“Batgirl” flap signals end of streaming evangelism in Hollywood

Almost five years to the day since it began, Hollywood’s evangelistic zeal for streaming was snuffed out this week by the “Batgirl” mess.

Warner Bros. Discovery’s decision to scrap the completed DC Comics film destined for HBO Max is the boldest example of legacy media’s economic rigor applied to contemporary content editions.

David Zaslav, CEO of the newly formed media conglomerate, did not hide his surprise at the decision-making process and the optimistic profit forecasts of the former WarnerMedia regime. Zaslav and other executives spoke to Wall Street analysts during WB Discovery’s second-quarter earnings call on Aug. 4, which lasted 95 minutes as executives spoke candidly about the new world order.

Gunnar Wiedenfels, Zaslav and WB Discovery’s chief financial officer, has said more than once, with palpable desperation, that there simply wasn’t a business case for spending $90 million on a DC Comics film designed to skip theaters and go straight to HBO Max.

“We’ve been looking deeply into the direct-to-streaming business,” Zaslav said. “And our conclusion is that expensive direct-to-stream movies in terms of how people consume them on the platform, how often people go there or buy them or buy a service for them and how they’ve been nurtured over time.” are no comparison to what happens when you start a movie in theaters. And so we can’t find any economic reason for this idea of ​​expensive movies being streamed direct. We can’t find any economic value for it.”

Emphasizing how “Batgirl” might – or might not – recoup its costs was the equivalent of a bucket of ice water being thrown at the media and entertainment sectors. Zaslav has already vowed he’s not trying to “win the spending wars” while doing the pre- and post-merger rounds around the AT&T spinoff deal with Discovery.

But the granular financial details and significant strategy shifts outlined by Zaslav and Wiedenfels drew the curtain on a period of irrational exuberance in Hollywood that began on Aug. 8, 2017 — the day former Disney CEO Robert Iger dismissed many of those Wall-Street Analysts surprised by announcing plans to launch the streaming platforms that have become Disney+ and ESPN+.

“I would call this an extremely important, very, very significant strategic shift for us,” Iger said at the time.

That was the cap cannon going off. From that day on, Disney has outmaneuvered Comcast Buy 20th Century Fox, AT&T pursued then-Chairwoman of Time Warner and Paramount Global Shari Redstone, doubling down on efforts to bring Viacom and CBS back under one roof in a deal completed in December 2019.

Disney’s strategy of focusing on a direct-to-consumer business model for most of its content – following the path Netflix has taken as a platform with a global reach – also crystallized the industry’s focus on spending on content made in be measured in the tens of billions. Netflix drew talent like moths to fire with its regular revelations about startling content spending numbers. The traditional television industry was already feeling the strain of TV production spikes, but Disney’s big move in 2017 prompted most of its Hollywood peers to continue increasing the volume of content production.

Five years later, more content is available than ever, but the road to a return of movies and TV shows less than hits Top Gun: Maverick and Stranger Things is murkier than ever. It’s no secret that executives from Netflix, Amazon, Disney+, and others are looking at the worst-performing shows in their vast streaming libraries. There’s a growing realization that it’s a financial imperative to consider some sort of syndication licensing for little-watched shows in hopes of some sort of return on sale by selling them to an outside buyer.

Paramount Global CEO Bob Bakish has been a proponent of a diversified approach to streaming. He has championed the company’s investment in free-to-air TV (FAST) channels on its wholly-owned Pluto TV platform, which is built on a revenue-sharing model with external content providers, blended with the premium subscription content offered by Paramount+ and the standalone offering become Showtime streaming app.

“We believe our streaming business can reach TV media-like margins (from 20% to 25%) over time,” Bakish said diversity. “We’ve only recently gotten into streaming. It’s going to take a while and that’s why we say our model has some real benefits.”

Until now, the major TV networks have never had to deal with juggling so much film and TV inventory – which all comes with a certain level of residual fees due to creative partners. That’s another cold, hard financial reason why it made more sense for WB Discovery to ground Batgirl and take a big tax write-off on the film rather than spend more money on a property that Zaslav made clear it didn’t had grown valuable “Batman” franchise.

Wiendenfels acknowledged that WB Discovery’s mindset on content spending for its soon-to-be-merged streaming platforms — HBO Max and Discovery Plus — has changed in the 16 months since Discovery and AT&T first reached an agreement on the spin- off transaction that resulted in WB Discovery. These changes have certainly also been accelerated by the volatility in stock markets and the collapse in WB Discovery’s share price in recent months. On Friday, the market cap of the company, which is home to two of Hollywood’s brightest brands — HBO and Warner Bros. — fell to $35.4 billion as its share price fell 16% following its after-market earnings report.

Direct-to-consumer streaming is “a platform in a larger portfolio of assets and in a larger lineup of outlets. We will not be religious when it comes to driving hard to fuel just one platform,” Wiedenfels said at the call. “DTC has its space and Warner Bros. Discovery’s massive footprint is uniquely positioned with our customers to serve them and tell great stories for decades to come.”

Zaslav went even further, saying that WB Discovery will return to selling content internationally in select cases. Under the previous WarnerMedia regime, led by Jason Kilar, the studio made the difficult decision to forgo that third-party revenue and instead stock up on titles found only on HBO Max.

“Anything that’s important to us as we grow HBO and HBO Max … we’re going to keep that exclusive,” Zaslav said. “What kind of content could be non-exclusive and have no impact on us (that’s it) what we want to monetize to add economic value. And then there’s content that we’re not even using right now – huge amounts of TV and film content that we’re not using.”

The precipitous climb that Team Zaslav faces was underscored by a question from Morgan Stanley media analyst Ben Swinburne, who gently reminded the new owners that not so long ago, HBO reported about $2.5 billion in earnings (before interest, taxes, depreciation and amortization) per year as a linear cable offering.

But therein lies the dilemma for big media. There’s no going back to the linear era of traditional cable’s fat margins. The explosion of free and lower-cost options has led to a steady decline in high-paying subscribers from linear MVPD providers like Comcast, Charter, and DirecTV. Because of the importance of pay-TV to Hollywood revenue, churn is recorded every quarter.

WB Discovery is considering a FAST channel iteration of HBO Max and Discovery+ that will serve as a barker service of sorts to attract paying subscribers. The skyrocketing popularity of FAST channels has industry veterans cackling that consumers now have the means to recreate the traditional cable bundle, but on economic terms far worse for content providers.

All of this volatility, coupled with mounting macro headwinds, explains why media stocks have been under pressure so far this year. With Netflix’s aura of invincibility shattered with the Q1 surprise of subscriber losses, the gospel to spend at all costs to build platforms and gain market share has lost some of its hold on CEOs and CFOs.

The health of the subscription streaming market will face a key temperature test next week when Disney reports its fiscal third quarter results on Aug. 10.

Paramount’s Bakish is pleased to see that the strategy he embarked on in 2019 of assembling a blended portfolio of FAST and pay channels is being embraced by Paramount’s larger competitors. With the path forward more unclear than ever, Bakish said this is the kind of business environment that creates its own opportunities, for companies not paralyzed by fear and doubt.

“You make your own decisions about what to do and then move on,” Bakish said.