Motley Fool Hidden Gems Investing - HBO and CNN Split Up

Starting point is 00:00:00 Hello, mid-sized business. We see your big ambitions, but how do you achieve the wins you want when your technology is holding you back? SAP Grow is built to grow with your business, no matter its size. With AI embedded at its core, working across every system,

Starting point is 00:00:16 all ready to go from day one so you can hit the ground running. Bring it with SAP Grow. AI Cloud ERP for any size business. Warner Brothers files for divorce. You're listening to Motley Fool Money. Welcome to Motley Fool Money. I'm Andy Cross, joined here by Jason Hall. Hey, Jason. Hey, Andy. So, Jace, let's jump right into the big news of the day. Warner Brothers Discovery is planning

Starting point is 00:00:58 to split itself up into two distinct companies, Warner Brothers Global Networks, that's home to CNN, and Warner Brothers Streaming and Studios, that's home to HBO and other things too. Jason, since the merger between Warner Media and Discovery that created this $25 billion media company in 2022, shares are down 60%. Now they're up 7% today, so maybe investors have some hope that WBD is finally creating. Maybe it's equivalent of Netflix. Is this good for shareholders? Yeah. I mean, I think that's the upside here is that we're finally seeing somebody make a true competitor to Netflix, you know, a stripped down streaming and content production company that's hyper-focused on that and not this legacy media giant that throws out a streaming brand,

Starting point is 00:01:51 but still has all of its legacy businesses that are in transition it's having to navigate through. I think the response we're seeing with the stock price, Andy, is as much wanting to see change, just some sort of positive change, as maybe that bullishness. Last week, we got an overwhelming rejection of management's pay package by shareholders at the annual meeting. More than 60% of voters voted against management's compensation package. yeah now of course that's a non-binding quote advisory wrote uh vote but it's pretty clear that shareholders have not been happy about how things have gone now jason it's interesting that legacy business so that's really the global networks you're talking like cnn and discovery

Starting point is 00:02:34 tlc food network that kind of thing and the streaming is the more exciting by the way that first part of the business is the bulk of the revenues the bulk of the cash flows and the bulk of the profits also getting a bulk of the debt the streaming one is much faster growing profitability turning. And that's home of Warner Brothers, DC Studios, a television, and of course, HBO. And interesting, the networks is going to own 20% of the streaming business. Well, for good reason. It's going to be the larger business. It's taking on more financial risk with the debt that's going to be flowing over to it. And I think that investors are going to be looking at that legacy business. Look, it's still in decline. It needs to be financially

Starting point is 00:03:18 manage well, to milk that cash cow business as long as possible. There needs to be a little bit of a sweetener there for some sort of growth. I think that's where it's happening. The interesting thing, too, if you look at how they're breaking up the business and who's going to run it, David Zaslav is going to remain the CEO of the growth-oriented, really content-focused business, which is more in his wheelhouse, and the CFO of the combined business now, where you want those combined skills of, of, of allocating capital and making smart financial management decisions to pay down that debt, take excess cash buyback shares, you know, maybe pay a nice dividend at some point along the lines. Like, I think you can see the strategy of what they're trying to build

Starting point is 00:03:59 already. You know, Jason, I think we've, we've kind of said that Netflix in a lot of ways has won the streaming battle. You have YouTube dominance in there as well. So I see this as a good positive news by the way like they talked about focusing the businesses and separating them so this isn't a huge surprise i think maybe the fact that it happened now is a little bit maybe probably maybe more surprising but the fact that they are now making this official taking this conglomerate and splitting it up into this i think it is a reaction to the netflix and youtube success of course we have you know apple with their streaming service and amazon with its streaming services too. And then we can't forget about Disney. Yeah, that's right. And I think

Starting point is 00:04:43 that's to me, that's a big part of the story here is that if you look at what's happened across media really since right before and then the pandemic, it seemed a lot of things kind of hit kind of a critical mass where so many more people were moving to streaming. Disney Plus was launched and had explosive growth. But at the same time, these legacy businesses still had all of their existing cash cows, which are the linear model cable, all of that kind of thing. And of course, we've seen so much integration. They own the studios too. And the movie industry is still well below where it was five or six years ago. It's that how hard it is to get through that transition. And you mentioned Netflix and YouTube that they didn't have any of those legacy things

