HBO Max is finally here. From the initial announcement in October 2018 through today, there’s been an enormous amount of speculation about the streaming service, fueled by several iterations put forth by AT&T management, non-stop rumors about content decisions, price and release dates, all coming during a rapidly changing media landscape over the last 20 months.
I detail how we reached this point, why I’m highly bullish on the service, and offer predictions on how many subscribers HBO Max will attain.
What Could Have Been: The Potential Fox & Time Warner Merger
In my view, the story of HBO Max starts back in July 2014, when 21st Century Fox tried and failed to buy Time Warner for $80 billion. It was a different time in media, with trends that are obvious today just starting to emerge. Rupert Murdoch, whether he understood the severity of those changes or not, was aiming for as much entertainment scale as possible by targeting Time Warner.
2013 was the first year US Pay-TV subscribers had ever declined, but there wasn’t much worry, at least publicly, from the big media companies. At an ESPN investor day in April 2014, Disney management assured attendees that while cord cutting was “real,” it expected “levels to remain fractional.” Disney later confirmed they weren’t just placating analysts, as in October 2014 Disney joined with Time Warner to sign a long-term contract for NBA rights at nearly three times the annual rate of the previous deal.
Streaming was also new, and Netflix, rather than as a competitor or threat, was viewed as a fast growing revenue stream for the MediaCos. In an article on the potential FOX/TWX deal, the Wall Street Journal wrote that one of the benefits to a tie-up would be increased TV production to enable “licensing shows to international channels and online players including Netflix and Amazon.” Times have certainly changed.
A merger of FOX and TWX would have created a formidable foe to Netflix given that wealth of TV and movie library and production capability. It also would have added a broadcast network to help support TWX’s cable channels in carriage negotiations with video distributors and to offer sports leagues the combination of the wide reach of broadcast for their best events, and cable channels for depth.
After deal talks fell through the companies went in different directions. Fox decided that without enough scale, it would boldly exit the entertainment business to focus on live news and sports, where it has top tier properties in Fox News and FOX broadcast and an emerging Fox Sports 1. Time Warner, already sub-scale in Murdoch’s eyes in 2014, suddenly found itself even more sub-scale two years later as media trends accelerated. Rather than move forward on their own, they decided to accept an offer to be acquired by AT&T in October 2016.
AT&T Knocks Down the Walls
After a year and a half of regulatory delay, AT&T closed the TWX deal in June 2018. Led by newly appointed WarnerMedia CEO and soon to be AT&T CEO John Stankey, the company quickly got to work on one key area: breaking down the silos of Turner, Warner Bros. and HBO. The ultimate goal, which came into greater focus as time went on, was to bring all company assets together for a new mass audience streaming service.
Many cited the move as yet another example of AT&T needlessly meddling with a recently bought asset. Yet despite the criticism, AT&T simply aligned WarnerMedia with how other MediaCos are currently operating.
Take a look at Disney. The Mouse is using FX and its acclaimed TV library and production to fuel Hulu. National Geographic is prominently featured on Disney+. Fox library assets, including The Simpsons and Avatar, have bolstered the Disney+ catalogue.
Disney is also using talent that has helmed incredibly successful blockbuster movies to create Star Wars and Marvel TV shows to power Disney+’s original content. Elsewhere in media, Comcast is operating across studio, streamer, and broadcast and cable channels as well. For instance, NBC moved Brave New World from USA Network to Peacock and will have NBC news personalities produce content specifically for the new streaming service.
While AT&T generates a substantial amount of criticism from investors, that doesn’t mean every decision they make is wrong. It appears their HBO thinking was right as well. Since AT&T first agreed to buy TWX in October 2016, Netflix has grown from 46 million subs in the US and 83 million overall to over 60 million in the US and 183 million overall. Meanwhile, HBO has stayed roughly flat for the last several years at around 35 million US subs.
Consumer demand has changed. Many streaming subscribers favor services that can replace the several hours a day they used to spend watching content on the traditional bundle. HBO, while offering top tier originals, never had the depth to maintain those types of consumers. AT&T recognized that better than Time Warner did, which led to the creation of HBO Max.
