Discovery + HBO: Streaming App Merger Inevitable but Risky
First signalled last Spring, the move to combine HBO Max and Discovery+ into one bundle, down the line as a single app, has been confirmed by WarnerBros. Discovery.
As of summer 2023 for US customers, the two apps will be one consolidated service, with both an “ad-lite” and an ad-free version becoming available. A LatAm expansion follows, and the European market launch is in 2024.
It’s in line with Warner Bros. Discovery’s aim to save $3 billion and reach a goal of 130 million global subscribers by 2025, following the $43bn mega merger of the two companies.
“Every streaming provider has three main buckets of cost: content, technology, marketing,” says Robert Ambrose, Co-Founder and Managing Director of Caretta Research. “Consolidating apps means an immediate reduction in cost and an increase in efficiency for technology and marketing, and allows the content budget to have much greater impact.
“In terms of the wider SVOD market, it reinforces the point that all of the big content owners want to emulate Disney and pivot to D2C. The jury is out on whether consumers will ultimately have the appetite to subscribe to multiple services on an ongoing basis to replace their cable bundle. Anything which cuts costs, increases the clarity of the consumer proposition, and puts more content into the service will help.”
The company also admitted on an earnings call earlier this month that both HBO Max and Discovery+ had shortcomings from a product perspective. The new, as yet unnamed, product would address it.
“HBO Max has a competitive feature set, but has had performance and customer issues,” Jean-Briac Perrette, CEO and president for global streaming and gaming, said. “Discovery+ has best-in-class performance and consumer ratings, but more limited features. Our combined service will focus on delivering the best of both, market-leading features with world-class performance.”
Certainly, both Warner Bros. and Discovery each had a fragmented set of apps which creates numerous issues spanning technical, partnerships and marketing.
“Given the duplication of development and operational effort, especially in the ever-thorny challenge of getting apps to work on streaming sticks and smart TVs plus back-end development costs, it makes even more sense to take cost out by having a single core tech stack that can scale,” says Ambrose. “Ultimately this enables a much better app and UX, on more devices, at lower cost.”
According to articles in TechCrunch the HBO Max app was particularly buggy. It had a notorious reputation of being a buggy app with many issues: the app freezing and crashing on Roku; unable to remember subtitle settings on Apple TV; and content being inaccessible at times. The HBO Max’s app ratings — 3.7 on the Google Play Store and just 2.8 on the Apple App Store — are reflective of customers experiencing multiple issues.
Ambrose outlines that further duplication of effort was needed to sign super-aggregation deals with operators “crucial for both HBO Max and Discovery+” as they carry less weight standalone in the market versus Netflix and Disney.
When it comes to marketing, the analyst says it is much easier to build consumer recognition around a single brand, rather than confusing customers by trying to get them to guess the difference between HBO and HBO Max.
The integrated offer will combine acclaimed scripted shows such as Succession and House of the Dragon with unscripted shows such as Fixer Upper under one roof--much like Netflix does with its mix of documentary and drama. Disney is also able to bundle sports with ESPN, something WBDiscovery may seek to emulate with Eurosport.
“The size of content catalogue, and even more so consumers' perception of that size, is crucial for retention and mitigating churn,” says Ambrose. “If you can hook people with a wider range of content like HBO drama, Discovery factual and Eurosport live sport and apply good recommendation and personalisation across that, it's going to increase engagement.”
Gunnar Wiedenfels, Discovery’s CFO, told MediaPost HBO Max, Discovery Apps To Be Merged, Following A Bundle Period 03/15/2022 (mediapost.com), “Right out of the gate, we’re working on getting the bundling approach ready — maybe a single sign-on, maybe ingesting content into the other product so that we can start to get some benefits early on,”
Globally, the D2C dynamics will be an “exponentially better business” than Discovery’s traditionally linear TV-driven model, Wiedenfels said.
But building a “blowout” combined D2C product and platform offering a “great consumer experience” will take time — at least months, although “hopefully not years,” he said.
The company confirmed in its earning calls that “once our SVOD service is firmly established” it would explore a fast or free ad-supported streaming offering “that will give consumers who do not want to pay a subscription fee access to great library content, while at the same time serving as an entry point to our premium service.”
The monthly subscription cost of the upcoming combined SVOD has not been released. CNBC suggests the firm may want to raise the price for a combined HBO Max-Discovery+ offering, especially as competitors Disney and Netflix have recently raised prices. Eliminating little watched content, while adding a slew of new Discovery + content, could help justify the increase.
“All the SVODs including Netflix are getting excited by introducing the ad-supported tier as a way of widening their market at lower price points, or free,” notes Ambrose. “What's yet to become clear is whether it will work. Will it be just as hard to attract and retain a $3 customer as a $10 one? Will the ad sales targets be met in what is a largely untried model? What we do know is that free AVOD is a pretty tough business, with FAST proving a simpler and more attractive option for many.”
Both HBO and Discovery built their business on cable and must now wean itself away from linear to digital first. At Discovery this has been slowly in train for the best part of a decade.
“Like all premium content owners, Warner Discovery has to balance the growth of streaming revenue with the loss of the much easier and more lucrative carriage fees,” Ambrose advises. “Affiliates will get ever-more reluctant to pay top dollar for channels when all the good stuff is on streaming first. Disney bet the farm on switching from linear to SVOD. Will HBO/Discovery do the same? Can they convince operators that it is a better deal to bundle the app?
Ambrose adds, “In a linear channel world you could be profitable at a smaller scale. In streaming, it's all about building economies of scale on a global business. Hence M&A is inevitable. If they weren't consolidating their D2C offers as a result, that would be mad.”
The total number of direct-to-consumer subscribers across HBO, HBO Max and Discovery+ was 92.1 million in the second quarter of 2022, up 1.7 million from the end of Q1 with 90.4 million subscribers. The company did not break down the numbers individually, so it’s unclear what the exact number is in terms of HBO Max and Discovery+ subs.
The goal of 130 million global subs by 2025 is a stepping stone on the path to a 400 million global target outlined by CEO David Zaslav (for example last November with CNBC https://www.cnbc.com/2021/05/17/david-zaslav-on-subscriber-goals-for-combined-discovery-warnermedia.html )
As it stands its main competitors are Disney+ (211 million subs reported in the company’s fiscal Q3) and Netflix at 220 million in June. WarnerDiscovery is ahead of Pararmount+ with 43m in June and Peacock’s 27m (including free users).
"We want to be whatever we wish to be in the content landscape," said Warner Bros. Discovery CIO Dave Duvall in a keynote at the IBC media and entertainment technology trade show in Amsterdam. "Our ambition is not limited by resource. Now it's about product market fit with our D2C business and scale is a big driver."
The HBO Max and Discovery Plus merger is a bellwether of a major shift towards aggregation, while Apple and Amazon have key advantages over services such as Netflix due to their financial resources and a new focus on non-scripted programming like sports events