Selling CNN.

What follows is my take on what happens next at CNN, now that Mr. Licht has been overthrown by the locals. There’s a case to be made that WBD should put CNN up for sale and use the proceeds to clean up its balance sheet and invest in core “products.” CNN would fetch a high price. That much we know for sure.

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In April of 2022, senior management at Warner Brothers Discovery (WBD) shut down CNN+, CNN’s bespoke news streaming service, that senior management at CNN had inexplicably decided represented the future of the company.

At the time of launch, CNN (and therefore WBD) had already sunk tens of millions of dollars into the project. The longer-term plan called for the investment of more than $1 billion over 4 years.

The launch of CNN+ was marked by a lavish “gala” on the 101st floor of a mid-town Manhattan skyscraper, that offered what The New York Times described as a constellation of CNN “stars” and “dizzying views of the Manhattan skyline.”

Three weeks later, CNN+ was shut down, for good. CNN executives were shocked. They may have been the only ones who were.

Sidebar! A remarkable sidebar to this story is that CNN “green-lighted” the $1 billion-over-4-years streaming project without consulting its new owner, WBD. This was apparently based on the idea that if CNN+ was presented as a fait accompli, the new owner(s) would have to go along, since undoing it would be (in theory) more expensive than finishing the job. The new owners were understandably insulted by CNN management’s presumption that it could go ahead without the parent company’s explicit approval. That’s not the way the world works from the point of any new owner, much less one as demanding as WBD CEO David Zaslav.

There is, obviously, ample evidence that migrating CNN’s distribution from the old “cable model” to the “streaming service model” is inevitable and therefore necessary. More and more “cable customers” are indeed “cutting the cord” (dropping cable TV service) and becoming “streamers,” who purchase entertainment, news, sports and weather programming via the internet, from service providers like YouTube and Hulu, or from individual companies like Disney and Netflix.

The more people “cut the cord,” the less money there is for cable system operators to pay “content providers” for their offerings, thus requiring higher prices to make up the difference. Higher prices, of course, generate more cord cutting, so the prices of various “cable packages” rise higher and higher, leading to more cord cutting, leading to even higher prices, etc. It’s a classic doom loop.

So it made/makes sense, in theory, to get ahead of the game and lay down the track for streaming CNN content. But it made no sense to offer CNN+ as a stand alone product. Management’s plan, like the launch party, was garishly grandiose. The notion that the “streaming service” would have its own programming and “stars” and management and marketing and all the rest of it was an inexplicable waste of money. The world doesn’t need more CNN programming. It needs better CNN programming. Improving CNN’s current programming makes a lot more sense than creating more of it.

With regard to the distribution question, just because a dying business model (roughly two-thirds of CNN’s revenue comes from fees paid by cable system operators) will someday collapse doesn’t mean it can’t make money on the ride down. AOL’s dial-up service generated revenue long after it was doomed. There are still AOL dial-up customers today. In CNN’s case, there are probably millions of customers who would prefer getting access to CNN’s programming via their cable companies until the day they die, which, by the actuarial tables, means that the average CNN watcher will pay up for ~10 more years. (Life expectancy in the US was 78.7 years, pre-pandemic. The average age of the CNN viewer is ~68 years.)

The truth is CNN+ was never going to work as a stand-alone product. Even the dimmest bulbs in media world understood that. A more practical idea would be to offer CNN (not CNN+) as part of a bundle of “brands” that attract a much larger number of subscribers. That in turn would enable a two-tiered pricing structure; an ad-free offering (more expensive) and an advertising-supported offering (less expensive but more revenue, since there would be two revenue sources — the subscription price and the advertising dollars).

WBD carries a ton of debt (estimated at $48 billion), so getting revenue “right” is the over-riding concern at the company’s headquarters. By now, Mr. Zaslav has probably decided what combination of companies and revenue streams will make up the final iteration of WBD and what companies and revenue streams will be sold off or shut down (if they can’t be sold off).

This gets to the heart of the matter. Is CNN a good fit for WBD? Does it make what business and financial people call “strategic sense?” (As we’ve noted before, everyone’s a “strategist” now).

WBD, if you look at its various parts, is an entertainment company attached to a library of content (basically movies and TV shows from the past). News programming is a non-essential service for an entertainment company; a “nice to have,” but not really a “need to have.”

Mr. Zaslav presides over an unwieldy conglomerate that needs to be “rationalized” and “right-sized,” as it pays down debt and invests in future programming. Those needs point to the sale of CNN, and the sooner the better.

If we say for the sake of argument that CNN’s annual earnings are $750 million, a multiple of 15x or 20x earnings would command a sale price of as much as $15 billion. And perhaps more, if we add in the possibility of an acquirer whose interest is less focused on earnings and more on political power. Having both, of course, would be best, as Rupert Murdoch will attest.

Another reason a sale makes sense at this time is that the number of private equity firms has nearly tripled in the last twelve years at the same time the availability of “good deals” has been reduced by private equity firms buying up all the “good deals.” Some PE firms are now doing leveraged buyouts of dry cleaning chains and convenience store gas stations and dog treat companies, which tells you pretty much everything you need to know about the current state of “deal flow.”

Putting CNN for sale would get everyone’s attention and attract a slew of bidders, not because it’s perceived as (or is) a diamond in the rough, but rather because it’s a well-recognized brand that throws off enough cash to make its debt payments, on time and in full. Investors in PE firms, especially institutional investors, like the comfort of investing in established brands that pay their interest coupons, year in and year out. Smart PE firms look at CNN’s 4000 employees and presume that 2500 high-performing or better employees would produce a better product. Plenty of revenue and plenty of fat to be trimmed is a PE firm’s idea of winning the lottery.

Because it’s CNN, because PE firms are sitting on huge amounts of “dry powder” (uninvested investor money), because there are now three times as many PE firms as there were 10 years ago and because the number of high-profile, debt-paying deals is so few, the likelihood of a bidding war is much more likely than it might otherwise be.

Whatever else he might be, Mr. Zaslav is smart. A sale of CNN divests an under-performing asset, helps focus the parent company on its core businesses, immediately (and dramatically) improves the parent company’s balance sheet, almost certainly (and dramatically) boosts the company’s stock price and makes the case for an increase in Mr. Zaslav’s already generous compensation much easier to prosecute.

Looked at that way, from Mr. Zaslav’s point of view, last things first.