WarnerMedia chief Jason Kilar offered some fresh thoughts and a sprinkling of numbers about HBO Max’s progress and outlook, emphasizing the lift it expects to get from adding a cheaper, ad-supported tier.
“We have worked hard to earn more of consumers’ precious time, and it’s working,” Kilar said. The service, which launched just weeks after Kilar’s arrival as CEO of WarnerMedia last spring, is also reaching a “younger, more engaged audience” than linear HBO, he added. About 43% of HBO Max viewers under 35, compared with 15% on linear and daily view time on Max of 2.8 hours, compared with 1.5 hours.
The insights came during AT&T’s investor day, which featured Kilar, AT&T CEO John Stankey and other executives in a remote setting. The event differed notably from the razzle-dazzle of the company’s October 2019 investor day and other recent streaming events held by Disney and ViacomCBS, which included waves of programming news. During about an hour of pre-taped remarks and a live Q&A session with analysts that lasted a bit longer than that, the company also covered wireless strategy, capital allocation and other topics. But HBO Max talk predominated.
The exec said HBO Max has about $80 million in advertising commitments for the ad-supported tier, which will launch in June. He said sports will not appear on HBO Max in 2021, a view contrasting with previous pronouncements by AT&T management. And by 2025, he expects the ratio of subscribers will be half in the U.S. and half elsewhere, a more international-heavy outlook than the expectations put forward in 2019.
HBO Max — described in an on-screen graphic as “software-based entertainment” — was a central part of the event. Kilar said about $80 million in upfront advertising commitments have been made to the ad-supported tier of HBO Max.
“The economics of HBO Max’s growth are compelling,” Kilar said. “To use the U.S. as one example, we currently earn 90% in margin from each retail subscriber that we add.” Of the 41.5 million combined HBO and HBO Max subscribers domestically by the end of 2020, a minority is pure retail, but Kilar said the share is growing. One big stimulus to retail subscriptions, Kilar said, was the controversial move (at least in Hollywood talent and movie theater circles) to release Warner Bros’ 2021 slate on HBO Max at the same time as theaters.
AT&T has long indicated its hope that the AVOD rollout will be a key growth driver. Prior to the investor day, the company boosted its subscriber forecast for the streaming service to 120 million to 150 million globally by 2025, a big step-up from initial projections.
“The main difference will be with the theatrical premieres,” Kilar said of the new, lower-priced tier. Only those paying for the ad-free, top tier will continue to have access to day-and-date premieres of Warner Bros movies. “Everything else will be the same,” he said, reaffirming that HBO original series will not carry ads. Some AT&T executives had actively explored putting ads on HBO, to the angst of many inside the network, after the close of the Time Warner deal in 2018.
As to content spending, which came in at $2.4 billion last year, Kilar said it will continue to grow, but he didn’t offer any forecasts.
The company expects the streaming service to not only become one of the small handful of winning outlets in the coming years, but also to generate significant revenue. AT&T projects HBO revenue will hit $15 billion, up from $6.8 billion in 2020. Reflecting trends since launch, Kilar said, the majority of that $15 billion will come from streaming, not traditional linear carriage of HBO. The revenue per user of HBO Max thus far, which is not a complete surprise given its $15-a-month, top-of-market price point, continues to be a big talking point for AT&T.
“If you’re going to proudly and confidently invest in content for decades to come, you have to have a very strong business model and revenue is a very important part of that,” Kilar said.
Asked to break down the mix of subscribers by 2025 in terms of ad-free and AVOD, he said it’s “too soon to tell.” Citing his experience as the founding CEO of Hulu, which was purely ad-based when it launched in 2007, Kilar said the revenue gap between HBO Max subscription tiers would be more than made up by add dollars. He declined to say whether the lower tier would be priced above or below $10 a month. While Netflix and Hulu are in the double-digits, Disney+, Peacock, Apple TV+, Discovery+ and Paramount+ all have plans from free to $10 a month.
Several new players in streaming are investing in the ad-supported arena. Free or low-cost AVOD services have been launched by NBCUniversal and Discovery in recent months, and ads are a key component of Paramount+, the rebrand of CBS All Access.
The overall streaming field has grown much more crowded, with Disney, Apple and a host of media companies joining the pursuit of Netflix.
Stankey said the decision to part with 30% of DirecTV enables AT&T to focus more resources on developing a “software-driven, forward-leaning platform like HBO Max.” Not only will it be one of a small handful of streaming services to continue growing over the next five years, the CEO added, but it will be in a position to carry third-party services.
Many analysts and industry figures have posited a streaming future that resembles the pay-TV world, where niche or struggling services could wind up being carried by a larger, more successful ones. Also expected is a transfer of linear networks into streaming. “I don’t know, it may happen,” Stankey said of that migration. When the $16.25 billion DirecTV deal was finalized last month, with private equity firm TPG taking a 30% stake, “we had specific discussion around that and we left options open.”
The reshaping of the traditional bundle, Stankey added, “still has a few innings to go here and it’s probably going to be a little bit choppy as it goes through that transition.”
Streaming players have discussed aggregation strategies for years, but for the moment, none has pulled the trigger.
The WarnerMedia chief also offered a vigorous endorsement of the traditional pay-TV bundle, even though it’s shrinking. He said the Turner networks specifically will remain distributed through MVPDs and other partners and won’t be folded into HBO Max, at least not anytime soon.
“I’m a big fan of the Turner networks,” Kilar said, citing a pay-TV universe of 85 million households across traditional MVPDs and internet-delivered bundles. He acknowledged that’s down from 100 million-plus a decade ago, but asserted, “That’s a damn good business when you have 85 million households choosing that form of entertainment.” Cash flow resulting from network carriage, even in decline, “allows us to invest not only in the Turner businesses but also in HBO Max” and other efforts, he said.
Surprisingly, no analyst asked about Kilar’s view of theatrical release windows for movies. Warner Bros in general got scant attention, apart from a few shoutouts to DC, Harry Potter and other properties and a “beautiful friendship” quote from Casablanca by Kilar. The improving exhibition landscape, with New York and LA theaters finally reopening has led boosters like AMC Entertainment CEO Adam Aron to forecast a run of blockbusters like Top Gun: Maverick in July, which Aron predicts will be the first $1 billion post-pandemic hit.
Against that backdrop of recovery, many industry figures have wondered if WarnerMedia could end up leaving money on the table by sticking to its HBO Max plan. The takeaway from the two-hour investor day, and its pointed mentions of the value of day-and-date movie premieres, is that a change doesn’t seem to be imminent. It could be difficult-to-impossible for the company to revert to prior windows beyond this year. Yet rival studios like Disney, Paramount and Universal have all articulated plans to settle on reduced windows without (in most cases) eliminating them entirely.
Shares of AT&T initially perked up more than 3% on the elevated subscriber forecast, they have drifted down over the course of the trading day. They closed at $29.81, up a shade less than 1%. Traditional media companies like ViacomCBS and Discovery have led a big upswing in media stocks, but AT&T has not closed above $30 a share since last December. It has been locked in a tight range between $27 and $30 for most of the past year.
While he didn’t specifically reference AT&T’s stagnating stock, Stankey admitted being frustrated by the lack of “value being recognized” for the company’s strategy. “I’m not happy about that and I wake up every day thinking about that,” he said. “I understand that it’s our collective responsibility, with me as the leader, to make sure that’s ultimately manifested at some time.”
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