HBO and CNN Split Up

Summary

Motley Fool Money Podcast Summary

Episode: HBO and CNN Split Up
Release Date: June 9, 2025
Hosts: Andy Cross & Jason Hall
Podcast: Motley Fool Money
Description: A deep dive into the recent strategic split of Warner Brothers Discovery into two distinct entities and its implications for investors and the media landscape.

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1. Introduction to the Split

The episode kicks off with Andy Cross introducing the major news of the day: Warner Brothers Discovery's decision to split into two separate companies. The new entities are Warner Brothers Global Networks (encompassing CNN and other global networks) and Warner Brothers Streaming and Studios (housing HBO and other streaming and studio operations).

Andy Cross [00:34]: "Warner Brothers Discovery is planning to split itself up into two distinct companies."

2. Rationale Behind the Split

Jason Hall elaborates on the merger's aftermath and its financial performance. Since the 2022 merger that formed the $25 billion entity, the company's shares have plummeted by 60%. However, there's a glimmer of hope as shares experienced a 7% uptick on the day of announcement.

Jason Hall [01:36]: "I think that's the upside here, is that we're finally seeing somebody make a true competitor to Netflix."

The split aims to create a focused streaming and content production company free from the complexities of legacy media operations, potentially enhancing profitability and competitive positioning against industry giants like Netflix and YouTube.

3. Financial Implications for Shareholders

Andy and Jason discuss whether this strategic move is beneficial for shareholders. Jason points out that legacy businesses, such as CNN, generate the bulk of revenues and profits but are in decline. By separating these from the more dynamic streaming division, investors can better assess and invest in growth-oriented sectors without the drag of underperforming assets.

Jason Hall [03:04]: "It's taking on more financial risk with the debt that's going to be flowing over to it."

Additionally, the split could lead to more effective financial management, including debt reduction, share buybacks, and potential dividends, making each entity more attractive to investors.

4. Market Positioning and Competition

Andy notes the competitive landscape, highlighting Netflix's dominance in streaming and the strategic responses from other media companies.

Andy Cross [04:02]: "This is a reaction to the Netflix and YouTube success."

Jason agrees, emphasizing that legacy media companies have struggled to adapt to the streaming revolution, whereas newcomers like Netflix and YouTube have thrived without such baggage. The split is seen as a necessary structural adjustment to better compete in the modern media environment.

5. Operational Focus and Leadership

David Zaslav will continue as CEO of the growth-oriented streaming and studios division, ensuring continuity in leadership and strategic vision. Jason suggests that this move will allow for more focused capital allocation and smarter financial management.

Jason Hall [03:04]: "David Zaslav is going to remain the CEO of the growth oriented, really content focused business."

6. Subscriber Metrics and Revenue Analysis

The discussion turns to subscriber numbers and revenue per user. Warner Brothers' streaming service boasts 120 million subscribers globally, compared to Netflix's 300 million. Revenue per user in the U.S. stands at $12 for Warner Brothers versus Netflix's $17.

Andy Cross [05:51]: "Warner Brothers has now, I think the direct to consumer part streaming part is like 120 million subscribers. Netflix is more than 300 million."

Jason highlights the challenges of sustaining profitability in the North American market, questioning whether it can support multiple high-priced streaming services without significant consolidation.

7. Industry Trends and Future Outlook

Andy and Jason discuss broader industry trends, including the separation of media properties by companies like Comcast and the ongoing consolidation of content. They predict a return to licensing models reminiscent of pre-streaming eras, where content is licensed to various platforms rather than exclusively available on a single service.

Jason Hall [06:24]: "We're heading back that direction."

The conversation also touches on how other giants like Disney, Amazon, and Apple are navigating the streaming landscape with distinct strategies, further shaping the competitive environment.

8. Potential Stock Performance and Investment Strategy

When addressing the stock's future, Jason advises patience, suggesting that the true impact of the split will unfold over several quarters. He speculates that the newly formed streaming division could outperform significantly in the long term, but cautions against immediate bullishness until more data is available.

