Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Warner Bros. Discovery Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Additionally, please be advised that today's conference call is being recorded. I would like to hand the conference over to Mr. Andrew Slabin, Executive Vice President, Global Investor Strategy. Sir, you may now begin.

Good afternoon, and welcome to Warner Bros. Discovery's Q2 earnings call. With me today is David Zaslav, President and CEO; Gunnar Wiedenfels, our CFO; and JB Perrette, CEO and President, Global Streaming and Games. Before we start, I'd like to remind you that today's conference call will include forward-looking statements that we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include comments regarding the company's future business plans, prospects and financial performance. These statements are made based on management's current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our Form 10-K for the year ended December 31, 2021, our quarterly report on Form 10-Q for the quarter ended March 31, 2022 filed with the U.S. Securities and Exchange Commission on April 26, 2022, and our quarterly report on Form 10-Q for the quarter ended June 30, 2022, which is expected to be filed with the SEC on or about August 4, 2022 as well as our subsequent filings made with the SEC. A copy of our Q2 earnings release is available on our website at ir.wbd.com. We released a trending schedule with pro forma results and additional financial information, which also can be found on our website. And lastly, our discussion today will include an accompanying slide presentation, which following the call, will be available on our website. And with that, let me turn the call over to David.

Hello, everyone, and thank you for joining us. We've had a very busy and productive 4 months since launching Warner Bros. Discovery. And today, we want to provide you with an update on where we are and where we're headed. Among our top priorities have been combining the rich legacies of these 2 great organizations, building out our senior management team and beginning to integrate the cultures into one global operating company. We've made significant progress on all fronts. Nearly our entire senior leadership team is in place, and I could not be more excited to continue locking arms with the exceptionally talented group of individuals that we've assembled from both legacy companies. Plus more recent additions like esteemed filmmakers, Mike De Luca and Pam Abdy, now at the helm of Warner Bros. Pictures Group, and a uniquely talented media operator, Luis Silberwasser, driving our leading global sports strategy. And just last week, we announced our new Chief of Diversity, Equity and Inclusion. Asef Sadek. Asef previously served as Head of Diversity Equity and Inclusion International for WarnerMedia and is one of the most dynamic leaders in the diversity space. Since the close of the deal, the entire leadership team has been moving as quickly as possible to integrate key elements of our business, assess growth opportunities and make important progress in our synergy capture and strategic planning. We've been able to dig deeper into the financials and have gained a much better, more complete picture of where we are and the path forward including identifying some additional and unexpected challenges that have and will continue to require our focus and attention. The upside is that there is even more room for improvement in cost savings. At the same time, we're keeping a close eye on the many cross currents…

Thank you, David, and hello, everyone. Over the last almost 120 days, I've had a chance to spend time with this incredibly talented team, take a closer look at both products and their technology, better understand our proficiencies as well as areas where there's need for further development and dig in on what consumers are saying about the 2 services. We have a lot of work to do, but these first few months have only strengthened our belief in the significant opportunity ahead of us. And I'm excited to share with you some initial thoughts on our strategy and road map. First, a bit of context. For decades, our industry has embraced changing technology and consumer demand by evolving a very successful windowing approach to exploiting content. However, in recent years, a strategy has emerged that suggests the video business will be better off collapsing all windows into streaming, overpaying for and overinvesting in content and offering it all at the same time for a low price. We don't believe in this strategy. While we intend for streaming to be a critical part of our company and a key driver of our growth as consumers continue to shift their viewing habits from linear to nonlinear, it's only one part of our diversified approach. The focus of our streaming strategy is consumer choice. We believe there are multiple global consumer segments in streaming, just like there have been for decades in traditional television. Some who are willing to pay a premium for an ad-free experience, others who are more price-conscious and prefer to pay less with limited advertising, and a sizable third group who will not pay a subscription fee and only want to enjoy ad-supported entertainment. Warner Bros. Discovery's unmatched depth and breadth of content provides us the opportunity to…

