Sorry, Porky Pig and Elmer Fudd. Internal issues at Warner Bros Discovery may have led to many seasons of Looney Tunes getting hit with Acme Disappearing Paint.
In a follow up to our previous articles covering the ongoing parade of content disappearances on HBOMax, we theorized that the latest casualties were destined for another streaming product under the Warner Bros Discovery banner.
According to Variety, that may not be the case. On Tuesday, Todd Spangler reported that 255 cartoon shorts in the Looney Tunes catalog did not disappear because of some grander financial destiny intended to monetize the content elsewhere. Instead, HBOMax simply declined to renew their intra-company agreement with Warner Bros. Apparently HBOMax felt that the view times produced by the Looney Tunes were not profitable compared to the cost of obtaining the content from Warner Bros.
For those not familiar with how intra-company accounting works, when separate business units within the same company do business together, they will still perform similar accounting procedures as if they were separate parties in order to accurately represent the exchange, “charging” each other fair market value for the goods and services exchanged. While this might seem silly or superfluous from an outside standpoint, it is actually critical from a business, tax, and legal standpoint.
From a business standpoint, these units function differently and independently of one another, especially in light of the numerous mergers, acquisitions, and splits that Warner Bros, AT&T, Time Warner, HBO, Discovery, etc. have been through over the years, leaving us with the current organization we have now.
Under normal circumstances when a company like HBO is bought by a company like Warner Bros, the HBO business unit would continue to have its own balance sheet to track its own revenues, expenses, assets, etc.
You might recall that one of David Zaslav’s first moves as CEO of Warner Bros Discovery was merging HBOMax and HBO into a single business unit. Believe it or not, HBOMax was not a division of HBO or vice versa. Presumably, this would have merged their overall reporting structure into a more unified balance sheet, etc.
From a tax standpoint, departments have to perform “transfer pricing substantiation” when they make exchanges to another business unit. This means that they have to prove that they charged or received a fair market value for the goods exchanged so that they can’t be accused of intentionally inflating or deflating the value of a business segment. Basically, it protects against fraud.
Even though this practice is common, it will be of special importance if Warner Bros CEO David Zaslav decides to spin off parts of Warner Bros Discovery. The income statements and balance sheets will need to stand on their own in order for any sale to go through.
Finally, these business units are separate because it is an internal informational metric for the differing levels of executives in charge. The more robust the data, the more easy it is to get a clear picture of what is working and what is not.
The only people allowed to make decisions above the individual profit motives of a business unit are the high level executives that stand above multiple business units. In this case, it is probable that David Zaslav signed off on allowing the Looney Tunes licensing deal to sunset.
Looking at the current situation, Warner Bros presumably now has the option of licensing the Looney Tunes to other streaming services. Stay tuned to That Park Place for more on the developing HBOMax situation and more business analysis.