Jason Hall [11:19]: "I think we have to give this time to play out, see what the structures look like."

Andy concurs, opting to "wait and see," acknowledging the rapidly changing information landscape.

Andy Cross [12:07]: "I'm going to wait and see. Informations changing every time, every day seems right."

9. Related Media Developments: Reddit and AI Licensing

The episode briefly touches on Reddit's legal actions against Anthropic for allegedly scraping posts to train AI models, highlighting the broader industry challenges regarding intellectual property and AI integration.

Andy Cross [13:56]: "Reddit sued the owner of the Claude chatbot Anthropic for illegally scraping posts."

Jason connects this to Warner Brothers Discovery's strategic pillars, particularly their focus on licensing content to tech companies for AI purposes.

Jason Hall [15:11]: "The first pillar of growth is licensing content to tech companies to use the audio and video to train AI models."

10. Conclusion and Final Thoughts

As the discussion wraps up, both hosts express cautious optimism about the structural changes at Warner Brothers Discovery. They emphasize the importance of monitoring the split's progression and its impact on both the media landscape and investment portfolios.

Jason Hall [16:07]: "This was great. Good to be on. See you next time, Andy."

Andy Cross [16:09]: "Thanks for listening..."

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Key Takeaways

• Strategic Split: Warner Brothers Discovery is dividing into two focused entities to enhance competitiveness and financial performance.
• Investment Implications: The split could lead to improved profitability and attract investors seeking growth without the burden of declining legacy assets.
• Market Positioning: Aligning more closely with successful streaming models like Netflix, while addressing the challenges posed by legacy media businesses.
• Future Outlook: Patience advised for assessing the long-term benefits of the split; potential for significant outperformance by the streaming division.
• Industry Challenges: Ongoing issues with AI licensing and content scraping reflect broader tensions between media companies and tech innovators.

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Note: This summary is intended for informational purposes only and does not constitute investment advice. Always conduct your own research or consult a financial advisor before making investment decisions.

Transcript

[Unknown Sponsor]

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[Andy Cross]

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.

[Jason Hall]

Andy.

[Andy Cross]

So, Jace, let's jump right into the big news of the day. Warner Brothers Discovery is planning 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 WarnerMedia 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 its equivalent of Netflix. Is this good for shareholders?

[Jason Hall]

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 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. I mean, 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 vote, but it's pretty clear that shareholders have not been happy about how things have gone.

[Andy Cross]

Now, Jason, it's interesting that legacy business, so that's really the global networks, you're talking like CNN and Discovery, 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 like Warner Brothers DC Studios, a television and of course HBO. And interesting, the networks is going to own 20% of the streaming business.

[Jason Hall]

Well, for, 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 that are going to be looking at that legacy business, look, it's going to be, it's still in decline. It's going to take time for, you know, it needs to be financially managed well to kind of milk that cash cow business as long as possible. So there needs to be a little bit of a sweetener there for some sort of growth. And 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, you know, David Zaslav is going to remain the CEO of the growth oriented, really content focused business, which is more in his wheelhouse and, 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, buy back 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 already.

[Andy Cross]

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, I see this as a good positive news by the 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 business, 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.

[Jason Hall]

Yeah, that's right. And I think 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 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. Yeah, it's that how hard it is to get through that transition. And you mentioned Netflix and YouTube. They didn't have any of those legacy things 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 go to market with, with your customer 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.

[Andy Cross]

I mean, Jason, Warner Brothers has now, I think 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 U.S. warner Brothers does about 12. Netflix International 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.

[Jason Hall]

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. Right. They've made the attempt, they've launched the media, the streaming products. But again the combined businesses has been one of the challenge. And is the, is the North America. 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 of these extreme 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. We're going to see 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. Right. I think that's we're heading back that direction.

