Warner Bros. Discovery, Inc. (WBD) Earnings Call Transcript & Summary

Great. Welcome back, everyone. I'm joined now by Robert Fishman from MoffettNathanson. Hi, Robert, and J.B. Perrette, who is President and CEO of Discovery Streaming and International. Hello, J.B., way over there. You're in London right now. He oversees and sets strategy for all discovery businesses outside the U.S. Discovery's unrivaled global footprint includes an average of 10 channels across 220 countries and territories. Previous to Discovery, I knew J.B., when he was at NBC, where he was instrumental in starting Hulu, way back, back in 2006 and launched in 2007, he sat on the Board. You've been involved in this business a long, long time, probably longer than most of us here. Thank you for coming today. I know this is a sensitive time. You're in the middle of an antitrust review and you don't want to say anything that's going to muck it up. So I -- please, everyone, who is watching know that I can't pin him down on some Time Warner questions. We just had a session for those who are with us on Asia Pacific, and we decided to have you come today. And I know you can speak about the whole world, but really try to have you focus on a market Europe, where you've spent a lot of your time, a lot of your building, a lot of the Discovery M&A has been focused there. So thank you for being here.

Great to be here Michael.

So J.B., after North America, we would think Europe is probably the most fertile ground for streaming services. That's where Netflix went right away. A broad question, I know, but given the size of the market and the diversity of language and cultures and economies, which markets do you see in Europe as leading the revolution and which markets are perhaps lagging?

Yes. So we've been in the market in the region for over 3 decades. And so we've seen the evolution of it. We started out in paying and then went to free and then went to direct-to-consumer. And I'd say we look at the market as it sort of pivots to this direct-to-consumer, almost in 3 segments. You've got the kind of high penetration today and high willingness to pay markets, which would be sort of the Nordic territories, obviously. The U.K. generally falls into that category, and I'd say France is also close to that. Then you have a second segment that is big scale historically low pay-TV penetration in the 20%, 30% range, but obviously, big opportunity. And that's the Germany, Spain, Italy as certainly the leads. And then you have kind of -- you have another emerging markets category, which is really the Eastern European markets, which are a little bit more fragmented, but still sizable including markets like Poland, where you got 40 million people -- almost 40 million people and still a growing middle class. And so I think we segmented that way. And you see penetration in the Nordic markets where we've been and we have a combination of free-to-air, which is increasingly kind of what we're calling free-to-view as you move from linear to online ad supported to still pay-TV staying very healthy at penetration rates of north of 80%. And what we've seen in the dynamic there, Michael, that we will have debated a lot, which is less than what's happening here in the U.S. where it's sort of cord-cutting, but a lot more of cord shaving, which is going from higher-priced more premium tiers coming down to more basic tiers, including the broadcast assets and maybe a smaller subset of pay-TV channels, including a la carte sports oftentimes. And then adding on SVOD on top. And the Nordic markets have been certainly at the forefront. Netflix, as you know, that was the first region they launched in, they originated content out of that market. And so that's kind of how we see Europe breaking out into those 3 tiers.

Right. And when you look at that first tier, is there a wealth in this language broadband availability? Like was there -- what was the special sauce about those was first tiers? And then I'll follow up.

Yes. I think it's generally a high propensity to pay. So if you look at the -- in all those markets, Pay-TV historically has been at 60% or in the case of all the way in the Nordics, up to 90% penetration. So high propensity to pay, high broadband penetration rates and essentially a cultural element, which is, I think, different again than the U.S. You have to remember in Europe, a lot of these markets, there is a cultural reality of strong decades, like almost a century's worth of strong public broadcaster that satisfied a lot of the mass consumer interest in video, and they got it free, indirectly through obviously a tax payment, but they essentially got it free. And they were very satisfied with that. And so when pay-TV came in, the price point was higher. And -- but the willingness and the desire to pay, that's why pay-TV in Italy never got beyond sort of 20-ish percent penetration, 20%, 30% perpetration, in Germany never got beyond sort of the low 20s penetration. I think what we're seeing now is in a relatively short period of time, Netflix launched in Germany about 6, 7 years ago and their penetration after pay-TV was in the market for almost 25 years, their penetration rate is now ahead of where pay-TV was in just 7 years. And so I think what we're seeing is that the lower price point, the better quality content, I'd say arguably, we think there's a lot of potential still in scaling those markets that historically haven't been high willingness to pay for any type of video, but this lower price point and more access and better access on an on-demand basis is making those markets very compelling with a lot of growth still to come.

