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Warner Bros. Discovery Knows It Can't Compete With Disney. That's a Good Thing for Investors

As streaming competition grows, companies are realizing the importance of identity in the industry. Since the merger of WarnerMedia and Discovery, the newly formed Warner Bros. Discovery (NASDAQ: WBD) has shifted its streaming strategy as it carves out its place in a crowded market.

Here's why Warner Bros. Discovery is right to play to its strengths and differentiate HBO Max from Disney's (NYSE: DIS) flagship streaming service, Disney+.

Self-discovery at the new company

The rapid introduction of multiple streaming services since 2019 has meant that companies must offer unique services to stay competitive. Before WarnerMedia's merger with Discovery, then-CEO Jason Kilar planned to order hundreds of hours of family-focused content for HBO Max. The strategy was to offer programming for the whole family, with the rise of Disney+ similarly triggering Netflix to ramp up production on PG content.

However, Warner Bros. Discovery CEO David Zaslav has changed course. On July 29, HBO Max released a statement announcing the cancellation of its tween series Gordita Chronicles, explaining, "Live-action kids and family programming will not be part of our programming focus in the immediate future." The move comes as Zaslav considers the market and takes steps to focus HBO Max's content on its more successful offerings.

Live-action family content, which dominated children's programming in the early 2000s with shows such as Hannah Montana and iCarly, has declined for years. YouTube and TikTok have risen steeply in popularity, making up a large portion of the live-action content young viewers now consume. The shift has been to the detriment of networks such as the Disney Channel and Nickelodeon, which experienced an audience decline of 82.3% and 74.5% between 2016 and 2021.

Disney+ is one of the few streamers that can produce successful live-action family content, but that's predominantly thanks to its juggernaut brands Marvel and Star Wars. So, Warner Bros. Discovery is correct to avoid competing with these eclipsing franchises and focus on what it does best: Prestige TV.

Playing to its strengths

The merger that founded Warner Bros. Discovery saw the new company assume $43 billion of debt from WarnerMedia, with Zaslav primarily focused on paying it down. In addition to a move away from underperforming live-action family content, the executive shut down streaming service CNN+, stopped production on various European series, and oversaw the departure of multiple WarnerMedia top execs. The CEO is on a mission to cut any part of the business that does not guarantee profits, especially in terms of content.

HBO has built a brand on prestige TV aimed at adult viewers, with its most-watched shows to date being the graphic fantasy drama Game of Thrones and Euphoria, a series with strong themes of drug addiction and violence. These top-rated shows fit right in with HBO's extensive library of award-winning mature dramas, which have helped boost HBO Max. A move away from live-action family content that doesn't lend itself to the service's most popular content is a step in the right direction.

Additionally, one of Warner Bros. Discovery's most prominent brands is DC, which has started differentiating itself from Marvel by offering grittier, more mature superhero titles. The recent direction for DC fits HBO Max's business model of adult content, with the service recently seeing success with the original DC series Peacemaker. The TV-MA show had the biggest single-day performance of a Max Original, with the finale's viewership up 44% from its premiere.

Although Warner Bros. Discovery is moving away from live-action family content, it will continue producing animation geared toward adults and children. While family animated series don't suit HBO Max's adult-focused library, the move makes sense given how popular and cost-effective the genre is. In July, 90% of the most popular children and family TV series were animated, with Warner Bros. Discovery owning three of the top 10 titles. The company's ownership of Cartoon Network and animated series from Discovery allow HBO Max to continue profiting from successful content with little risk.

A focused future

As HBO Max continues paring down its content offerings, it is optimistic that the company is tuned in to what works and what doesn't. With a massive debt to pay off, Warner Bros. Discovery needs to be vigilant in its investments and not concern itself with competing in a sphere that Disney+ now dominates. If its upcoming content can continue to only add to HBO Max's successful genres, the company will be in good standing in the future.

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Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool recommends Warner Bros. Discovery, Inc. and recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.


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