Starting point is 00:05:26 to have to navigate through transition. They were the new model, right. Of content directly for the internet, releasing it immediately. And it's clear. I think that something had to happen from the structural side of the business, not just what you're go to market with, with your customer, uh, like Peacock plus and Disney plus and that sort of thing. And that's, and I think that's, hopefully that's maybe that's what investors are going to get here. I mean, Jason Warner brothers has now, I think that the direct to consumer part streaming part is like 120 million subscribers. Netflix is more than 300 million. Netflix does about $17 in revenue per user here in the US. Warner Brothers does about $12. Netflix International

Starting point is 00:06:05 is probably more around $10. And Warner Brothers is probably more around $4. So I think if investors are looking to this case to increase the profitability of the streaming side, this would help because they have to be more competitive against the likes of Netflix, which is clearly leading the way. They have to. And I think we're starting to get to this point where we've seen these legacy media companies have all shot their shots. They've made the attempt. They've launched the streaming products. But again, the combined businesses has been one of the challenges. Let's not even talk about the international market, because these companies are going to make their first money in North America. Is the North American market big enough for all

Starting point is 00:06:48 of these existing streaming services that they need to get $15 to $20 a month, and they need 80 million plus subscribers just to be sustainable. I don't think the market's big enough. This is a split up, but I think we're going to see some continued consolidation of content. Maybe not where the businesses are combining, but licensing of content. Maybe the old model that Netflix benefited from before. We're heading back that direction. I think that's right. I think the licensing side, you see this with Comcast now separating off some its properties into the versant versant company like uh usa networks and cnbc msnbc golf channel they're keeping embassy and bravo and peacock that will stay with the parent company but they're

Starting point is 00:07:34 separating out as well trying to figure out the licensing deal even between these two companies like how do the sports licensing you know as netflix and others are going further into sports programming yeah the bulk of the sports side you know is is going to be on the network side so how do they overlap there? Of course, there's an international distribution, too, between the two companies. So, still a lot to understand how these two companies interact and what they actually look like post-spinoff. And that's why I'm finding it a little bit hard right now to be tremendously bullish on buying the stock right now and adding more to it. But I am more excited for them to be separate companies. Yeah, I think that's right. I'd like to talk a little bit about Disney and

Starting point is 00:08:16 the Amazons and Apples of the world, too. I think there is a little bit of compartmentalization that we're going to see in the industry. Number one, think about Disney. I think Disney's going to be the one consolidated media company that makes all of it work. We've seen the transition with Disney+, where they're at the point now where I think they can make money. They're going to get better operating leverage there. They've got so much content, and the brand recognition is so big. I think that that's when they can get to scale and they can make it all work. But then you look at the Amazons of the world. This is a different business model. Amazon is an ecosystem. Nobody subscribes to Prime for Prime Video. It's a bonus.

Starting point is 00:09:01 Exactly. It's part of the ecosystem to make it a little bit stickier. So I think that's a thing to remember about Amazon. They're playing a little bit different game than really anybody else in this space. And Apple, their model is a little more curated with their content. And I think they're focused to generate some, maybe you could almost say like HBO was 15 or 20 years ago in the cable model where they wanted to have one or two really big shows a year and then run those shows for multiple years. I think maybe that's more Apple's model because they're kind of focused kind of upstream. I mean, HBO has some of those great property. This is one reason I think we were investors were somewhat encouraged by them coming together because of those properties with

Starting point is 00:09:40 hbo shows like secession and the gilded age movies the upcoming superman yeah sinners and the voice show so they have these great brands to be able to leverage and turn more into hopefully profits on both the streaming side and the focus on the network side so here's the andy but this is the same company that also took hbo out of the name of their streaming product i just find that really head scratching i don't know you know why that was i'm glad that they brought it back right yeah to some degree because that's i mean the hbo is the brand right right so hopefully you know i don't know what the ultimate name of this company but maybe it is something with hbo because it is really going to be the it is it is the most well-known brand although warner you know the

Starting point is 00:10:22 studios business continues and warner brothers is a is a huge name too it's just that hbo is really the driver of the streaming side yeah no that's that i mean that's exactly right having the max in there even though you you and i are old enough to remember cinemax which eventually got renamed max but hbo max makes sense because it's hbo and then a bunch of other stuff so that makes sense the corporate name we'll see what they decide to do because they are still making all the studio content a lot of value there all right we got more stuff to talk about though well we'll also by the way just see how the debt like i mean they got 38 billion dollars of gross debt most that's going to go to the network side but they're going to have the cash flow to be able

