The Warners Movie Dump: An Ominous Sign for the Streaming Biz?

The announcement last week that the newly combined Warner Bros. Discovery was planning to dump seven of its films, including one big budget female-driven DC Comics superhero film, has brought on a lot of angst and debate among those tracking the film business. The decision was both surprising in some ways, while being entirely predictable in others.

While there are plenty of examples of feature films that have been unceremoniously dumped by their studios because of lack of faith in commercial potential, or because of a regime change, historically these decisions were based on not wanting to throw good money after bad by spending the necessary marketing money for those films to reach an audience.

In the current media environment, one might have assumed that while such films might be denied a life in theaters, they certainly would provide adequate filler for a streaming service, if for no other reason than to give the appearance of having a wide selection of offerings. Just one quick look at the menus for any of these services would indicate that quantity rather than quality rules that business model. So why would Warners just dump these films, rather than relegating them to their HBO Max platform?

The simple (and much reported) answer is that these films have been deemed to be more valuable as tax write-offs than as product. But if you dig a little deeper, this fact exposes several other underlying issues, some of which are classic and others that are new to the business since the advent of subscription streaming services.

In the latter category is the ongoing issue of how to put a value on product that is created for services such as HBO Max or Netflix. These services measure their success in “churn rate”—the rate of subscriber growth after taking into account new subscriptions vs. canceled subscriptions. In the current fiercely competitive environment (soon to be a bloodbath?), these consumer decisions come down to perception of value. If we logically assume that most consumers will not want more than two or three paid subscriptions, streaming services need “locomotives,” otherwise known as high profile product, to attract and keep subscribers. All the rest is filler. But filler serves the ongoing perception of value. If there isn’t a constant flow of new product, that value will not be seen.

It is this lack of connection between actual and perceived value that is the source of much consternation between the streamers and the creatives, who are used to sharing in the revenue streams from traditional release strategies. I don’t know enough about the tax strategies of major corporations to get into the weeds on this, but I would think that a film made for subscription streaming would be written off over many years of its useful life. If it never sees the light of day, I imagine that would mean it could be written off immediately. (I wonder aloud if that will be as potent a strategy now that Congress has passed a minimum 15% tax on major corporations.)

So why would a company like Warners think that a $90 million write-off would be more valuable than “Batgirl” might have been on HBO Max? The movie can’t possibly be that bad. That brings me to a classic structural issue. The heads of corporations are judged by short-term, rather than long-term results. The metrics that control bonuses, stock options and renewed employment agreements are tied to short-term profitability and stock price. Building a streaming service from scratch is an expensive and long-term proposition, which suppresses the short-term bottom line of a parent company. Just ask Disney or Netflix how that’s going.

This move by Warner Bros. Discovery is most likely an indication that the streaming bloodbath is already underway.  We are likely to be seeing a lot of cutting back and consolidation before we really understand what a mature streaming business looks like. What we can say for sure is that it won’t look a lot like what we have right now.

And even worse is what it means for the filmmakers. Not only are they being cut out from participation in upside revenue, but they also now potentially face their work never being seen at all. If one’s film is cancelled, what does that mean for the trajectory of a fledgling career? I have to believe that folks will be thinking twice about creating work in such an environment unless they literally have no other choice.

3 thoughts on “The Warners Movie Dump: An Ominous Sign for the Streaming Biz?”

  1. Ira: Enjoying your blog. I play golf with a friend often and beside golf, we usually talk about stocks and films to see. Today he told me he was thinking of dropping Netflix. As a long time shareholder of the stock, I wonder if now is the time to sell?

  2. Hmmm. So HBO Max is becoming the equivalent of Harvey Weinstein’s vault. Buy it to take if off the market and then lock it away? Or is it, as writer Alan Spencer has called it, HBO Max Bialystock?

    I could see it if they were solely doing this with acquisitions, but why on earth invest the kind of money it takes to produce a movie just to lock it away? The only time this ever made sense as a business decision was when Roger Corman did it with a tiny budget in the ’90s in order to contractually hang on to his soon-to-lapse Fantastic Four movie option.

    We’ve even seen new studio regimes bury a film with poor marketing and minimal release because they didn’t have faith in their predecessor’s slate. But vaulting a nearly complete $90 million film? I’m sure that will be a rarity at worst. At least let’s hope so. Spending that kind of mind to feed the hungry is a tax deduction too.

  3. Interesting. I was getting HBO free along with my ATT Internet connection. Earlier today I had to drop HBO to get the price downAfter they raised it when the year long promotion ended. I’ll wait for John Oliver to come back an look for,a new promotion.

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