Warner Bros. Discovery (NASDAQ: WBD) is one of the world's biggest names when it comes to entertainment. Although it has overall been a bad year for the company's stock price, positive news has allowed shares to recover.
On September 12, the company announced a multi-year deal with one of the largest U.S. cable TV companies, Charter Communications (NYSE: CHTR), also known as Spectrum. Since the announcement, shares have been up 21%. Let's dive deeper into what the announcement means for Warner Bros.'s long-term future and whether it can further reignite its shares.
Breaking Down Warner and Charter's Big Deal
The first notable point to make about the deal was that it was reached "nearly one year early." This shows the two firms understand the need to move quickly in this space. Nielsen data shows that, in June, streaming hit a record market share in TV viewing.
Of the total time spent watching TV, 40.3% was through streaming services, an increase from 37.7% in Jun. 2023. Streaming increased its share mostly by taking from cable providers, whose share went from 30.6% to 27.2%.
Clearly, cable still has a place in the TV market, but it is slowly dying. One good thing about the deal between Warner and Charter is that it focuses on both cable and streaming. This allows the firms to look toward the future with streaming while also maintaining a solid base of customers who still prefer cable.
The deal gives Spectrum customers the ad-supported versions of Warner's HBO Max and Discovery+ streaming services at no extra charge. It also maintains the availability of Warner's cable channels like TNT, CNN, and the Food Network. Warner will be receiving higher fees going forward for all its cable channels except for TNT. Management actually saw the lack of a fee cut for TNT as a win since the network lost its rights to broadcast NBA games.
This is key as its "networks" segment is its largest revenue stream and most profitable segment. The network segment's 43% earnings before interest, taxes, depreciation, and amortization (EBITDA) margin over the last twelve months is strong. It far exceeds the streaming segment's figure by less than one percent.
Charter is planning to fully launch its direct-to-consumer (DTC) distribution to its cable customers in 2025. This could allow Warner to increase its subscribers by tapping into Charter's cable customers. HBO Max will be a "preferred partner" for Charter, presumably putting the app in the spotlight when it comes to marketing its DTC platform.
Taking the Good With the Bad
There are reasons to be excited, and reasons to not be so excited, about the deal. Charter reached a similar deal with Walt Disney Co. (NYSE: DIS) to carry the firm's ad-supported Disney+ service at no extra cost in January. Yet, reportedly only 10% of Charter's Select TV customers have signed up for the offer after it has been available for over six months.
This shows either a significant lack of interest from Charter's customer base and/or its lack of marketing of the product. However, it is apparently fixing issues that may have contributed to the lack of uptake. As Charter irons out problems with the service, Warner should benefit from Disney's use as a guinea pig.
Still, Charter is losing cable subscribers, making the deal less beneficial to Warner the more those losses continue. It lost 408,000 cable subscribers in Q2, a loss that more than doubled from the same period last year. For Warner and Charter's sake, hopefully the further inclusion of streaming services in cable packages can help stem these losses.
A Likely Step in the Right Direction, But Not Proven Yet
Overall, it feels too early to say that this deal will fully reignite Warner Bros.'s shares. The increased fees for TV networks should help bolster profitability in that area, creating some stability. However, Warner's streaming services must boost their profits. Their EBITDA fluctuates between slightly positive and slightly negative each quarter.
The deal should help with that immediately, as the company can leverage Charter's reach and marketing efforts. Disney saw its streaming service have its first profitable quarter in the same quarter its agreement with Charter began.
However, these streaming businesses will need to demonstrate stronger uptake to prove these deals are driving significant growth.