HBO Max is going to cost AT&T a lot of money — but company executives are mostly fine with a short-term loss if the long-term gain pays off.
AT&T reports in its quarterly earnings this morning that its WarnerMedia division lost more than $1 billion in revenue due to investment in HBO Max, the streaming service it’s preparing to launch this May. Specifically, those losses are due to “HBO Max investments in the form of foregone WarnerMedia content licensing revenues.” Basically, AT&T is taking a pretty big hit by not licensing a number of its WarnerMedia shows and movies to streaming competitors like Netflix and Hulu.
The goal is to bring all of its top IP over to HBO Max — like Friends and The Big Bang Theory— as exclusive offers to reel in new subscribers. AT&T is also planning to invest around $4 billion over the next few years into Max, including ordering an array of original series on both traditional HBO and HBO Max, in order to compete with streaming services like Netflix, Disney+, and Apple TV Plus.
“We delivered what we promised in 2019 and we begin this year with strong momentum in wireless, with HBO Max set to launch in May and our share retirement plan well underway,” AT&T CEO Randall Stephenson says in the report. “Our 2020 outlook positions us to deliver meaningful progress on our 3-year financial and capital allocation plans as we continue to invest in growth opportunities and create value for our owners, as we did last year.”“WE DELIVERED WHAT WE PROMISED IN 2019 AND WE BEGIN THIS YEAR WITH STRONG MOMENTUM IN WIRELESS, WITH HBO MAX SET TO LAUNCH IN MAY”
More than $1 billion in revenue losses might not be what investors want to hear, but Stephenson has mapped out how costly HBO Max will be in the interim. Last quarter, Stephenson told investors HBO Max is going to be “a meaningful business to us over the next four or five years,” but reiterated at an HBO Max event that the company doesn’t think HBO Max will be a profitable part of AT&T until 2024 or 2025.
“I would tell you we feel very comfortable at these investment levels that we can do something very significant in the market and drive some significant subscriber gains,” Stephenson said on a call in October 2019.
HBO Max is set to be the “workhorse” for AT&T and WarnerMedia’s video divisions, according to Stephenson. Looking at the rest of AT&T’s earnings report, it’s easy to see why the company is betting big on cord cutting. While overall the WarnerMedia division, which houses HBO, Turner, and Warner Bros., fell just over three percent in revenue to $8.9 billion, there was some subscriber growth. HBO saw a 1.9 percent increase in revenue thanks to digital subscribers (that’s HBO Now and HBO Go), while Turner saw a 1.6 percent increase in revenue, also thanks to subscriber gains.HBO MAX IS SET TO BE THE “WORKHORSE” FOR AT&T AND WARNERMEDIA’S VIDEO DIVISIONS
Both Stephenson and AT&T president John Stankey have previously spoken about converting a number of AT&T’s subscribers on the digital front to HBO Max. Customers with HBO Now or HBO Go subscriptions can transfer over to HBO Max for free, for example. But it’s not just digital subscribers AT&T is hoping to convert to HBO Max believers. The company reported that its traditional TV subscribers continue to fall, with a loss of more than 1.2 million subscribers on the pay-TV front. Premium services like DirecTV saw a net loss of 945,000 customers, while AT&T TV Now (similar to Hulu TV and YouTube TV) saw a loss of 219,000 customers. All together, AT&T’s existing TV subscribers have dropped 20 percent between December 31st, 2018 and now.
“Everybody knows pay TV is in transition,” Stankey said on a call with investors this morning. “It’s a mature product, but I like where we stand.”
Stankey noted some prime changes happening in the pay TV space that analysts and executives at other companies have picked up on, too. Customers still subscribed to live TV or using services like Hulu TV and YouTube TV are doing so for two main reasons: sports and news. General entertainment is quickly becoming a dwindling reason for people to subscribe, analyst Michael Nathanson pointed out in a letter last November. Stankey is aware of this, too.
“The bulk of our profitability comes from three networks: TBS, TNT, and CNN. The general entertainment in the bundle isn’t performing,” Stankey said, adding that having a “more contained portfolio, and a mix of content (sports and news) is important to ride out this transition.”