Can the movie industry be saved?

Key Concepts

• Warner Brothers Discovery (WBD) Financial Performance: Third-quarter loss, 6% revenue decline, $148 million loss on $9 billion revenue.
• Strategic Alternatives for WBD: Split into two companies by mid-2026 (Plan A), potential sale of the full company or parts of the business.
• Potential Bidders for WBD: Netflix, Paramount, Comcast.
• WBD Business Segments:
  • Studio Business: Strong performance, films like "Superman" and "The Conjuring" boosted movie revenue by 74%. Expected to generate close to $4 billion in EBITDA. Valued at mid-teens multiple.
  • Linear TV Networks: Struggling, network revenue down 23%, advertising down double digits. Generates significant EBITDA ($6-7 billion) but with a low multiple (mid-single digits).
  • Sports and News: Plans for a new standalone US sports streaming app and retooling CNN into a global digital subscription platform.
• Synergies in M&A: Potential cost savings and value creation through combining businesses (e.g., Comcast combining its studio unit with WBD's).
• Paramount Global: Potential beneficiary of acquiring WBD, lacking a clear strategy, struggling streaming business, but has acquired sports rights and content deals.
• Netflix: Likely interested only in WBD's studio IP, defensive move, subscriber base over 300 million, potential acquisition price of $75-80 billion.
• Impact on Creative Industry: Job losses in LA County (41,000), consolidation leading to reduced output and potential reboots of IP.
• Production Cost Competitiveness: US struggles to compete with international film rebates and subsidies (up to 50% of production costs).
• Georgia Film Production Decline: Loss of 50% of production since 2022, $2 billion in direct economic activity lost, impacting jobs (e.g., Marvel movies).
• US-China Film Market: China's market has become insignificant for US films (dropped from 60-70% to 5% market share) as China developed its own domestic film industry.
• International Market Importance: Still generates significant revenue for big franchise movies (up to 60 cents on the dollar).

Warner Brothers Discovery's Financial Performance and Strategic Outlook

Warner Brothers Discovery (WBD) reported a third-quarter loss, with a 6% decline in revenue. The company incurred a $148 million loss on $9 billion in revenue, a stark contrast to its profitability in the previous year. Despite these financial challenges, WBD confirmed its plan to split into two separate companies by mid-2026, which is designated as "Plan A." However, the company also stated its openness to "all strategic alternatives," including the potential sale of the entire company or specific business units. While WBD did not disclose specific bidders, reports indicate interest from Netflix, Paramount, and Comcast.

Analysis of WBD's Business Segments and Valuation

Gita Raganathan, a senior media analyst at Bloomberg Intelligence, highlighted the distinct value propositions of WBD's different business segments in the context of a potential split or sale.

• Studio and Streaming Businesses: These are identified as the high-growth areas and the primary source of value for WBD. They are expected to generate nearly $4 billion in EBITDA this year and have a strong trajectory for increased profitability. These assets are highly sought after by potential bidders like Netflix and Comcast. The valuation multiple for this segment is estimated to be in the mid-teens.
• Linear TV Networks: This segment, characterized by declining viewership due to cord-cutting and ratings weakness, is considered a "no-growth" area. Despite its challenges, it remains a significant cash generator, contributing approximately 70% of WBD's total EBITDA this year, estimated to be between $6-7 billion. However, the valuation multiple for this business is significantly lower, at most mid-single digits.

The potential for synergies, such as cost savings of $3-5 billion if Comcast were to combine its studio unit with WBD's, is a key driver for potential acquirers.

Potential Bidders and Their Strategic Interests

The discussion explored the potential benefits for various bidders:

• Paramount Global: Seen as the entity that would benefit most from acquiring the entire WBD company, as they currently lack a clear strategy and are struggling in both their TV networks and studio/streaming businesses. Paramount's streaming service, despite acquiring sports rights (UFC) and content deals (South Park, Duffer Brothers), has not yet achieved profitability and has lost key talent like Taylor Sheridan.
• Netflix: Primarily interested in WBD's studio IP and library. Their interest is viewed as a defensive move, as acquiring WBD's subscribers (currently over 300 million) might not significantly boost their base, and they would likely need to discontinue the HBO Max business and global theatrical distribution. The potential acquisition price for WBD is estimated to be between $75-80 billion, raising questions about its worth for Netflix.
• Comcast: Mentioned as a potential bidder, particularly for the studio unit, with the potential for significant synergies.

The Fate of the Non-Film Business and Creative Industry Impact

Despite the challenges in the linear TV business, it is still seen as a valuable asset because it "throws out a lot of cash." The idea is that combining forces could help stem the decline and extract further value.

Chris Fenton, a media executive and professor at the University of Southern California, provided a perspective from within the creative industry. He highlighted the significant impact of consolidation on jobs, noting the loss of 41,000 jobs in LA County's entertainment business in recent years. He anticipates further job reductions and a consolidation in the creative aspect of Hollywood. If Paramount acquires WBD, there could be a reduction in movie output. If Netflix acquires WBD, they might focus on reboots of existing IP.

Production Cost Competitiveness and US Film Rebates

Fenton also addressed the decline in film production in areas like Atlanta, attributing it to the lack of a national policy on film rebates and subsidies in the United States. This makes it difficult for the US to compete on production costs with over 70 countries offering nationwide subsidies. While individual US states have incentives, they cannot match the global offerings, which can provide up to 50% of production costs back. Countries like Canada, with a weaker currency, further amplify this effect. Georgia, for instance, has seen a 50% decline in production since 2022, representing a loss of $2 billion in direct economic activity, impacting thousands of jobs associated with productions like Marvel movies.

Fenton advocates for incentivizing studios to keep production in the US through rewards (more incentives, subsidies, and cost-effectiveness) rather than punishment, such as tariffs on foreign films.

US-China Film Market Dynamics

The discussion touched upon the US-China film trade war. The Chinese market, once a significant revenue source for the US, has diminished in importance. The US inadvertently helped China develop its own domestic film industry, which now caters better to its audience. Consequently, US films' market share in China has dropped from 60-70% to 5%. However, the international market remains crucial for big franchise movies, still generating up to 60 cents on every dollar earned.

Conclusion

Warner Brothers Discovery is navigating a period of financial strain and strategic reevaluation, with a planned split and potential sale on the horizon. The company's studio business shows strength, while its linear TV networks, though declining, remain a significant cash generator. The potential acquisition of WBD by entities like Paramount or Netflix carries implications for the broader entertainment industry, including job security and creative output. Furthermore, the competitiveness of US film production is hampered by a lack of national incentives, leading to a decline in domestic production and a shift of activity overseas. The once-lucrative Chinese market has also become largely insignificant for US films.