If I can just follow and I'll let Robert go. JB, one of the mistakes we make -- we're honest about our mistakes is we always used pay-TV penetration in European markets as kind of an upper band for SVOD, right? So we cover Netflix in the beginning, we had experience covering European media. That's why I started at Bernstein and I'm like, you know because you've been in this market, you'll never see pay-TV penetration rise in these markets. But SVOD penetration has totally surpassed pay-TV, it's to what you just said, right?

I think that's the thing is that we look at it and say -- we had done the same thing. Penetration percentage as a percentage of pay-TV. What was peak pay-TV penetration, what did you think you could get out of that market? And the reality is, again, I think a lot of it driven by price points. If you're talking about a 20-, 30-year-old package, versus, in our case, where we kind of market with a $4.99 package. The entry price point in the ticket is so much lower that there is a much more willingness to sample and trial. And also behaviorally, even though there is that cultural instinct in a lot of those markets to be rooted in sort of an expectance or expectation of free that the evolution of the consumer behavior is such that they're saying, look, yes, I'm willing to sign up for EUR 6 to EUR 8, even up to EUR 10 a month for this service. And so that's why you're seeing it. I say Germany is a perfect example. Biggest market in Europe and ultimately, pay television just could never get out of the 20-ish percent penetration after decades. And here, you got Netflix after 7 years being -- starting to get close to a 25% penetration. And we think there's still a lot of room to grow in that market.

So JB, in the U.S., we've clearly seen accelerated growth in all the streaming devices and connected TVs now. We're curious if you can expand upon how the landscape for connectivity is different in Europe than it is in the U.S. And in that context, are there a different set of gatekeepers that you're dealing with there?

Yes. I'd say the biggest difference is the US -- the MVPD world basically lost some traction in the IP device business, right? They kind of kept to their gated community of the set-top box for so long, and they allowed Fire, Roku and these other -- and the connected TV sets, obviously, to kind of make much bigger inroads from a consumer behavior, and that's why you've got huge penetration for Roku and Amazon Fire and connected TV, both device and boxes. Europe has a little bit of a -- learned a little bit. I think the MVPDs and the distribution partners in Europe learned from what was happening in the U.S. and took a much more aggressive position. So you have Sky in the U.K. who launched their Sky Q box, which is essentially an interactive app-based set-top box. And they've got now 60% of their base using that box, and they're obviously going outside of their footprint with the Sky Glass product, which is essentially a connected TV using their IP and their technology to try and drive distribution. So the traditional -- Canal has done the same thing in France, the telco operators, Vodafone in select markets, TIM now in Italy. So I think the difference -- the biggest difference is in the U.S., those guys have been laggards. In Europe, the traditional distributors have been leaders or at least co-leaders because you still have Fire TV, you still have the connected, the Samsungs, the LGs. Roku is small, but trying to sort of gain traction again. But it's not the same [ discrete ] where it's essentially a runaway of connected TV players versus the MVPDs. There it's a much more balanced ecosystem. So for us, the benefit is we've been able to actually leverage those historic partnerships we have with people like Sky or Telecom Italia in Italy. And as they're making the pivot and wanting to have more streaming services on their IP connected boxes. We've got a great relationship with them, and we were able to, as we've announced and talked about, we've gotten a great partnership with them to drive discovery+ across their boxes in -- across those 2 partners as examples.

And J.B., we just had a good discussion with friends yours about Asia Pacific. And there, we learned in those markets is going to be Mobile First and low prices have to come down aggressively as we saw from Netflix this week. Can you talk a bit about those third tier European markets? And what have been the gating factors? And is that -- is the solution there kind of like what we see in APAC in order to drive growth? And how do you see that developing?