Starting point is 00:10:55 to pay that down and again like you said the cfo going over to their manners that business you know joel greenblatt the great author investor wrote you can be a stock market genius talked about spinoffs. And sometimes it's like the ugly debt level one that does actually better. So my question before we get to our next story is how about that? Which one of these businesses are you most interested in? And what are you thinking about the stock today? It's funny because we were in our pre-planning, we were kind of joking around about that. And this is exactly the situation where depending on what happens with this, with the splits, the story of, you know, HBO unleashed almost the idea of it fully like leveraging all of those resources without

Starting point is 00:11:33 the legacy history, the story could cause that stock to do great things initially that hurts the long-term performance. And everybody forgets about this legacy declining sleepy business that could end up outperforming two or 300 percentage points over the next decade. Yeah. I think we have to give this time to play out, see what the structures look like, give them a few quarters to standalone businesses and then weigh in. Yeah. I'm going to wait and see mode two as it this right now but information changing every time every day that's right that's right so after this we're moving on to reddit stop wasting your nights on a mattress that doesn't get you experience the most comfortable

Starting point is 00:12:17 mattress in the world the sleep number smart bed at the touch of a button you can personalize your comfort. Choose firmer or softer. Adjust cooler to warmer. And right now, save up to $2,500 during our massive Labor Day event. Hurry into your local Sleep Number store today, because we have your number. All right, Jason, moving on to another media story that actually is related, and we'll get to that in a second. Last week, the user community of hundreds of millions, Reddit, sued the owner of the Claude chatbot, Anthropic, for illegally scraping posts. Reddit has licensing deals with Google and OpenAI already. So it's very naturally protective of its IP, but it is not the only one who is trying to leverage AI based on the IP it has accrued over the years.

Starting point is 00:13:14 You remember CuriosityStream, right, Andy? I painfully remember CuriosityStream, yes. For those that don't know, it's a media streaming business with fact-based content. Went public via SPAC back in the SPAC race 2020-2021 area. You and I both own some shares, Andy. You walked away sooner than I did. Well, I walked away at a very large tax loss. I took a tax loss on it to offset some gains. But yes, I had hoped for better to be able to leverage the documentary assets curiosity has. And that did not work out in the timeframe that I had owned the stock. Well, yeah, you had good reason. The business was really struggling with weak

Starting point is 00:13:53 growth, high expenses. Uh, it didn't look like it was going to get to scale and survive on its own balance sheet. The only reason I didn't sell Andy's because I owned it in a retirement account. So there was no tax loss harvesting. And I wanted to see how John Hendricks new business was going to play out. John Hendricks, of course, the founder of discovery channel, taking us back to our first story, the stock bottomed at 45 cents a share, uh, February last year. It's, it's a 13 bagger since then. It's now part of the Russell 2000 and Andy, it pays a dividend. How much of that is on the licensing deal? That's the thing that ties us back together is one of their, and if you look at, they have these five pillars of growth in one of those, the first pillar of

Starting point is 00:14:36 growth, is licensing content to tech companies to use the audio and video to train AI models. Yeah, it's crazy. I mean, Jason, just today we saw the British Film Institute put out a report that claimed that 130,000 titles had now been scraped for their AI purposes. I mean, so now they were worried and complaining about it for the Institute, but that is going to be somewhat of a model, somehow of a business model for some of these content creators, like perhaps WBD. Yeah, I think that's exactly right. It's a reminder that this technology is pervasive in the smart companies and the law of unintended consequences, right, Andy? Winners from technological disruption can come out of surprising places.

Starting point is 00:15:21 Well, we'll see how it all unfolds. Thanks so much for joining me today, Jason. This was great. Good to be on. See you next time, Andy. That does it here for us at The Motley Fool. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against. So don't buy stocks or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Jason Hall, our producer Dan Boyd, and The Motley

Starting point is 00:15:58 Fool team. I'm Andy Cross. Thanks for listening and Fool on!

Motley Fool Hidden Gems Investing - HBO and CNN Split Up

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.