Warner Bros. Discovery Wants to Be a Streaming Powerhouse, with Theatrical as the ‘Top of the Funnel’

When WarnerMedia and Discovery announced their plans to merge earlier this year, one of the biggest benefits cited by executives was the power the combined entertainment giant would have in the streaming space. But that doesn’t mean the new company — Warner Bros. Discovery, as it will be called if and when the deal the deal is finalized next year — is turning its back on theatrical.

In an interview with Variety published Wednesday, Discovery CEO David Zaslav says reinvigorating Warner Bros. is key to his plans at the helm of the conglomerate. Box office will be “the top of the funnel” for drawing eyeballs to his streaming services, including HBO Max and Discovery+, as they charge forward with an existential mission to amass over 200 million subscribers to give Netflix a run for its money.

“Our job is to grow the right side of the company — the streaming business, the motion picture business and the TV production business — faster than the traditional business declines,” Zaslav said.

Zaslav is staying tight-lipped on details while the proposal makes its way through regulatory approval. But his assertion about the role of theatrical in a post-COVID, streaming-dominated entertainment landscape offers a window into what the industry could look like moving forward.

Historically, theatrical revenue has been an important part of studios’ balance sheets. But in recent years, the stock prices of the dominant theatrical player, Disney, have risen and fallen based on the subscriber numbers reported during quarterly earnings calls. That dynamic has encouraged executives to double down on their direct-to-consumer offerings, even at the potential expense of theatrical grosses, which could have been the case with Disney’s day-and-date play for “Black Widow.”

“Dune” was among the movies on Warners’ 2021 slate that debuted in theaters and on HBO Max the same date. It grossed $354 million worldwide on a $165 million budget, which is not enough to break even based on grosses. But Warner Bros. announced a sequel weeks before the full picture of the movie’s theatrical success was in view.

It’s harder to tease out Wall Street’s reception to WarnerMedia’s streaming investments because of its status as a subsidiary of AT&T. But once it’s separated from the telecom giant and under Zaslav’s control, WarnerMedia will be part of a company exclusively dedicated to entertainment. For his part, Zaslav says he wants to help “create a new narrative” on Wall Street for legacy media companies.

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Macall Polay/Warner Bros.

“Most of the media business is so mired in what has been happening and where we’ve been, and we really need to focus this company on where we’re going and how lucky we are to have the assets and the hand we have in an environment where I have been for a long time,” he said. “The industry is in the midst of a full evolution.”

The idea that theatrical can boost a film’s profile is nothing new. They can help attract reviews, while platform releases can help steadily build word-of-mouth before studios take on the expense of going wider. In the streaming era, where companies are pumping billions into an enormous amount of content, a theatrical release can help a movie stand out in a sea of streaming-app tiles.

While Netflix has has a multi-year head start in the streaming game and now has 214 million subscribers, Warners has something it doesn’t: Strong relationships with exhibitors worldwide. In the rare occasions that Netflix releases its movies theatrically, it’s in a small number of theaters. Before the pandemic, major circuits declined to show Netflix movies, given the streamer’s demand for shorter windows. Windows have since been shattered, but if the next evolution of the streaming era demands theatrical releases, Warner Bros. Discovery has a clear advantage.

Warner Bros. Discovery will have a projected $8 billion in free cash flow over the next few years, and Zaslav says one of his biggest considerations is how to spend it. “How do we put it to work so that when we emerge five years from now, a very big percentage of our overall company is our global streaming business that’s reaching 200 million-plus homes, and there’s a strong Warner Bros. motion picture business and the Warner Bros. TV production business,” he said.

The company plans to spend $20 billion on content next year, an amount dwarfed by Disney’s plans to spend $33 billion in what represents a 32 percent increase it spent in the last fiscal year.

The merger is expected to be finalized in the middle of next year, but it could be a rocky road ahead. On Monday, over 30 Democratic members of Congress raised anti-trust concerns about the deal in a letter to Attorney General Merrick Garland, in what represents the first government pushback faced by the proposal.

“The merger threatens to enhance the market power of the combined firm and substantially lessen competition in the media and entertainment industry, harming both consumers and American workers,” the letter reads.

Zaslav has argued the deal is not anti-competitive, as it will not reduce the number of Hollywood studios: Discovery is primarily in reality TV.