Can Warner Bros Discovery win back Hollywood?

Having worked for decades to reach the top of the cable television business in New York, David Zaslav briefly became the toast of Hollywood.

Discovery, where he was CEO, had agreed in May 2021 to purchase Warner Bros’ parent company from AT&T for $43bn in a climate when the movie business was suffering from the one-two punch of the Covid-19 pandemic and the exploding popularity of streaming.

At the same time, Hollywood’s longtime de facto leader, Disney’s Bob Iger, was heading towards his shortlived retirement, leaving a spot open for someone to step into his shoes. The role of King of Hollywood was perhaps not a natural fit for an East Coast TV guy — Discovery is known for unscripted fare such as Man vs Food and Naked and Afraid — but Zaslav was eager to try out for the part.

So, in the autumn of 2021, Zaslav decamped to the Beverly Hills Hotel and launched a listening tour. Channelling the movie moguls of Hollywood’s golden age, he took meetings from the Polo Lounge, while superagents Ari Emanuel (Endeavor) and Bryan Lourd (CAA) threw celebrity-studded dinner parties in his honour.

For some industry insiders, however, it was too much, too soon. “He was swanning around Hollywood before the deal was even done [and] he did way too much talking,” says one veteran entertainment executive. “That was all a mistake.”

When the Discovery-Warner merger closed on April 8 2022, bringing the reality TV giant together with Warner Bros studio, HBO, CNN and DC Comics, Zaslav quickly discovered that the business was, as he put it to investors, “messier than we thought”.

WarnerMedia’s targets for adjusted earnings before interest, taxes, depreciation and amortisation were off by $2bn, the result of a rapidly declining advertising market and what the company has said were overly optimistic projections by AT&T before the deal closed. AT&T later paid Warner $1.2bn to settle the matter.

“David came in and went, ‘Whoa, where did all the money go?’ And so all of a sudden, his raison d’être is changed,” says one former Time Warner official. “He couldn’t have bought the company at a worse time.”

Already burdened by a $55bn debt load when the deal closed, the new Warner Bros Discovery team was under more pressure to cut costs. The talent-friendly posture Zaslav had assumed only months earlier quickly gave way to the demands of his axe-wielding chief financial officer, Gunnar Wiedenfels.

The completed $90mn film Batgirl was killed and written off as tax loss, sending shockwaves across Hollywood. CNN’s expensive new streaming service was scrapped soon after its launch. Thousands of jobs were slashed across the company. Shock shifted quickly to outrage.

The cost-cutting was particularly galling, critics say, given that Zaslav was ranked by As You Sow, a non-profit focused on shareholder advocacy, as the most overpaid CEO in the US in 2021, with a stock options-heavy package worth $246mn. In 2022, this dropped to $39mn after a reset in compensation practices following “shareholder feedback”.

He’s made some very tough decisions. He had no choice

Now, after a painful 12 months, Zaslav is once again on the charm offensive hoping to repair ties with Hollywood’s talent community and improve morale among Warner staff, already bruised after several tumultuous years under AT&T’s leadership.

He is promising to revive big Warner film franchises and prioritise full cinematic runs before moving to streaming services. To demoralised staffers, he has vowed that the worst is over. “We’re all done with restructuring,” he said recently. “We’re in finished mode.” 

Some in Hollywood say Zaslav deserves credit for making hard calls in his first year. “He’s made some very tough decisions,” says Michael Ovitz, co-founder of CAA. “He had no choice.”

There is an existential matter for Zaslav, who declined to be interviewed, to contend with, however. Like other US studios, Warner Bros Discovery is facing the rapid decline of the linear television networks that generate most of its cash flow. At the same time, the so-called Great Netflix correction has cast doubt on the streaming business model.

Warner is out in front of its rivals in one respect. Zaslav’s austerity campaign presaged the restructuring under way at other studios, including at Disney, where Iger is culling 7,000 jobs as part of an effort to cut costs by $5.5bn. Paramount and NBCUniversal are also watching their spending and even Netflix has capped its $17bn content budget.

But if Zaslav is to reverse Warner’s fortunes, increasing its stock price and making its streaming services profitable, he will have to put in the performance of a lifetime.

Rebuilding a legacy

For now, Zaslav’s strategic priority seems to be ensuring that Warner’s content across its divisions lives up to its storied pedigree. He has the perfect vantage point to oversee the company’s creative output from his second-floor office on the Warner Bros lot in Burbank.

The previous CEOs of various incarnations of Warner were based in New York, but Zaslav wanted to do the job from LA. Some Warner veterans have criticised this move, noting that the company’s corporate headquarters remain in New York, where Discovery and CNN are based. The Turner television networks are in Atlanta.

Some in Hollywood see Zaslav as an interloper, a reality TV executive posing as the 21st century Jack Warner — the legendary mogul whose office he has moved into.

“He wooed Hollywood and people really loved that,” says a former Warner executive. “And then what does he do? He comes in and sets up in the Warner studio lot, which no public company CEO had ever occupied, and starts sitting in on creative meetings, which raised a lot of eyebrows.”

Zaslav’s allies say it makes sense for him to be near the Warner Bros movie studio and TV divisions, where he has installed new leadership teams charged with refreshing its valuable library of franchises.

At DC Studios, the recently appointed co-chiefs, James Gunn and Peter Safran, are planning to launch five new films and TV series, including new Batman and Superman movies by 2025.

The new Warner studio chiefs, Mike De Luca and Pam Abdy, are weighing up big questions about whether to revive money-spinners such as Harry Potter, Lord of the Rings and Oceans 11.

“It makes sense to me that [Zaslav] would place himself physically where he can have lots of interaction [from an office] right across the hall from Mike and Pam,” says a Warner veteran who asked not to be named. “That kind of proximity facilitates his learning curve . . . David has not read a lot of screenplays in his life.”