Thank you, JB, and good afternoon, everyone. As you heard from JB, we are taking thoughtful approach in how we intend to scale our D2C business smartly and methodically. And it's just one component of a more balanced distribution strategy versus one that seeks to drive subscriber growth at any cost. This will be an important theme throughout the discussion of our second quarter financials and our outlook for the balance of the year as well as 2023. Turning to our financials. As you can see, it's been an extremely busy first full quarter as a combined company, strategically, operationally and financially. Picking up from when we spoke to you last, while we've already implemented a significant number of initiatives following the closing of the WarnerMedia transaction, we've only become more confident about the long-term potential for Warner Bros. Discovery. The strategic logic behind bringing these 2 great companies together is as apparent and sound as when we announced the deal. As noted prior, the recently concluded upfront is a timely example of just that. Despite the more challenging macro environment, we're very pleased with our performance, which proved the enormous value of our content portfolio to our advertising clients and as a differentiated means to service brands. Out of the gate as a combined company, we have been focused on debt paydown, and I am pleased to report that by the end of this month, we will have paid down $6 billion of debt since closing the transaction. We're equally as focused on integration and efficiency, and I'm very pleased with the progress of the synergy program. We now have 1,000 individual initiatives staffed. Measures already implemented worth $1 billion of run rate savings. The clear grip on milestones and business cases for at least another $2 billion in…

[Operator Instructions] Your first question will come from Bryan Kraft at Deutsche Bank.

I need to ask 2, if I could. I guess, first, David, there's a lot of reporting in the press about some rates being delayed and of course, the canceling of Batgirl. I think that film, in particular, was almost completed. Can you just talk about the reason for decision to cancel Batgirl? What's the issue? And what's happening more broadly, Warner Bros. film business, changes you might be making and basically the direction you're taking with the DC universe. And then just had one for JB on the SaaS product. Is the intent there to offer the SaaS service in Western markets like the U.S. where consumers are accustomed to paying for content? Or will it be more limited to markets where you've got -- where you would have a low penetration of paid services and therefore, way of building penetration where you might not otherwise achieve it?

Great. Thanks, Bryan. Well, let me start with the fact that the Warner Bros. Motion Picture Group has fantastic IP and a great history, as you know, when they're turning 100. And between DC., the animation group together with the entire Warner library, our ambition is to bring Warner back and to produce great high-quality films. And as we look at the opportunities that we have, broadly, DC is one of the top of the list for us. We -- when you look at Batman, Superman, Wonder Woman, Aquaman, these are brands that are known everywhere in the world, the ability to drive those all over the world with great story is a big opportunity for us. We have done a reset. We've restructured the business where we're going to focus -- where there will be a team with a 10-year plan focusing just on DC. It's very similar to the structure that Alan Horn and Bob Iger put together very effectively with Kevin Feige at Disney. We think that we could build a long-term, much stronger sustainable growth business out of DC. And as part of that, we're going to focus on quality. We're not going to release any film before it's ready. We're not going to release a film to make a quarter. We're not going to release a film under -- the focus is going to be how do we make each of these films in general as good as possible. But DC is something that we think we can make better, and we're focused on it now. We have some great DC films coming up, Black Adam, Shazam and The Flash. And we're working on all of those. We're very excited about them. We've seen them. We think they're terrific, and we think we can make…

And Bryan, on fast, 2 quick comments. Number one is just a reminder that as we look at that space, the content we're talking about for -- that would be in that kind of a product would be totally different than the content it will be in our premium SVOD offering. So number one, the distinction is totally different and with over 100 titles -- episodes across our combined portfolio. There's a lot of content that wouldn't necessarily make sense in a premium product that might make sense to the fast. The second thing is on market by market, look, that's part of the assessment that we're going to -- we're looking at and we'll look through over the next few months. And as we have more details of how we think and where we think the opportunity is the richest, we'll come back to you and take you through it.

Just -- the objective is to grow the DC brand, to grow the DC characters, but also our job is to protect the DC brand, and that's what we're going to do.

You next question comes from Jessica Reif Ehrlich of Bank of America Securities.

