It has been a little over a year since Discovery merged with WarnerMedia to create Warner Bros. Discovery (WBD 0.92%). And while the entertainment company spent much of its first 12 months executing a significant restructuring plan, Warner Bros. Discovery is now thinking about the long-term future of its business.
From melding HBO Max with Discovery+ in an effort to make a family friendly subscription video-on-demand (SVOD) service to overhauling its superhero content strategy, Warner Bros. Discovery is seemingly trying to demonstrate to Wall Street its best days are yet to come. But considering the company is still weighed down by debts of almost $50 billion, some investors may wonder just how fruitful the next half-decade might be. Let's explore.
A thriving video games business
In February 2023, Warner Bros. Discovery subsidiary Warner Bros. Games launched Hogwarts Legacy on a handful of platforms. The Harry Potter-themed video game proved an immediate hit, selling more than 12 million copies.
Speaking on the company's fiscal fourth-quarter earnings call, Warner Bros. Discovery CEO David Zaslav talked up the success of Hogwarts Legacy and what it could mean for the company going forward. "We've already seen more than $850 million in retail sales, and we still have more platforms launching over the next few months," noted the executive. "And there's lots more to come including the highly anticipated Mortal Kombat 12 and Suicide Squad: Kill The Justice League."
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Key Data Points
Zaslav's confidence in the video game space is backed up by a widely held belief that, despite there being an estimated 3 billion gamers around the world, the industry has much more room to grow; according to a forecast from Bain & Company, global video game revenues are projected to rise from just under $200 billion in 2022 to north of $300 billion by 2027.
Betting on FAST
While the recurring revenues of SVOD have long captured investor interest, the growing popularity of free ad-supported television (FAST) among consumers is something the streaming industry is paying close attention to.
According to analytics company Kantar, by the third quarter of 2022, a quarter of U.S. households were accessing FAST channels -- a 35% increase year over year. Fellow research outfit Omdia estimates FAST services generated $4 billion in the U.S. last year -- a figure it projects will exceed $10 billion by the end of 2027.
Warner Bros. Discovery has made clear it intends to capitalize on the FAST trend. During the company's fourth-quarter 2022 investor call, Zaslav said Warner Bros. Discovery has plans to launch a FAST service sometime this year, claiming the scale of its content library puts it in a unique position. "We have the largest TV and motion picture library in the world," explained Zaslav. "And we can create a Tubi or a Pluto without buying content from anybody."
Warner Bros. Discovery is not only focused on building its own FAST service -- it's also working with its competitors.
"We also signed FAST content deals with Roku and Tubi, adding to these popular platforms hundreds of our TV shows and movies, while maximizing the reach and overall value of our content," Zaslav told stakeholders on the Q4 call.
Warner Bros. Discovery's long-term prospects
If industry experts are proven right, then Warner Bros. Discovery's bet on FAST may well pay dividends -- particularly as major streaming competitors like Netflix and Walt Disney are yet to enter the space. And should Warner Bros. Discovery manage to keep putting out video game hits, then there's every possibility it will benefit from the growing popularity of that arena also.
Despite all this, the company's debt burden may have been one of the reasons Warner Bros. Discovery's share price has fared worse than its peers. And while some are anticipating a bull market in 2023, others are concerned macroeconomic headwinds will suppress trading for a while yet, perhaps making Warner Bros. Discovery's liabilities seem even heavier.
Investors interested in Warner Bros. Discovery should pay attention to the company's first-quarter 2023 results, scheduled for May 5, 2023. If Warner Bros. Discovery provides fresh sales numbers for Hogwarts Legacy or further details for its upcoming FAST service, then that may be enough insight for market watchers to make a decision on the company as a long-term bet.
