Image: House of the Dragon, HBO
Warner Bros. Discovery (WBD) reported earnings this week with largely positive news for its direct-to-consumer (DTC) streaming business. In Q3 2024 the company saw its largest quarter-on-quarter growth in subscribers to 110.5 million subscribers globally from 103.3 million in Q2. This translated to a 9% growth in revenue for the DTC segment which was largely driven by growing subscribers in international markets.
While the company appears to be gaining momentum in its streaming business after years of focused investment here, the company’s debt load and reliance on traditional cable revenue complicate its future growth potential. This dilemma has been highlighted recently as other legacy media companies explore selling off cable assets.
While Warner Bros. Discovery reports subscribers at the total DTC level, Parrot Analytics’ Streaming Metrics can break out streaming economic performance by platform. According to our model, domestic revenue growth for the company’s streaming platforms has been mixed. Domestic revenue growth slowed for most of the year following the company’s merger in Q2 2022. This culminated in an outright decline in DTC revenue in Q3 2023. Part of the story behind these numbers was declining revenue from Discovery+ as the company figured out how to balance multiple platforms. Our model estimates that Discovery+ only accounts for 12% of the revenue for the DTC segment.
Since the end of 2023 domestic DTC revenue growth has been reaccelerating. Global revenue should continue to grow as the company moves forward with its international rollout of Max. However, the domestic region is the most profitable with the highest average revenue per user (ARPU). Per the company’s latest earnings report, domestic ARPU was $11.99 compared to only $4.05 internationally. Any slowing subscriber growth domestically will have to be offset by large subscriber gains internationally or increases in the ARPU of international markets.
The value of WBD’s cable assets to its streaming business is clear when we look at the share of demand for shows on Max. 75.9% of demand for series on the platform in Q3 2024 was for shows from a cable channel (primarily HBO). Importantly, cable series only account for 65.8% of titles on platform, showing that these not only make up a large share of Max’s catalog, but overperform when we consider demand. This highlights the conundrum faced by legacy media companies with profitable but declining Pay TV assets.
Recent revenue growth and robust demand for the company’s content are positive indicators for the future of WBD. Navigating the transition from a declining cable industry to a new streaming era alongside international expansion while managing the company’s debt obligations are the challenges.