I hope you meant questions. So if it's okay, I'd actually like to go around to each one of the speakers. David, one thing -- I mean, you have an amazing set of assets, but one thing that's clearly being challenged are your linear networks. I think the big surprise in Q2 results so far is how bad the video sub losses are in the U.S. So could you just talk about your -- kind of your longer-term view of your linear networks? For JB, just on the content side, it sounds like sports news are going to be an important part of your content strategy. How different is that from linear? How are you thinking about getting new content for direct-to-consumer? And then, Gunnar, just on the guidance. So if you take your '22 guidance of $9 billion to $9.5 billion plus $2 billion to $3 billion, I guess, synergy, we're at $11.5 billion to $12 billion for '23 as a base. But what about -- if D2Cs -- direct-to-consumer losses are peaking this year and coming down, can you give us color on the magnitude upfront? It sounds like pricing was great, film should be normalized. Where do you see the underlying growth?

Well, why don't I start with the linear business because we're big believers in the linear business. There is some secular decline. There's been secular decline. It's leveled off. It's declined more. In the end, you look at March Madness, the biggest numbers since '94. The NBA up dramatically. That was at a time when people said nobody below a certain age is watching. Well, they're tuning in for sport, they're tuning in for news. And when you look at the overall portfolio that we have, live sports, live news, together with entertainment and the best kind of branded nonfiction library where people get up, the levers of food of [ HG of ID ] and watch all day. So we think it's very hard to predict, but we expect it's going to be a very significant cash generator for us and a very good business for us for many, many years to come. We have a great team running it. This is what we do. It's what we know how to do. We have a team that's been doing this for 30 years. If the linear business is a race car, we've got a team of race car drivers. And when we hear a noise or it's in third gear, we know how to fix it. It's a business we know well. We haven't begun to implement the libraries that we have now, where we could take content that document -- old documentaries on crime from HBO and put them on ID or take programming that exists in the library and move them on each of the cable channels or vice versa. So we just -- that hasn't begun yet. We also are first getting our hands around the idea that we are very often the largest player in…

Jessica, on the sports and news for streaming, I guess I'd categorize it as on sports, it's really about experimentation that I'd say -- and we're going to continue to be disciplined. We have essentially 2 experiments ongoing, which is one where we bundle sports. In this case, Champions League in Brazil and Mexico into our core entertainment offering at the same price as a -- really as an acquisition driver, and we are very happy with the results there. And then we got a second one in Europe, where we upsell sports through a -- to a buy through tier at a higher price point. And obviously, we'll be doing more of that now as we get closer to closing on our BT Sports deal in the U.K. which is probably will be the biggest experiment on that. And so we love the 2 experiments we have going, and I think we want to see that play out a little bit more to understand better what is the right strategy there. But we're going to stay disciplined and smart as it relates to sports. In news, I'd say it's really more about we see live news is still a critical healthy, important part of the traditional pay-TV ecosystem. And so live news will continue to be exclusively in that service. But that long-form factual programming from CNN in particular, with their award-winning Originals and CNN films, that has a natural home and a huge demand that we can associate now initially on discovery+, as we announced this morning, and then eventually sitting firmly within the future product as it comes together. And lastly, on news, we obviously continue to see outside of our kind of core streaming products with CNN.com and the CNN digital services, a lot more opportunities with over 100 million users across the world to continue to experiment with that product and move potentially on ways to find not just ad-supported models, but other models where we can monetize that significant user base that comes to the service.

Okay. And then Jessica, on the guidance. So just to recap, we adjusted our outlook predominantly for 3 reasons. The macroeconomic outlook that today is a little less supportive than it was 15 months ago or even in April when we last spoke, the industry dynamics in the streaming space and then the differences that we see between projections made available to us prior to closing versus what now the legacy WarnerMedia budget baseline post close. And to answer your question specifically, that you walk from the $9 billion, $9.5 billion for this year to the $12 billion for next year, the math is obviously right. So you are right, $2 billion to $3 billion of synergy capture, as I said. I also do think that we're going to see some flow through from the course correction measures that we have implemented right after closing that should support the first quarter, second quarter of next year. So if you put that together, the answer is yes, I'm not really assuming any meaningful growth in the underlying or underlying growth in the business as usual in those numbers. The main reason is, as I laid out in the outlook for Q3, is the macroeconomic environment. There are so many factors right now. I just don't think it's prudent to guide to a significant underlying improvement here in the core business. That said, we are super excited about the progress we're making on the synergy side. David spoke a little bit about the linear business. I do think that there are further cost opportunities there. So we'll keep monitoring the external factors. We will keep doing the work for the areas that we control and update you as we go along.