I think the 2 things we'd see in Europe -- again, it's a little bit different. I think Mobile is certainly a game, but I do think the traditional set-top box or IP connected boxes, whether traditional players or not is a much bigger component of it because people still want it on the biggest screen they got in the house. And so generally, I think that is maybe a little bit different than the APAC markets where literally mobile devices is the primary or is a big portion of the interest. The second thing is, like the U.S., we do think there is price. There's an ability to scale the product through this AdLite Tier as well. We don't it's still very early days in Europe. AdLite is a concept. But if you look at markets -- and I know you're asking more about Eastern Europe, which I'll get to in a second. But if you look at Western European markets, where the price points are sort of more akin to what you see in the U.S., mid- to- high single digit into low double-digit euros or pounds for services. What we think is part of this next wave of scaling penetration in those markets is also an opportunity to look at AdLite offerings, which allow you, just like we've done here in the U.S. to come in with a kind of low to mid-single-digit subscription fee, but put 5 minutes of ads which consumers generally don't mind. And as we've seen here, the ARPU based on our experience is higher than our ad-free proposition significantly. And so as we look at sort of coming and driving penetration in markets also, like those big 3, Germany, Italy, Spain, which historically have been more price sensitive, we think that's a big opportunity for us and for others potentially to launch new products. And by the way, in Eastern Europe, the same is true. And we've learned ourselves from 2 experiences. One is the one in the U.S. and the second is one in Poland, where over the course of the last 12 months, we introduced -- we changed 3 things. We introduced an AdLite product earlier this year into that market. We started windowing content much more aggressively in pre-premiering things on our streaming product and then bring it to linear and kind of getting those 2 bites of the apple. And we've tripled our sub numbers in the course of the last 12 months, and it's now one of our biggest markets globally in terms of streaming. And so that experience set for us has been really helpful to understand, and we just literally last week, finished a re-platforming of our technology product to bring our European product to be the same tech stack, front and backend as the U.S. And that will enable us to launch AdLite products now across the rest of the footprint. And we're -- we think that's a big new growth opportunity for us in the market next year.

So you already touched on where we were going with this in terms of like just the broad price elasticity within Europe as you're building out these streaming services. I guess the follow-up question would be, is there an opportunity to build out a pure AVOD product as a top of the funnel way to drive other streaming subscriptions in the future?

It's really interesting. I think the short answer is yes. I think we think -- again, there is a historic and a big percentage of viewers in Europe that still are free-to-air viewers. And so -- and that's not going away. Now the distribution mechanism on which they want to consume the content, traditional linear versus a digital linear plus on-demand offering is obviously evolving. But that's a sizable audience in Europe, and I think it will remain sizable. And so given that we have -- we're the second largest broadcaster in Europe. People sort of haven't figured that out because we think about us still as a pay-TV business in the U.S. The reality is we are very big in the free-to-air space. And we like that business for 3 reasons. One is the content creation opportunity. So I mean, as Michael knows because we've been talking about this for a while, but we do think to scale globally, it's great to have an incredible factory of great U.S. content that travels very well internationally, which is sort of a secret sauce of what we've been doing for 30 years. And obviously, with the future Warner product, we'll do that in an even bigger fashion. But we do think at some point in time, you still need to have that local content to scale and go deeper in individual markets. And obviously, Netflix is seeing this, and they've been smartly over the last several years, investing more and more in local content and scale markets. We already have, in some of the biggest markets in the world, we have that presence because we've been investing in local content for decades. And so that content, we think, is going to be very valuable. The second is the marketing footprint that it allows -- that it gives us to be able to actually use our free-to-air platforms for organic and low-cost [ SAC ] essentially, which is very helpful. And then the third is we're constantly looking at this new models as we talk about the ad sales opportunity. We've got an infrastructure where we have literally hundreds of ad salespeople in market and who have relationships with all main ad clients. And so as we move to that AdLite product, we leverage the infrastructure that already exists. We don't have to spend $1 more to be able to start upselling people and monetizing both our linear audience and our new digital audience. And we think that combined reach will be incredibly attractive. So we think there's a -- the free-to-air model will move to kind of gradually this what we're calling free-to-view, which means it will be more on digital platforms over time. And we love our positioning. The one thing we -- is still a question is how much of that can really serve as a true funnel to convert to pay or how much of that is just a stand-alone, strong free-to-view, ad monetizable at high CPM traditional kind of broadcast business, if you will. And the reality is, both look, in my days 15 years ago at Hulu.

That's good.

Good news. I don't know if that means I'm saying something that's good to be recorded or...

I think it's the DOJ. So be careful, okay?

So I -- 15 years ago at Hulu, we launched, obviously, as an ad-only product. And then gradually a couple of years later, we launched Hulu Plus at the time, which is a subscription product. And then eventually, and by that time, I had moved on, but the discussions we had started at the Board, which was, was that funnel really working? And I think in the end, where Hulu came out, which is what we've seen in certain markets where we have had AVOD front porches attached to a product that is subscription as well is the conversion funnel is not as effective as you might think. And therefore, great stand-alone businesses, but probably slightly more separate than -- and you can cross-market them but not necessarily needing to have one attached to the other.

I think David gave us an example recently there was a tennis championship, where a lot of content was available for free, but if you want to see the best match good to pay for it. And people were like, "Well, I'm good. Like, okay, I'll miss the finals. I've seen enough tenants for this week for free. Thank you." And right, that may have awoken your brains; and maybe it's harder than we think to drive people to pay.

