How much content is enough?

All signs point to a significant escalation in the streaming wars after AT&T and Discovery announced plans to combine two massive content catalogs.

AT&T’s WarnerMedia division, which includes CNN, will be spun off and combined with Discovery in a new standalone media company, reports my CNN Business colleague Brian Stelter.

AT&T’s shareholders would get the majority of stock in the combined company, at 71%, while Discovery’s shareholders would get 29%. Discovery CEO David Zaslav will run the business, but executives from both companies will be in “key leadership roles” according to a press release.

AT&T spinning off WarnerMedia, forming new venture with Discovery

WarnerMedia properties include HBO, CNN, HLN, Cartoon Network, Cinemax, TCM, Turner Sports, TNT, TBS, and the Warner Bros movie studio.

Discovery Communications is the corporate home for Discovery Channel, HGTV, Food Network, TLC, Animal Planet, MotorTrend, Travel Channel, the Oprah Winfrey Network and Eurosport.

But this is not a merger of equals. Discovery, which saw its share price skyrocket and then crash earlier this year during the Archegos Capital snafu, has a market value of roughly $30 billion including debt.

Time Warner (which became WarnerMedia), for comparison, was valued at $108.7 billion (including debt) in 2018 when it was bought by AT&T.

The deal with Discovery will allow AT&T to focus on its telecom business. It also gives WarnerMedia and Discovery more of the scale they need to compete with streaming giants Disney and Netflix.

The numbers

HBO and HBO Max, the streaming service from AT&T, have roughly 44 million subscribers in the United States, and another 20 million in other markets. Discovery has 15 million paying direct to consumer subscribers, driven primarily by its Discovery+ streaming service.

But Netflix now has 208 million subscribers globally, while Disney’s streaming service has nearly 104 million subscribers. In order words, they have a clear lead over HBO Max.

If antitrust regulators sign off on the deal, WarnerMedia and Discovery may be better equipped to compete. Zaslav said as much in an interview with CNBC last December.

“Within the next two years, it’s going to be put up or shut up for all of us,” he said. “Can you show you’re scaling? Are you going to be a player in the US? Are you going to be a player around the world?”

He predicted consolidation: “I think ultimately a lot of those companies are going to realize, ‘I don’t have enough.’ And then they’re going to say, ‘Who can we merge with or who can we do a deal with? And if we put together our [intellectual property], maybe we can compete with Disney.'”

The thinking is the same at AT&T. CEO John Stankey said in a note to staff on Monday that there was virtually no overlap in the creative and content capabilities at WarnerMedia and Discovery.

“We are now in a world where relevance and future success will be tied to greater scale and growth globally,” he said.

Shares in Discovery were up 17% in premarket trade. AT&T stock was up 1%.