Your next question comes from Doug Mitchelson of Credit Suisse.

Gunnar, following through on that, the 33% to 50% free cash flow conversion in 2023, what's holding that back from your usual 50% to 60% that you talk about? And does that get carried by '24? Or is that long-term goal of 60%, something that's going to feather in over a longer period of time? And JB, I'm just curious on what's your confidence level in the ability to increase engagement? It's a big driver, I think, of what you're trying to do. And as that engagement increases and you're able to monetize advertising at a higher and higher level, is the thought that you keep the price point and let that ad dollars flow through to the bottom line? Or do you lower your ad supported to your price point and try to broaden out the service? How are you thinking about pricing on the ad tier particularly in the United States?

Let me start, Doug, with your cash flow question. So bottom line, the drivers behind this 1/3 to half conversion guidance are essentially the same that I laid out for the EBITDA outlook. And then in addition to that, we obviously, right now, have a number of moving pieces and cross currents in our financials. As we move through our restructuring, the cost to achieve for our synergy program, there will definitely be some CapEx requirements, and we'll have to see how the cadence for our content investment pans out. So these are all factors that are going to impact these numbers, especially sort of from a year-over-year basis. But to your point, I don't want to give guidance for 2024 yet, but I'm confident that we'll see continued progress towards that longer-term goal.

And Doug, on the questions on the streaming. On engagement, I'll tell you that I think there's 3 levers that we think are key and why we are confident in our ability to drive much better engagement. Number one is kind of a brand marketing point, which is, obviously, HBO and HBO Max has stood for something which was a very high-quality premium scripted in particular, drama series, they've never executed a real brand campaign to define what the new service is. And as we think about rolling out our new service, certainly, we will be coming a market with a big noisy campaign, expanding the proposition with a much, much bigger content offering. And so, a, we think the brand and the marketing component of this is significant. Second is, obviously, the content proposition will be drastically enhanced as we bring the 2 services together with a much more complete array of content across all the genres that I talked through earlier. And then third, the product enhancements can't be underestimated. We see this from the HBO Max product today, where limitations on search and Discovery really limit the amount of content that is surfaced and viewed by users. And we are confident based on what we've seen from the discovery+ side and a much more -- much broader use of content and a much longer use of watch time that we can actually get the combined product to see a much higher engagement level. That's one. And two, on the pricing, nothing to share with you at the moment. We're working through a bunch of different scenarios, but this far out from when we will come to market, we really don't want to discuss specific pricing yet, but we will certainly have more details for you probably as we go into 2023.

Your next question comes from Ben Swinburne of Morgan Stanley.

Wanted to ask you about the longer-term outlook for direct-to-consumer. And I know we're going to hear a lot more at your Investor Day, so you might not have a lot of details, but it sounds like you're going to have a bit of a pause here in growing the business as you get everything over to 1 product and 1 tech stack. When we think about that 40 million net adds, in the path to $1 billion of EBITDA, should we be thinking about that growth as being really kind of starting at least in earnest back half of next year? And so it's kind of '24 or '25 when we'll sort of see what this business can do? And then I'm just wondering, David, you guys clearly have a view that sort of the streaming at all cost strategy is flawed. I think there's a lot of -- probably sympathy for that in the market today. If you look back to 2019 when HBO was mostly wholesale, the business did like $2.5 billion of EBITDA, which wasn't that long ago. I'm just wondering when you think about the long-term opportunity here, can you get back to those kind of economics? I know you just laid out a '25 target, but did you entertain the idea of really rolling back the strategy more substantially or at least thinking about reclaiming those historical economics for the business?

