Warner Bros Discovery (basically) admits its merger didn't work

• Discovery merged with WarnerMedia back in 2022 to create Warner Bros Discovery. Investors hate the outcome.
• Now someone at WBD is floating the idea to basically undo that merger, and create two new companies.
• It's unclear how serious WBD is about this plan. But the fact that it's even a discussion shows you how dire things have become.

Remember back in 2022 when we told you that combining the company that used to be called WarnerMedia with Discovery would be a great idea?

Well, what if we just pretend that never happened?

That's basically the pitch the management of Warner Bros. Discovery is floating to investors today, via a story in the Financial Times: "A dramatic plan to split its digital streaming and studio businesses from its legacy television networks."

The theoretical plan, as best as I can understand from the FT report, is to turn WBD into one "Goodco" — its (formerly known as HBO) Max streaming business and its Warner Bros. movie studio — and one "shitco" — all of its declining linear TV networks, including CNN, plus most or all of the $40 billion in debt WBD has taken on.

The details are fuzzy, and it's unclear how serious WBD is about any of this. And I've gotten a range of reactions from media business veterans and observers on this one. Some think it's a drastic but reasonable idea, others think it's a non-starter. We can go over pros and cons in a second.

But the biggest takeaway is the seeming admission behind the trial balloon: That the WarnerMedia-Discovery deal — pitched at the time as a way to scale up to fight Netflix and Big Tech companies — hasn't worked.

That is: Adding Discovery — a collection of basic cable TV networks that bring you Shark Week and Dr. Pimple Popper — to a company that owns its own basic cable TV networks, plus HBO and a movie studio hasn't created a bigger, better company, but a weaker one.

That's not a new idea, and plenty of other people have figured it out, too. Investors, for starters, have whittled down WBD's stock price from $24, when the combined company first hit the market, to around $8 Thursday.

Another indicator that mashing up Discovery content alongside HBO hasn't made for better streaming service, no matter what WBD executives have publicly insisted: A new branding plan that will label Max's biggest-budget, highest-profile new shows as … HBO shows.

And in what is probably very much not a coincidence, this week analyst Jessica Reif Ehrlich declared that WBD is definitively "not working" and that "staying the course appears to be untenable." She then went on to list several possible solutions, one of which maps to what the FT says WBD is now considering. (WBD PR declined to comment on the report.)

The argument against this kind of breakup is pretty straightforward: Sure, it would be nice for WBD to magically move its declining assets into a separate company, along with all that debt. But those declining assets — TV networks that still command billions of dollars in subscriber fees — still throw off a lot of cash, and that cash helps to fund the rest of the combined business. Plus, what investor wants to own a shitco? And would the money from those declining networks be enough to service all that debt?

"Nonsensical," says analyst Rich Greenfield in a note Thursday morning.

The flip side of the argument: Splitting HBO and the movie studio from the cable networks is something the company's various owners should have done years ago. And yes, the value of those cable assets has been in steady decline, and you'll get a lot less for them now. But it's literally better than doing nothing.

Plus, separating HBO and the studio from traditional TV instantly makes those businesses attractive M&A targets, especially for tech companies that like content but don't want to own TV networks. Apple, most notably, inquired about buying HBO way back when its parent company was called Time Warner.

And, the argument goes, this is going to happen one way or another, eventually. If WBD can't split the company the way it's supposedly proposing now, it will end up selling off assets (maybe CNN? Maybe its gaming company? ) over time. This just moves things along much faster.

It's tempting here to lay all of this at the feet of WBD CEO David Zaslav — most recently seen at the Sun Valley media conference, all but endorsing Donald Trump. Which is fair, since he's been the public face of this deal.

On the other hand, the problem Zaslav is trying to solve — how to balance a declining but profitable TV business alongside a streaming future that's unclear and expensive — is one facing every big media company. (See, for starters, Paramount, which also tried to merge itself into the future and has had to admit defeat via a drawn-out fire sale.)

And if Zaslav ends up unwinding his deal, he won't be the first person to realize he's made a mistake by buying HBO et al: AT&T did the same thing in 2021, when it undid the $100 billion deal it first proposed in 2016 by selling to … Zaslav.

As they said in one of HBO's signature shows: Time is a flat circle.