Look, we've learned to -- Michael, to your point, we've learned a lot over the last 8 years, and we've made a lot of mistakes, frankly, in doing it. In the sports space, in particular, we have a Eurosport Player which we've been trying for years to try and figure out. And we have that challenge, which is how do you -- can you give some people a little bit of something for free and then get them to pay, more challenging than you'd think. And at the end of the day -- also the sort of hamster wheel that is sports and trying to figure out how do you make sports something more than a pay-per-view business, which becomes very challenging from a churn perspective. And that's why we decided to collapse our Eurosport business into our discovery+ product. And even in the short period that we've done it over the course of the last 6 months or so, we've seen exactly what we expected, which is much higher engagement across both sports and entertainment and much better retention. And so we're going to continue that rollout and we'll be completed in 2022 of completely collapsing our sports product into discovery+. And we think as we think, again, for, we'll have a very unique proposition in a Warner discovery world of a premium sports tier, an incredibly strong entertainment product with great local and global content coming out of the U.S. And then obviously, an opportunity still to have a potentially separate free-to-view ad-supported-only offering in market as well.

Okay. And can I just follow up on some of you said about broadcast? Is there a heat map of markets where you really need more local language? Where basically the local population just expects content delivery in the voices, the languages, the dialects of the region? Can you give us a sense of like what -- where is that the most intense and where can you get away with maybe having less original content?

I think -- I mean, as a general rule, the difficulty with international, it's very hard to speak. It's the most misleading word in the English language. It's one word, but yet it's completely fragmented. So it's hard to speak in generalities. But I would say the western markets generally, for all the cultural affinities and simulations that have happened over years, are a little bit sort of more probably receptive to English language content. If you look at a market like Poland, the English language content works well, but is dwarfed by the local content. So I think the further east you go, generally, local content matters, but the flip side is, look, in all these markets, in Germany, in Italy, in Spain, local content does matter. In terms of what we see, I think the benefit is we've made a lot of progress just leveraging essentially -- a windowing strategy as opposed to a lot of original content investment. And that's been a really interesting learning is that it's not necessarily just, "Oh, you've got to pile a bunch more money into a market." We can actually get 2 bites of the apple because back to this two different customer segments, there's a customer segment that wants to pay either because they don't want the ads, they want it early or they want it, obviously, in a different operating environment and user experience in the streaming space. And then you still have some of the more traditional viewers that still want to see it and don't want to pay. And ultimately, having a platform like ours where we have both, we have 3 actually, the D2C opportunity upfront, the pay proposition, but still a very good business in Europe and not seeing the declines in subscribers that we have in the U.S. And then the free-to-air for sort of 2 portions of the customer segments, either the older generation, which is just as a tradition, has gotten used to that, or the very young who maybe don't have the disposable income and are still using that as a video consumption outlet for free. We think we've got -- we like that multiplatform approach, and we think it makes us unique.

Robert?

You've already touched on Germany a number of times already. Can you just discuss specifically your -- the ProSieben joint venture? And then more broadly, how do you -- How do you approach partnerships in Europe? And how does that help give you an advantage?

Yes. I mean I think part of the international story we were just talking about is -- one of our great successes is that we've not been a one-size-fits-all shop. We've tried to basically understand that every market is a little different, the partners and the players, the dynamics, the cultural, the consumer behavior is a little different. And we've had teams on the ground who really lead us and who are the experts. We don't want to be dictating from kind of a central spot how to best satisfy the German consumer versus a Brazilian consumer versus an Indonesian consumer. And so in Germany -- so we tried to take a tailored approach and do some experimentation. And based on my Hulu background, I've always thought in Europe, the broadcasters generally are hurting themselves by fragmenting and each having their own service. It's just in a world of globalization and of giants, it's not going to end well if they continue to keep kind of their own individual plays just because it's a scale business, and it's going to be very hard for them to make the technology investment, make the engineering investment and then out market these other services. I think obviously not to mention the content investment. So we sort of a couple of years ago, well before discovery+ existed, we said, look, in Germany, it's a big market. What if we could sort of act as that vehicle to try and bring the players together. And so we launched this joint venture with ProSieben called Joyn. I think the market -- the one thing that's been tough is that it's irrational, but people still -- broadcasters still want to sort of do their own thing. And while I don't think that's necessarily the winning strategy, it's very hard to get people -- convince people to get off of that mindset because it seems counterintuitive. They feel like they're going to give up control and they're going to -- but I still believe in that. So the joint venture has been great in terms of getting us in the market. It's one of the leading AVOD businesses in that market. It's gotten great monthly active user growth. But I think now, obviously, we're in a different position than we were 3, 4 years ago with discovery+ coming and obviously, the Warner future. So it's one that we'll continue to evaluate what we want to do. But it was a great experiment and it's worked very well. The question is now with our competing interest of discovery+ and our future bigger streaming product, where does it fit within the whole and that's something we've got to figure out.