But actually, on -- this is Gunnar. Let me actually take both questions because I think they're very related. So we laid out some building blocks for the longer-term outlook for D2C. And to answer your question specifically, there are obviously 2 drivers: one is the revenue growth and the operational gearing from that revenue growth. And I think directionally, you're right. As we said, we're going to be a little more cautious regarding marketing, et cetera, before relaunching. And so a lot of that incremental growth is going to kick in sort of after our JV has relaunched their product in the summer. The other point, though, is cost savings. And as we said before, D2C has a lot of synergy opportunity. We see savings opportunities and synergy opportunities across the entire cost side of the P&L. And that obviously is going to start kicking in earlier. And I mean, in the very short term, we're all super excited about House of the Dragon. HBO, as you heard David and JB say, in the middle of the largest marketing campaign ever, so hopefully, that's going to be a big helper for the very near term in this quarter. And then to your point about the long-term perspective, again, the $2.5 billion I don't want to give an additional number here, but you heard JB say what we think is possible to be achieved, $1 billion in 2025 despite the fact that we're still seeing some start-up losses in that number, even in 2025 for markets rolled out later. And we do continue to see, even for the combined company, a long-term margin opportunity of north of 20%. And that's on the basis of our combined model now with sort of fully fledged frameworks on the various cost buckets. So we're confident that this is going to be a great addition -- an additional platform. And as we said, not being religious about turning the entire company into a support pipeline for D2C, but D2C as one additional platform. So I think this is a great outlook. We're excited about it. We're committed, and we'll implement these plans and keep you posted.

There were some buzz today about HBO Max, and we're going to start doing less series. And the -- our strategy is to embrace and support and drive the incredible success that HBO Max is having. It's really -- it -- the culture and the taste of Casey and the team and the fact that they not only read the scripts, but they fight with all their creatives to make the content and storytelling is as strong as possible. It's at a very unique moment. We think it's an extraordinary asset. It's an extraordinary advantage. I've said this before, it's not how much. It's how good. That aligns with us at Discovery as well in the content that we've been doing and the characters and the way that we drive brand. But the majority of the people on Casey's team have been locked up. Casey is here for the next 5 years, and we hope longer. He's truly a unicorn. His ability to relate to talent, to make content better, his leadership, and you see it in what's been coming out of HBO and how it's affecting the culture and the energy and what people are talking about. But we want it to be broader. Casey and the team wants it to be broader. And we're starting to have some real success. We're now going to put in everything that's on discovery+ and all that original content as well as some of the premium content from CNN. And it will be the home of all of that. And we will, as one company come behind that. And we think that, that product is going to be superb. And that is -- it's about curation, it's about quality. It's about how good. And so the center spoke of that is the quality of HBO Max and that team. We've already started creative meetings within the HBO Max team, together with -- we now meet once a week all the creatives of the company. That's something that we've initiated with me on the lot in person in addition to the multiple overall staff meetings, but the creative meetings with everyone together has been really effective. And a way to not only talk about storytelling, but talk about how do you share content and how do we help each other with great talent. So very encouraged and very supportive.

And Ben, as you probably can imagine, the #1 thing in our view for a successful streaming service as a business is to get churn down and to have a low churn number. At the end of the day, having great but appointment -- small amount of appointment viewing series, the challenge is people come in and then they go out, if there's nothing else. And ultimately, the breadth of the offering matters to get the churn down so that there's something for everyone in the household, everyone in the family. And we've seen it across all our data points where the more people you have in a household, using the service, the stickier it is, the lower your churn is the more viable our businesses. And so at the end of the day, putting all the content together was really the only option we saw to making this a viable business. And as David said, I think it's important given some of the noise, but that HBO and the Max Originals remain the unequivocal home with the best premium television and it remains the centerpiece of our combined streaming platform given the quality that's coming out of Casey and that team.

And JB, I should have mentioned as well that as part of our projections, that's the part that's going to continue growing. We're spending as much as never before, and we intend to keep growing that spend for HBO content, to be clear.

Your next question comes from Robert Fishman of MoffettNathanson.

