zaslav – is more than willing to move away from the company’s approach when it was controlled by AT&T and led by Jason Kilar.

Mr Zaslav has moved quickly since taking office in April. That included pulling the plug on CNN+ days on the job — and just weeks after the streaming service launched — as well as canceling movies and shows that had been approved by previous leadership. The company earlier this week decided not to release the superhero movie “Batgirl” despite the fact that it had already been filmed.

“We’re not going to make a movie if we don’t believe in it,” Mr. Zaslav said during the call.

Mr. Zaslav said the company’s new approach was to put more emphasis on quality content. “It’s not about how much,” he said. “It’s about how good.”

Warner Bros. Discovery — whose properties include the Warner Bros. movie studio and cable channels TNT, Food Network and HGTV in addition to HBO and CNN — posted a loss of $3.42 billion in the second quarter, which it said was due to in part to merger-related charges. Revenues were about $9.83 billion.

Chief Financial Officer Gunnar Wiedenfels warned investors that the company is adjusting its financial outlook for both 2022 and 2023 in part because of the macroeconomic environment affecting advertising.

“2022 will clearly be a transition year,” Mr Wiedenfels said. The company expects third-quarter global ad sales to decline “from high single digits to low double digits,” it said.

Mr. Wiedenfels said the company now expects adjusted earnings before interest, taxes, depreciation and amortization of between $9 billion and $9.5 billion this year and at least $12 billion in 2023. The company previously expected adjusted ebitda of $10.2 billion for this year and 14 billion dollars for next year.

Warner Bros. Discovery said it had 92.1 million subscribers on its streaming platforms, up about 1.7 million from the first quarter. That compares with 220.7 million for Netflix and 205.6 million for Disney, whose services include Disney+, Hulu and ESPN+, according to the company’s most recent figures.

The streaming landscape has become increasingly fragmented in recent years, giving users an array of options. HBO Max, Discovery+, Disney+, Apple Inc

Apple TV+, Comcast Body

Peacock has entered the space since 2019, while Paramount Global has rebranded and expanded its CBS All Access service, now known as Paramount+. All are fighting for market share with more established players, including Netflix, Hulu and Amazon.com Inc

Prime Video.

Among those services, Peacock already offers a free, ad-supported tier of its platform, competing with a host of other players including Fox Corp.’s Tubi, Paramount Global’s Pluto TV, Amazon’s Freevee and its Xumo Comcast. These services, long derided as streaming’s second-class citizens, have grown significantly, while streaming’s biggest player, Netflix, has lost subscribers for two straight quarters.

Mr. Perrette said that content on a free Warner Bros. platform. Discovery will be very different from what will be in the future combined HBO Max and Discovery+. “The distinction is completely different,” he said.

Beyond exploring a free-to-air streaming platform, Warner Bros. Discovery said Thursday it is looking to raise prices for its subscription products and move away from deeply discounted offerings.

“We’re not trying to get every subscriber, we want to make sure we get paid and we get paid fairly,” Mr Zaslav said. “We want to drive profitability and free cash flow.” The price increases will occur in some international markets, Mr. Perrette said. “We will also schedule periodic increases as they are accepted in the market.”

Addressing the company’s heavy debt — $53 billion at the end of the second quarter — remains high on Warner Bros.’ priorities. Discovery. Mr. Wiedenfels said the company will devote any free cash flow it generates to paying down its debt. The company expects to generate $3 billion in free cash flow in 2022.

“We will have paid off $6 billion in debt by the end of August,” Mr. Zaslav said during the call.

Write to Lillian Rizzo at Lillian.Rizzo@wsj.com

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