AT&T Financially Commits More Than Everyone Expects
With HBO Max launching as the exclusive streaming home of Friends, The Big Bang Theory and South Park, it’s easy to forget that many prominent media voices were doubting whether Warner Bros. hits like Friends would be on the service at all.
Outspoken media futurists and strategists said, wrote, and tweeted that AT&T would have a hard time making content like Friends exclusive to their streamer because they either didn’t have the financial capability or were too stuck in their “legacy media” ways. Long-established executive fiefdoms, debt problems and the allure of short-term profits would be too much to keep the content for themselves, they said. Matthew Ball, the former Head of Strategy for Amazon Studios, even oddly castigated WarnerMedia for taking a $100 million check from Netflix to license Friends, non-exclusively, for 2019, even though HBO Max would not launch until mid-2020.
That thinking was wrong. Friends is now exclusively streaming on HBO Max, as is another Warner Bros. TV hit, The Big Bang Theory. While the former gets discussed the most, the latter may be more important. The never before streamed sitcom was the #1 non-NFL show on TV for 6 seasons in a row from 2013-2019, even beating Sunday Night Football in the 2017-2018 season with an average of 19 million viewers per episode. Perhaps even more remarkable, reruns on cable often get larger audiences than new shows of other top comedies.
As Friends and The Big Bang Theory are Warner Bros. library hits, AT&T pays less than the sticker price reported because they own a large chunk of the shows. (Netflix has to pay full price to license content, another advantage streamers with decades worth of library have over Reed & Ted). Yet this isn’t the only area where AT&T is spending. They paid a lot, maybe even an overpay, for licensing rights to South Park, but it demonstrated a commitment to bolster content in a key demo for streamers: young men.
AT&T also has a variety of Max Originals completed and in the works, and has signaled it will be active on the content acquisition front, from recently purchasing American Pickle, a Seth Rogen feature from Sony, and licensing Studio Ghibli movie rights in the US. Add that onto an already 50% increase in HBO original content spending since AT&T took over, and AT&T’s strong financial commitment is clear.
Many doubted it, but it turned out that Big Media did in fact fight back.
Where Does HBO Max Fit in the US Streaming Landscape?
The US streaming market is increasingly getting crowded. Streamers need a strong value proposition to stand out. So who will subscribe to HBO Max?
Consistent HBO Subscribers: If you have been paying $15/month for HBO, it is, as John Stankey said, an IQ test for whether you will want HBO Max at the same price.
On & Off HBO Subscribers: HBO Max is attempting to convert the occasional HBO subscriber, someone who subscribes when hits like Game of Thrones, Westworld and Curb Your Enthusiasm have new episodes, to a consistent HBO Max subscriber.
Is there a demo for this? Yes. Consider Netflix and Hulu. In 2013 Netflix reached almost 30 million US streaming subs prior to releasing their first original series, House of Cards. Netflix proved that a broad library of popular old TV shows and movies were highly valuable to subscribers. Hulu, currently known more for their library than originals, has around 30 million subs today. Along with viewing data that finds the most watched TV shows on Netflix are The Office, Friends and other licensed content, we know there is significant demand for the TV and movie library content that is the “Max” in HBO Max.
New Demos: AT&T is attempting to reach demos that otherwise, broadly, wouldn’t have considered long-term HBO subscriptions. For example, AT&T is targeting the young woman demo with Friends, a Gossip Girl reboot, CW shows and women-led Max Originals including Love Life starring Anna Kendrick and The Flight Attendant starring The Big Bang Theory’s Kaley Cuoco.
Cord Nevers: There is currently a misunderstanding among investors, including sell-side equity analysts at major investment banks, that more cord cutting directly benefits streamers. In 2019, the rate of cord cutting reached an all-time high, yet Netflix recorded the fewest streaming subscriber adds in its history. Why? Consumers choose to cut the cord because they have replaced consumption already with Netflix. Cord cutting is the effect of streamers gaining more usage from consumers, not an indicator that more streaming adds are coming.