Zaslav, a lawyer by training, began his TV career at the NBC network, where he helped launch the business-focused cable channel CNBC and news network MSNBC. He took over at Discovery in 2007.

A person who has worked closely with Zaslav says that he is, in some ways, “a throwback to an [earlier] kind of executive. He’s a golfer, he goes to Vegas. He always wants to be the host [at a gathering]. He’s always working the room.” The person added that Zaslav is a devoted family man with “a very clear set of values”.

Emanuel, the chief executive of William Morris Endeavor, says Zaslav is making the transition from the “king of unscripted” content to the world of scripted film and television. “He’s a guy who wants to be in the movie business,” Emanuel says. “He realises that he has to be out here.”

The move also positions him closer to the top talent he is trying to lure to the studio. Under AT&T, then-Warner chief Jason Kilar stunned Hollywood with his decision to release the company’s entire film slate on the HBO Max streaming service at the same time as it was released in cinemas. The decision was deeply unpopular with Hollywood’s creative community, with star director Christopher Nolan splitting with Warner after nearly 20 years as a result.

Zaslav has reversed that policy, arguing that a splashy cinematic release brings in box office revenue and builds awareness that ultimately aids the film’s performance on the streaming service at a later date.

In 2022, Warner Bros only released six films in the cinemas, but this year — when it celebrates its 100th anniversary — it will bring a full slate of 15 releases, including Barbie, Dune 2 and The Flash. Some Hollywood executives say the talent may be angry at Zaslav now, but they will work with him again once they realise he is starting to write cheques for new films and TV programmes.

“It doesn’t take that long for people to show up when you’re spending money,” says Emanuel. “I think he’s being discerning — but he’s spending money.”

The studio points to recent deals with George Clooney’s Smokehouse Pictures, M. Night Shyamalan and Elvis director Baz Luhrmann as examples of its ability to attract top talent despite the fallout from last year’s cuts.

But one Hollywood veteran notes that while Zaslav has imported his allies from Discovery to other parts of the new company, he still needs to “build loyalty on the Warner Bros [studio] side”.

“He likes having his people,” the executive says. “We’ll see what happens when their desire to make a certain kind of movie bumps up against his fiscal discipline.”

The debt burden

The weight of the company’s debt appears to never be far from Zaslav’s thoughts. One colleague recalls hearing him tell fellow executives to be mindful that Warner Discovery was operating under “a substantial debt load”.

In its difficult first year, the company managed to slash gross debt by $7bn — an impressive feat of cost-cutting, but it remains a heavy burden. Even after the cuts, “the leverage is high”, says Moody’s analyst Neil Begley. “I think that’s driving a lot of their thinking.”

The big question is whether the combination of high debt and a quickly shrinking core cable TV business will prevent Zaslav from fulfilling his grand ambition of, in the words of one adviser, “rebuilding Warner Bros to a point of pre-eminence”. 

About 70 per cent of the company’s free cash flow comes from cable subscription fees at a time when increasing numbers of Americans are transitioning to streaming. “It’s an existential issue for them,” says Begley, of Moody’s. 

This means a lot is riding on the relaunch of the company’s streaming service this spring, which will combine HBO Max — home of Succession, White Lotus and Game of Thrones — with Discovery Plus, where the trending shows include 90-Day Fiance and Celebrity HELP! My House is Haunted. Begley says combining the streaming platforms is the “most important” move the company will make anytime soon.

The key questions surrounding the launch are about branding and pricing. While combining HBO’s award-winning programming with Discovery’s low-cost unscripted shows might seem to be a mismatch, analysts say the combination could create a streaming platform with far broader appeal than they have separately. Adding CNN news along with sports programming, as is being discussed, could be even more compelling.

The other shadow hanging over Warner Bros Discovery is uncertainty about Zaslav’s endgame. As the company cut costs last year, many inside and outside the company speculated that it was being prepared for another quick sale, with Comcast, owner of NBCUniversal, emerging as the most commonly discussed buyer. Zaslav addressed the rumours in September 2022 when he assured staff that, “We are not for sale”.

That theory comes up that, well, they’re just going to wait and sell it to [Comcast]. But the stock has to be higher than what it is trading at today

Because of the structure of the Discovery-Warner transaction, any deal would not be possible until 2024 at the earliest. The idea is not one that employees who have already weathered two acquisitions relish. “One thing you can’t get around is the question of what the real game is here,” says the longtime Hollywood executive. “The issue of Comcast buying Warner comes up [with employees]. I don’t hear anybody [at the company] saying we’re here for the long term.”

Unless the stock recovers significantly — it is down 40 per cent since the Warner-Discovery deal closed — a sale would be a blow for Zaslav and the rest of his team. Not to mention AT&T, whose shareholders were left owning 71 per cent of the company after offloading it at a steep discount from its initial $85bn purchase price.

The shares are up 50 per cent this year to $15.10, still well below the closing price of $24.47 when the stock began trading in April 2021. For Zaslav to exercise the extravagant options awards he received, the shares will need to reach prices ranging from $35.65 to $43.33.

“That theory comes up that, well, they’re just going to wait and sell it to [Comcast]. But the stock has to be higher than what it is trading at today,” a former Warner executive said earlier this year.

Perhaps the best clues about how Warner’s story ends may come from Zaslav himself, who some say wants to reinvent himself in the mould of an old-school studio chief. He is even refurbishing the Beverly Hills mansion once owned by the larger-than-life Chinatown producer Robert Evans.

“He’s enjoying his life here,” says the veteran entertainment executive. “He bought the Robert Evans house. He hangs out with producers. He likes Hollywood.”

Zaslav, it seems, is not ready for his final scene.