[Andy Cross]

I think that's right. I think the licensing side, I mean, you know, you see this with Comcast now separating off some of its properties into the Versant company like 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 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.

[Jason Hall]

Yeah.

[Andy Cross]

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 spin off. And that's why it's. 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 excited. More excited for them to be separate companies.

[Jason Hall]

Yeah, I think that. I think that's right. I'd like to talk a little bit about Disney and the Amazons and Apples of the World too because I think there is a little bit of kind of compartmentalization that we're going to see in the industry. So 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. But they've got so much content and the brand recognition is so big. I think that that's one that can get to scale and they can kind of 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. Right, right.

[Andy Cross]

It's a bonus.

[Jason Hall]

It's a bonus, exactly. It's just, 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.

[Andy Cross]

Yeah.

[Jason Hall]

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.

[Andy Cross]

I mean, HBO has some of those great properties. This is one reason I think we were investors were somewhat encouraged by them coming together because of those properties with HBO shows like Secession and the Gilded Age movies, the upcoming Superman.

[Jason Hall]

Yeah.

[Andy Cross]

Sinners, I think they. 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 then the focus on the network side.

[Jason Hall]

So here's the Andy. But this is the same company that also took HBO out of the name of their streaming product.

[Andy Cross]

I just find that really head scratching. I don't know you know why that was. I'm glad that they brought it back.

[Jason Hall]

Right?

[Andy Cross]

Yeah, to some degree. Because that's a. I mean the HBO is the brand.

[Jason Hall]

Right?

[Andy Cross]

Right. So hopefully, you know, I don't know 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 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.

[Jason Hall]

Yeah, no, that's. That. I mean that's exactly right. Having the Max in there. Even though 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. We'll see 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.

[Andy Cross]

Well, we'll also by the way just see how the debt like they got $38 billion of gross debt. Most of that's going to go to the network side but they're going to have the cash flow to be able to pay that down. And again like you said, the CFO going over there to manage 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?

[Jason Hall]

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 the split, the story of HBO unleashed almost the idea of it fully leveraging all of those resources without 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. Yeah. They could end up outperforming 2 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 of standalone businesses and then. And then weigh in.

[Andy Cross]

Yeah, I'm going to wait and see Mode 2 as of this right now. But information changing every time, every day seems right.

[Jason Hall]

That's right.

[Andy Cross]

So after this, we're moving on to Reddit.

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[Jason Hall]

Foreign.

[Andy Cross]

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.

[Jason Hall]

You remember CuriosityStream, right Andy?

[Andy Cross]

I painfully remember CuriosityStream, yes.

[Jason Hall]

For those that don't know, this is it's a media streaming business with fact based content went public via SPAC back in the SPAC craze 202021 area. You and I both own some shares, Andy. You walked away sooner than I did.

[Andy Cross]

Well, I walked away at a very large tax loss on. I took a tax loss on it to offset some gains. But yes, that, that was a. That was pain. I had hoped for better to be able to leverage the documentary assets Curiosity has and that did not work out in the time frame that I had owned the stock.

[Jason Hall]

Well, yeah, you had good reason. The business was really struggling with weak growth, high expenses. It did look like it was going to get to scale and survive on its own balance sheet. The only reason I didn't sell Andy is 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 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.

[Andy Cross]

How much of that is on the licensing deal?

[Jason Hall]

That's the thing that ties us back together is one of their big and if you look, they have these five pillars of growth in one of those. The first pillar of growth is licensing content to tech companies to use the audio and video to train AI models.

[Andy Cross]

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.

[Jason Hall]

Yeah, I think, I think that's exactly, 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.

[Andy Cross]

Well, we'll see how it all unfolds. Thanks so much for joining me today, Jason.

[Jason Hall]

This was great. Good to be on. See you next time, Andy.

[Andy Cross]

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 fool team. I'm Andy Cross. Thanks for listening and full on.