The more lucrative opportunity for HBO Max is instead cord-nevers – young millenials and Gen Z (or zoomers) that have not and will never pay for a traditional video bundle, By putting shows like Rick & Morty and South Park – shows that air on bundled cable channels Cartoon Network and Comedy Central – on HBO Max, AT&T is aiming to attract consumers that would have never paid $50/month or higher for a bundle, but would be interested in paying $15/month for access to those shows. In fact, I suspect there are likely many zoomers that would pay $15/month simply for Rick & Morty alone given the show’s robust popularity.
Subscriber Predictions – Part One: Intro
As friend of the site Entertainment Strategy Guy says, predictions aren’t really worth paying attention to unless you put numbers behind them. It would be easy for me to state “I think HBO Max will do better than expected.” I want to go deeper.
As seen above from their HBO Max Analyst Day, AT&T is guiding for the combined HBO & HBO Max subscriber count to total 36 million by the end of 2020, 38 million by the end of 2021, and so on. I’m also interpreting the above to mean that much of the “existing HBO subscriber base” will soon transition over to HBO Max, but for simplicity AT&T labeled them as existing HBO subs in the slide.
Due to the variety of promotions and access AT&T is offering across its wireless, video and broadband users, simply predicting HBO Max subscriber counts without this context won’t be effective.
Below I detail the various AT&T promotions, my expectation of the impact on HBO Max subscriber counts, and then give my subscriber predictions.
Subscriber Predictions – Part Two: AT&T Promotional Offers, Summarized
For greater detail into the minutia of AT&T’s vast amount of video, broadband and wireless plans and the effect that can have on HBO Max subscribers, see the Appendix.
HBO Max Subs Added Permanently: The only AT&T customers that will be directly added to the HBO/HBO Max sub count as subscribers in perpetuity are current 1 GB fiber customers, which will probably amount to ~500k or less new HBO/HBO Max subs.
HBO Max Subs Added for One Year: Nearly all new AT&T video subscribers, mostly coming in through AT&T TV, will receive HBO Max free for one year. While it’s unclear how AT&T will count these, I wouldn’t be surprised if they are counted as subs, as AT&T would essentially be “paying” for them as a video promotion expense, with revenue going to HBO Max.
I estimate this promotion could add around ~250k new HBO/HBO Max subs per quarter.
HBO Max Subs Added for 3 Months: Likely over 10 million existing AT&T video subs will receive HBO Max free for 3 months. I do not expect AT&T to immediately attribute these subscribers as HBO Max subs, because they would then have to show a large amount of churn after 3 months.
I expect AT&T to count these as subs as soon as customers pay for HBO Max by their own volition in the fourth month.
HBO Max Subs Added for 1 Month: ~25 million wireless accounts and 13 million broadband accounts will be eligible to receive HBO Max free for one month. Many of these customers likely also have a video account with AT&T, and many of them likely also already have HBO. I certainly don’t expect AT&T to add these to HBO Max numbers, as this is a promotional offer to entice customers to sign up.
Subscriber Predictions – Part Three: Prediction Time
AT&T’s 2Q20 Earnings (ending 6/30/20) in Mid-July: With a launch date of May 27th, the 3-month promotional offer of HBO Max for free to >10 million video subs will still be in effect by mid-July.
Therefore, I don’t expect AT&T to give us a concrete subscriber number by then, since they are likely predicting a decent chunk of the 3-month free video subs will stay on, making future subscriber numbers look good. I wouldn’t be surprised by an “active user account” number, though.
If they do go with an “active” number, I predict an additional 4 million HBO/HBO Max subs that AT&T either has as paying subs or expects to convert into subs. This would result in 34 million HBO starting subs plus 4 million more “subs” for 38 million total.
AT&T’s 3Q20 Earnings (ending 9/30/20) in Mid-October: With the 5/27/20 launch date and October earnings, this gives us about 5 months post launch when AT&T will report 3Q20 earnings. I suspect we will get a 3Q20 combined HBO/HBO Max number and, if it’s good enough, a mid-October number.
3Q20 Prediction: 6 million additional HBO/HBO Max subscribers by mid-October, and 5 million by 9/30/20, when 3Q20 ends. I see the 6 million made up of ~4 million that have subscribed because they strongly desire HBO Max, ~1 million that are getting it from AT&T on the 1 GB Fiber and 12-month new AT&T video promotional offers, and another ~1 million that remain from the 3-month free offer.