I have one for David and one for JB or Gunnar. David, you discussed continuing to sell into third parties. Can you just help us in how you're thinking about HBO's strategy to sell content to Sky going forward in lieu of launching D2C directly in those markets? And then for JB or Gunnar, can you address how do you plan to allocate your future sports costs like the NBA renewal to D2C? Or how important the ad-light or FAS platforms play into your $1 billion EBITDA target or achieving that 20% long-term D2C margin?

Great. In legacy Discovery, we own together with Mike Fries and Malone, all 3 media. We had 30 production companies. And we would look in awe at Warner Bros. Television as the -- really the greatest and largest and most highest quality production operation and the incredible names and talent that they have. And so the legacy of Warner is creating great content and selling it. I mean, less built a big business by carrying all of Warner Bros. content. I've said it before when we were at NBC, it was must-see TV. Jack Welch, when the content -- when the entertainment guys left the room, he said it was Warner Bros. TV. A maker, they are a maker and the greatest maker of content. That's the heritage of this company. We want to sell to third parties. It's a very profitable business for us. We think it could be more profitable. There's a lot of money being spent for the best content. We have some of the best of it. And we want to continue to do that, and we're going to do that. In addition, we have a huge library of content. And strategically, we are pivoting to the decision of anything that's important to us to growing HBO, HBO Max, sitting down with Casey, sitting down with JB, going through the data, what's critical to us. We're going to keep that exclusively. What kind of content could be nonexclusive and have no impact on us? Why we want to monetize that to drive economic value. And then this content that we're not even using right now. So massive amounts of TV and motion picture content that we're not using. So do we use that to just develop our own best-of-class free platform? Do we sell a lot of that, and that's what we're going to come back to you with.

And on Sky specifically, Robert, we obviously have multiple years left in our existing and important and long-standing relationship with them. And so it's not -- we don't have to deal with that question at this point. Sky, the deal, as we talked about, has another -- is outside of the 2025 time horizon that we gave you projections on. And so as we get closer to the end of that deal, we'll certainly come back to you with further thoughts on how we go to market in those 3 markets.

And then Robert, just to clarify 2 things. Number one, any fast activity is not part of the guidance that we laid out earlier. Again, we'll update you as we go along. And then to the point about allocating sports costs, I just want to make one thing clear. So the way we're now segmenting the business is following the structure, how David looks at the business, that informs sort of the segment reporting structure. But importantly, we're also treating these individual segments essentially as individual units, and that means that all the intercompany activity revenues and costs are essentially negotiated on an arm's length basis. So from that perspective, you should assume that any content, sports or otherwise, is going to be accounted for at essentially fair third-party terms. You will see the -- this leads to a bigger chunk of eliminations in our consolidated P&L. But I think is the best way to really clearly and fairly show the actual economics of the businesses and needless to say, is also important from the perspective of our partners in the studio space. It's very important that we account at fair market values and third-party terms.

Your next question comes from Michael Morris of Guggenheim.

I'd like to ask one about HBO and the HBO brand. I know you're going to share more with us later in the year, but there's been some press indications that maybe you don't feel like the HBO brand itself is broad enough or it doesn't have as much value maybe on a global basis as you would be looking for. So I'm curious if you can share anything about how you feel about that brand and the future sort of maximizing that. And my second question for Gunnar. When you were discussing the items that have impacted your projections, you mentioned a couple of times change in streaming industry dynamics, I guess, relative to when you initiated the merger. I'm hoping you can expand on that a bit. So I understand that valuations have come in, but maybe could you be more specific on the dynamics that you see now is impacting the industry or the profitability of the business that you didn't see a year ago?

Thanks, Michael. Well, first, I think the HBO brand is one of the great crown jewels of the company and represents so much and how we all got introduced to really what premium television and series were really all about. We're going to look at -- we continue to look. The data right now is -- more and more, if you look at how people see HBO Max, more and more people are saying that's the place they go, that's the place that they prefer, it's the place that has the highest quality. That data looks different than it did a year ago. It looks different than it did 6 months ago. So we're talking to consumers, and we're evaluating, and we'll let you know when we make a determination.

