Paramount and Warner Bros. Discovery: Uncertainty Surrounds Customer Choices for Streaming

Key Morningstar Metrics for Paramount Global

• Fair Value Estimate: $20.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

Key Morningstar Metrics for Warner Bros. Discovery

• Fair Value Estimate: $22.00
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

We are reducing our fair value estimates for Warner Bros. Discovery WBD to $22 and Paramount Global PARA to $20. We are also downgrading our moat ratings for each company to none from narrow. We broadly view the firms similarly, and expect both to survive the evolving media landscape due to their scale, distribution channels, production studios, and content portfolios. However, in an environment defined by cord-cutting and numerous choices for streaming, the companies face significantly more uncertainty than they did when most television entertainment was contained within the pay-TV bundle.

These firms historically had three main sources of revenue: fees they received from pay-TV distributors to carry their television channels, television advertising, and licensing fees for movies and television programming distributed by third parties. Each source is now under pressure. Cord-cutting and diminished linear TV viewership have depressed carriage fees and advertising revenue. Less emphasis on movie theaters and an industry shift toward streaming services—with a byproduct of these firms keeping more of their content in-house—have depressed licensing revenue.

We believe the industry is on the verge of greater harmony as streaming services mature. We expect the streaming services for these firms to increasingly carry live programming, get bundled with other streamers, and get included in pay-TV subscriptions. As a blueprint, we have the agreement the Walt Disney Company DIS and Charter Communications CHRT struck in 2023 whereby Charter subscribers receive access to Disney+.

We also expect licensing to pick up and streaming marketing costs to decline as the firms adjust their streaming strategies. Nonetheless, uncertainty surrounding how consumers predominantly purchase streaming subscriptions (and at what price points) was the overriding factor leading to our moat removals. We don’t anticipate any likely outcome to be nearly as lucrative for these firms as the traditional models.