Year-End 2020 Prediction: 7 million additional HBO/HBO Max subscribers by the end of 2020, resulting in, with AT&T starting from 34 million HBO subs, AT&T realizing its 2022 subscriber forecast of 41 million subs at the end of 2020 instead of 2022.
1H21 Prediction: An additional 3 million net subscribers in 1H21, bringing the HBO/HBO Max total to 44 million by 1H21, achieving AT&T’s 2023 year-end guidance 2.5 years early.
Why I Might Be Too Optimistic
There is some risk that AT&T fails to convince consumers of the value proposition. There’s already far too much confusion among consumers for AT&T’s video products, and it’s possible that extends to potential streaming subscribers failing to grasp the difference between HBO, HBO Now, HBO Go and HBO Max. In fact, in a recent THR survey only 13% and 12% of those asked knew that Friends and The Big Bang Theory would be on HBO Max. Even more telling, only 24% knew that the HBO megahit Game of Thrones would be.
Clearly AT&T needs to educate consumers further on HBO Max. I believe they can. AT&T has an incredible ability to reach the consumer. Within HBO specifically, it has time before shows start to advertise HBO Max’s benefits to existing HBO customers. AT&T has several cable channels where they can advertise; for example, TBS can advertise Friends and The Big Bang Theory being available on HBO Max during reruns of Friends and The Big Bang Theory. How about that for targeting. Further, AT&T has a nationwide store footprint that helps support tens of millions of wireless, video and broadband customers. AT&T has the resources, it just needs to execute.
Conclusion: Betting Against HBO Max Means Betting Against AT&T’s Only Growth Area
Take a look at the above slides from AT&T’s most recent earnings presentation. The three key growth areas for T are clearly defined as 5G, fiber broadband and HBO Max. Yet as someone who follows communications closely, here’s a little secret: the other two aren’t actually growing.
Despite their misleading 5GE label, AT&T currently has a pedestrian 5G network and will have to wait, at the absolute earliest, until late 2021 to begin deploying 5G on mid-band wireless spectrum. Following the completion of AT&T’s massive 14 million Fiber to the Home build out in 2019 – required as a DirecTV Merger condition – the company is now savings billions of dollars in annual capex by discontinuing that build.
So while 5G and fiber sound great, they actually aren’t really happening. That leaves the one growth area across AT&T’s entire business as HBO Max. AT&T knows this. Stankey is betting his job and AT&T is betting their future ownership of WarnerMedia on whether HBO Max is successful.
I’m predicting success, and I’m putting numbers behind it. Now we wait for the results.
***Appendix: AT&T Promotional Offers, Detailed
AT&T has stated it will offer HBO Max to “tens of millions of its wireless, video and internet customers.” But as most things with AT&T, it’s a lot more complicated than that.
Video: HBO Max will be offered to a variety of AT&T video customers who currently receive HBO for free, thus not having an impact on total HBO/HBO Max subs. These are the most expensive AT&T video packages, including DirecTV PREMIER, DirecTV LO MAXIMO, any U-Verse package with 400 channels or higher, and AT&T Now Max, the most expensive package of the previously named DirecTV Now OTT service.
AT&T TV, just launched in March, is AT&T’s new broadband-based video product that now serves as AT&T’s primary video vehicle, replacing DirecTV. HBO Max will be included free for a year to all new AT&T TV customers, though consumers choosing the least expensive package, Entertainment, appear to only have until June 27th for the offer. DirecTV is also now aligned with this new product packaging and will also offer HBO Max free for 3 months, though AT&T is likely to sell fewer DirecTV subscriptions.
When AT&T launched DirecTV Now, a similar product as AT&T TV, it reached 300-400k subs per quarter at its height. One key difference is that AT&T is bundling AT&T TV with fiber broadband, the latter likely to get 200-250k subs per quarter. We’ll estimate around 50% of those broadband subs will bundle video with broadband. There are likely some customers churning off of more expensive DTV and U-Verse plans that will come to AT&T TV, which won’t change the overall AT&T subscriber count but will result in more AT&T customers eligible for the one-year free plan as they are “new” AT&T TV customers.