Also the HBO brand, no matter what, as David said, being a crown jewel will live on. There's a difference between what the service may eventually be called or not versus what HBO is. HBO will always be the beacon and the ultimate brand that stands for the best of television quality. So that remains unchanged in any scenario in our mind.

Whether it's in the topco name or not, and we'll keep you posted as we make a final decision.

And then, Mike, on the industry dynamics, look, I think it's clear that over the past 12 months and even more so over the past 6 months maybe, a lot of the viewpoints here have changed. And most importantly, when it comes to industry-wide subscriber growth, top line growth, and obviously, a lot of the cost structuring decisions, specifically for content sort of are being made 18, 24 months in advance. The most important point here for us is sort of the strategic response, as JB laid out, is one that focuses on value and on revenue rather than purely subscriber numbers. And I also think if you take a step back here from a longer-term perspective, the way I look at the changes in the industry, I view that actually as additional support for how we have all along been describing our strategy. D2C is one platform in a larger portfolio of assets and in a larger lineup of distribution outlets. We're not going to be religious about driving hard to fuel just 1 platform. D2C has its space and Warner Bros. Discovery is uniquely positioned with the enormous surface area with our customers to service them and to tell great stories for decades to come.

Your next question comes from John Hodulik of UBS.

Thanks for all the information this afternoon. First, on the content spend. We had you guys down for between $17 billion and $18 billion on a pro forma basis in cash content spend. And David, on the back of your commentary that you're going to spend dramatically more, can you give us an idea of how that grows over the -- first of all, if that's in the ballpark and how that grows over the next 6 year -- or the next few years as you reach those '25 targets? And then on the sub growth, you laid out sort of needing 40 million subs to hit those targets. How do you see that broken down in terms of U.S. versus rest of the world? I mean I think most of the growth you've been seeing recently has been rest of the world and you've had some speed bumps here in the U.S. with Amazon and AT&T. But do you expect to be able to reignite U.S. or domestic D2C growth as you guys roll out this new -- the new product?

Thanks, Mark. We will -- we're going to spend significantly more on the HBO Max product. In other areas, we'll spend less because we're not finding an effective return. In the aggregate, we're going to spend more money on content. We're a content company. That's our product. That's what we do. We want the best creatives here at Warner and at HBO and at Warner Bros. Television and across our traditional platforms, creating content. And we've worked in the budget that, that content spend will go up in each year and the years to come. JB?

Yes. I mean I think we ultimately are going to be measured in terms of our spend. As David said, we were reprioritizing what we're going to invest in. In terms of the penetration, obviously, the U.S., the HBO Max and discovery+ products are more penetrated than we are in much of the international markets. So by math, we will see more growth coming from outside the U.S. from inside U.S. But nonetheless, we do see still a meaningful opportunity to get greater penetration in the U.S. even if the total numbers inherently of that $40 million will likely skew more to international just because of the size of the opportunity.

But the number -- the number on the corner of JB's desk and mine is the breakeven and the $1 billion. If we do that -- I don't really care what the number is. We're not in the business of trying to pick up every sub. We want to make sure we get paid. We get paid fairly. We have very high-quality content in many markets, we should be paid more because we're providing dramatically better content and more robust content and higher quality content. If the number is 122 and we're making over $1 billion, that is the number for us. We're going to grow subs significantly, but we want to run -- we want to drive profitability and free cash flow.

And then on the -- the one other point that I would want to make on the content spend is to the point that David made, we're ramping up content spend. Both companies have been spending more and have been renting up the cash spend. So that should be viewed as one of the drivers as well for the site to know our cash conversion also into next year as amortization over time catches up with the higher spend as we grow our business.

Your next question comes from Jason Bazinet of Citi Group.

I just had a very basic question. If you guys penciled out the streaming business, the DTC business, and it was demonstrably better than linear, you'd be jumping in with both feet, right? And as Swinburne said, I think the market agrees with you that they don't really see that today. Might -- and so they understand your sort of path to pursue both linear and DTC. My question is this. Do you think that there's something endemic to the DTC business that will always make it worse, like churn or the amount of content you have to put into the app to make it relevant? Or do you think it's something that is potentially transitory like the pricing is just loaded today and if the industry dynamics change and pricing goes up, it could be, in fact, a business that's as good as linear?