So J.B, you did a great job answering our questions before I asked them, but I'll go back to your sports or sports conversation. Clearly, you've been invested in sports. You've been thinking about this for a while all the way back to Eurosport. In a streaming world, what role does that the sports [ rights ] play? And then going to our APAC conversation, what [ Udi ] said was, the one thing that cuts through all populations and dialects was cricket. And I wonder in Europe, it has to be soccer or football. How hard is it to actually buy those rights on a pan-European basis? And is that something that we should expect as you get bigger and more focused on streaming down the work down the road?

I think it will remain tough, both because the history of the way those rights have been sold, is all local market to local market. So I think it's going to be tough. And I guess stepping back, I mean, for us, the sports journey has been one with more on a ton. And as we talked about earlier, we've made a bunch of mistakes as well. I'd say we now look at sports and say, it's got 2 different purposes. In the traditional linear business where it still plays an important role in the pay-TV ecosystem. Again, Eurosport in that -- in those markets is more like a basic pay-TV channel, broad distribution, very well distributed. And there, the important thing is continuing to get 8 to 12 peak events throughout the year that consumers and then our partners on the distribution side say, my viewers and my customers want that or they want 3 to 5 of those a year, and therefore, you are kind of a must have or a need to have in -- a couple times a year. In the streaming space, you need to have volume because otherwise, the retention capability of a consumer, you just don't -- you're not going to make it work. But if a 2-week grand slam of the French Open is a great event on the streaming platform, the people come in and then they go out. And if you don't have something until the U.S. Open in September, they're gone for 3 months and you got to remarket them to get them back. It just becomes a very costly business. So for us, the big events that are sort of like a U.S. open or like some of the more championship events in other sports can sit still in a very healthy pay-TV ecosystem, and that's one. On the streaming side, yes, there's football. But we look at those as, again, and we are experimenting, you got to have volume, you got to have volume, you got to have it all. Because otherwise, you lose people. It will serve as essentially a customer acquisition and potentially a retention tool where it's probably not a big moneymaker, candidly. But where ultimately, you get them into the ecosystem and you get them spending time on the entertainment product and particularly if we find creative ways to package sports with an AdLite offering, you can really upsell and monetize that engagement. And on an ARPU basis of the whole, the ecosystem makes -- can make a lot of money. That's our belief. Now we are going to be smart and prudent about testing it because we still have to prove it out, but we believe that there's a real role that sports can play and that uniquely based on our infrastructure and our capabilities in that space over years that we are in a great position to take advantage of.

I know we're running out of time. Michael, I don't know if you want to squeeze one last question, but thank you, J.B.

Robert, can I squeeze one last in? In a minute before we got yelled at, Rob, why don't you throw the last one on J.B. thanks for being here. We really appreciate it.

Yes. So I mean, you already touched on it before, but maybe just to expand upon it in terms of the bundling of services. Just maybe expand upon how you think about the strategy and benefits of bringing the Eurosport within discovery+ versus having these stand-alone services and how that might impact future strategies.

Yes. I mean I think it's fairly straightforward, which is, at the end of the day, it can serve as an acquisition driver, which is obviously great to get more people into our ecosystem. In terms of the retention driver as well because ultimately, the seasons, again, if you have the right set of rights where you're working on a 8- to 9-month season as opposed to a 2-week event, you can keep the people in the tent and generally with the entertainment content over whatever hiatus period, whether it's 2 months, 3 months, between seasons, keep them engaged and not wanting to switch off the subscription because they've got all this other great content at their fingertips. And those 2 elements to us have real value to ARPU overall. And as I say, churn management and therefore, marketing and SAC effectiveness because you just don't have to go back and remarket and reacquire those customers. And so, we like that model, and we're going to continue to experiment and try and prove it out over the coming years.

With that, J.B., Robert, thank you. Thanks for being here, and we'll see you hopefully soon live next year.

Great to be with you, Michael. Thank you, guys. Thanks, Robert.

Thank you. Be well.