If we assume each quarter AT&T TV can get ~225k new subs, plus ~125k from broadband bundles, plus another ~200k in AT&T TV replacement of DTV and U-Verse subs plus new DirecTV subs, we can estimate around 550k subs per quarter. If we assume 65% of those subs (HBO has 35 million subs, which compares to over 100 million high-speed broadband and video homes) don’t already have access to HBO, that results in around 350k new AT&T video subs per quarter with HBO Max access free for one year. However, this number could be smaller going forward if the Entertainment option is not continued after June 27th; it wouldn’t surprise me to see up to half of those take Entertainment as it is the cheapest option, resulting in more like 250k per quarter.
Video: Existing Subs: In addition to the above, existing AT&T video customers on “many of our video packages will be eligible for HBO and HBO Max for 3 months at no additional charge when HBO Max launches.” This excludes AT&T customers on lower tier plans such as DirecTV Family (cheapest DTV plan, appears to be $30 and is not currently marketed by AT&T), U-Family and U-Basic (cheapest and second cheapest U-Verse plans) and AT&T TV Now Plus (the formerly known as DirecTV Now OTT option at $55/month).
AT&T currently has 19.4 million video subscribers, including 18.6 million “Premium TV” – mostly DirecTV – and 788k OTT. AT&T’s Premium TV ARPU is $126.27, so we can assume that most AT&T video customers are on pretty expensive plans, thus qualifying for the 3 month promotion to attain HBO Max.
I suspect that given the 19 million total video customers, over 10 million AT&T video customers will receive HBO Max for free for 3 months. There are clearly a bunch of caveats to that number, including subscribers that already have HBO, but the main point is that AT&T is giving away for free 3 months of HBO Max as a way to entice current video customers to stick with the streamer.
Broadband: After launch, AT&T will be including HBO Max as a free ongoing benefit for AT&T Internet 1000 customers, or 1 GB fiber broadband customers. This is similar to how T-Mobile provides Netflix for free to its wireless customers. Current AT&T 1 GB fiber subs do not appear to get HBO for free, so this should add some HBO Max subs to the total, whether these subscribers use the service or not.
AT&T currently has 4.1 million Fiber to the Home broadband subscribers, growing at about 250k/quarter. If we assume 15-20% have the 1GB plan, we can estimate around 700k have 1 GB plans. However, this again needs to be discounted by subscribers that already have HBO as they would not be new HBO/HBO Max subs. At 35 million HBO subs vs. 120 total video homes, around 30% of households have HBO, but I also suspect anyone buying the most expensive internet package over-indexes to spend more on video. So if we say 35% of AT&T 1 GB customers already have HBO, this offer may result in 700k *.65 or just about an immediate 450k subs getting HBO Max.
AT&T also stated “Across our other Internet plans, new and existing customers can sign up for a special offer of HBO Max included for 1 month on us. After one month, HBO Max will auto-renew unless customer cancels.”
AT&T has a total of 14 million internet subs, including the aforementioned 4.1 million Fiber to the Home subs and 9.5 million Fiber to the Node subs. FTTN is lower speed, typically 20-50 Mbps compared to cable and fiber which start at 100-200 Mbps and can reach 1000 Mbps or 1 GB. Streaming should work on a 20-50 Mbps connection.
Wireless: The AT&T Unlimited Elite plan already included HBO, so AT&T won’t get any new subscribers here. AT&T is offering wireless customers on AT&T Unlimited Extra, AT&T Unlimited Starter, and AT&T Mobile share plans HBO Max for free for one month. By perusing the AT&T wireless site, the above plans appear to cover all of their current postpaid wireless plans.
AT&T currently has a total of 63 million postpaid phone subs and 75 million total postpaid subs (additional being tablets and smart watches). If we use Verizon’s 2.7 postpaid subs per wireless account as a proxy for AT&T, this means they may have around 28 million total wireless accounts. We then need to discount this by wireless subs who either a) already have HBO, b) are already getting it through Unlimited Elite, c) are already getting it through video, and d) are already getting it through broadband.