Thanks, Jason. First, I think having both is a gift. This is a fully balanced company. We have our linear and free-to-air, we're a big maker of content for profit. We have gaming where we take our IP into gaming for profit. We have the motion picture business to gather some of the greatest talent in the world and for profit, and then we have our streaming. So having the amount of free cash flow that we're driving to in order to fund and support thoughtfully the streaming business, which is critical as we transition, is a gift. I do think the business is going to change. There'll be probably over time, there'll be repackaging. It's for people to -- they'll probably end up being a couple of the best services, which we expect and will drive to be and they'll be repackaging either by the programmers or by intermediaries like an Apple or a Roku or an Amazon. And the experience the consumers will become easier and as it becomes easier, some of the economic terms and churn may change. I believe it's over -- that it's underpriced. What has ended up happening is it was a reaction to the capital markets. Let's just go ahead and collapse businesses, overspend on content. People have shown that they were very happy to buy HBO, Showtime, Epic. There is a big group of people in America that love premium television. There's a big group that love a robust bouquet of opportunity. And they're willing to spend a lot of money domestically and outside the U.S., not as much, but they're willing to pay. It was a decision to say, "why have them pay a lot. Let's just collapse everything in and spend, spend, spend and then charge very little." And I think that was supported by this idea like clicks in the '90s that subs were going to be great currency. And so we're going to be very sensible. We're about free cash flow. We've got the best library, we think, and the highest quality content. We think we could build a great business -- streaming business to touch everyone. But we're not collapsing businesses on it. And I think sensibility will be that there'll be a lot of people that are willing to pay a lot more for the quality that we have.

Yes. And maybe just to add to that just quantitatively. Look, I wouldn't judge a business by how it compares to a 40%, 50% linear business, right? That's -- I mean, I think that's well understood that that's a high bar. We spoke -- we reiterated earlier that we see 20% plus margin potential for the D2C business. We are assuming moderate price and ARPU increases as JB laid out. And look, at the end of the day, the last thing I would also say is it's not either/or. I mean, the strength of our business and our opportunity here is the fact that we can manage these various distribution outlets at the same time. And I think these ecosystems will coexist for a very, very long time, and that's where we really get the superior returns for our content investments that we're able to monetize the content and get a return on every dollar spent across so many platforms.

We effectively have 4, 5 or 6 cash registers. If there's a cash register where a consumer can come in and either watch or pay for a piece of content, we have every platform in the ecosystem. And in a world where things are changing, and there's a lot of uncertainty and there's a lot of disruption, it's that's -- to me, that's a lot more stable and a lot better than having 1 cash register.

Thanks, Jason. Appreciate it. And operator, if we could take the last question, we'd appreciate it.

Your next question comes from Doug Creutz of Cowen & Co.

With the rollout of the combined product next summer, obviously, you have 2 separate products now that have pretty different content offerings and pretty different price points. How conceptually do you plan to manage that transition? Are you going to allow people who subscribe to legacy services to remain on those services? Are there going to be force conversion? Can you talk a little bit how you envision that playing out?

Yes, Doug, we will have a migration plan that will allow, obviously, some element of, particularly, as you can imagine, the lower price discovery+ subscribers for some period of time, the grandfather into the new product and migrate them -- or migrate as many of them as possible up to the new product. And so that is all part of the transition plan to obviously get people, optimize the number of subscribers that we retain, but at the same time, at some point, make sure that the people who own the service are stepping up at some point in time to the inevitably higher price point than the current discovery+ prices that are at today. So there will be a transition plan that maximizes essentially retention of subscribers but ultimately also gets to the right ARPU and price points over a relatively short period of time.

Great. Thanks so much, Doug, and thank you, everybody, for joining us, and that will conclude our call.

Ladies and gentlemen, this does conclude your conference call for this afternoon. We would like to thank everyone for your participation and ask that you please disconnect your lines.