The big day for investors in AT&T (NYSE:T) has come at last. After months of speculation and rumors regarding how the entertainment and telecommunications conglomerate would go on to compete with The Walt Disney Company (DIS) and its Disney+, ESPN+, and Hulu subscription services, and how it would compete with Netflix (NFLX) and Apple (AAPL), the latter with its soon-to-launch Apple TV+ service, the company has finally announced that it will launch HBO Max in May of 2020. While some information is still uncertain, the overall path the company seems to be taking is interesting, and if it sees the adoption rate that management anticipates, then the value creation potential for shareholders could be tremendous.
In its lengthy presentation to investors on October 29th, the management team at AT&T left a lot of information to unpack. First and foremost, a discussion of the service and what it will offer is in order. Launching in May of next year, HBO Max will provide users with access to a significant library of content owned and licensed by AT&T. This will include everything from its Warner Bros. cartoons to newer, adult-oriented content like Game of Thrones. In all, the company plans to have around 10,000 hours worth of content on its platform, including television series, specials, and documentaries, as well as 1,800 film titles like The Matrix, The Lord of the Rings Trilogy, The Hobbit, and more.
Overall, and this is most easily understood by looking at the firm’s line-up of original content, AT&T is primarily targeting young adults, kids, and families with this service. The business intends to provide subscribers with access to original series, much of which will be tied in to the company’s legacy library. Examples include Looney Tunes and shows related to the DC Universe. For a more mature audience, the company is offering a 10-episode prequel to Game of Thrones that takes place 300 years prior to the main series and that has been titled House of the Dragon. HBO Max will also have a series of Stand Up Specials promoted by Conan O’Brien, including a one-hour special created by comedian James Veitch.
For all that the service intends to offer, one downside for subscribers is that it doesn’t look like it will offer the company’s entire library of content. The firm did discuss the prospect of offering an AVOD (Ad-supported Video On Demand) option to give users access to more content while avoiding a high price tag on the service. It also intends to provide some other unique features. Take, for instance, its recommendation system. Unlike Netflix and other services that rely on your past viewing history to drive what content it sends its customers’ way, it will also utilize the recommendations of influencers important to its users. These influencers will be able to make short videos explaining why they like certain shows or movies and those will be shared with subscribers. Also on the side of recommendations, AT&T intends to allow users to create their own homepages, including group homepages, so that group viewing does not affect personal recommendations. Add to this content hubs and offline viewing options, and HBO Max does offer a unique setup.
While I am bullish on HBO Max, I am not as bullish on it as I am on Disney+. Disney, though having a diverse library of content, is largely centered around two large pools of content that have vast audiences and that has a wide reach: the Marvel and Star Wars content that fits a more mature audience, and the animated movies and shows that have become synonymous with the Disney name. HBO Max, while having a massive library of content that rivals Disney’s, is more a hodgepodge of movies and shows. This makes the value proposition more difficult to convey. You tell a person they are subscribing to Disney, they have a pretty good idea what content they will get as part of the deal. You tell a person they are subscribing to HBO Max, and a large swath of the population probably can’t guess even one show or movie that might be on the platform.
This is why the price point planned by management, at $14.99 per month, is difficult to swallow. Disney+ is planned to be only $6.99 per month. ESPN+ is $4.99 per month. Hulu has plans starting at $5.99 per month and going up to $44.99 per month if you want access to live TV with it. Apple TV+ is 4.99 per month, while Netflix starts at $8.99 per month and goes up to $15.99. AT&T’s own Crunchyroll service starts at only $7.99 per month. All of this put together means that, excluding live TV options, HBO Max sits at the high end of the range currently charged. Disney could probably justify that cost easily, but a hodgepodge of yesteryears’ greatest hits will be a hard sell unless the exclusive content offered on HBO Max is truly remarkable.
In order to make this service work, management is putting the company’s money where its mouth is. In 2020 alone, the firm intends to invest between $1.5 billion and $2 billion on the platform, much of which should go toward original content. By 2025, spending is forecasted to grow to $4 billion. While this pales in comparison to the $15 billion that Netflix is spending on content this year alone (up from $12.04 billion spent last year), Netflix doesn’t have the same extensive library that HBO Max does and, instead, it is playing a game of catch-up.
If all goes according to plan, AT&T believes that the upside could well be worth the investment. By 2025, the company expects to have around 50 million domestic subscribers on its HBO Max platform. Global subscribers should come out to between 75 million and 90 million (global referring to the US, Latin America, and Europe). Though figuring out the math here may seem simple, there are a lot of unknowns. For instance, management said that they will be giving all roughly 10 million subscribers of HBO access to HBO Max at no extra charge. The same applies to its HBO Now subscribers who signed up through the company’s website. Customers on its premium video, mobile, and broadband services will also be able to subscribe to bundles that include HBO Max at no extra charge as well.
At the end of the day, this creates uncertainty over how many of the company’s subscribers will actually be paying for this service. AT&T as a conglomerate boasts 170 million DTC (direct-to-consumer) relationships, it touches 5,500 retail stores, and it has 3.2 billion annual customer touchpoints. This gives it plenty of opportunities to sell through its HBO Max offering, but knowing how many of its users will be paying is ultimately important. As an example, if pricing remains unchanged and the company sees 60 million paid subscribers on its platform, annual revenue will be about $10.79 billion and that’s excluding other revenue sources like advertising and proceeds from non-digital content sales.
In some ways, even if there are “free-riders” on its service, the end result could still be accretive to the conglomerate. Take, for instance, its premium TV offering. In the third quarter of this year, the company reported 20.418 million connections through this service, down significantly from the 23.294 million seen just one year earlier. It also has 1.145 million AT&T Now subscribers, down from the 1.858 million seen the same time last year. For every one basis point (or 0.01%) improvement in the churn rate for its premium TV offering, the company said that incremental revenue will be $100 million. At the best, this might stop the bleeding or even grow its other premium TV services, while at the worst it should slow the bleeding down.
Right now, AT&T is in an interesting position. The company’s service is priced higher than many of its peers and its mix of content could make selling the service to prospective users a challenge. That said, if the company can make this work out by proving the value is there by offering quality service, a unique experience, and robust new content, this line of business could very well go on to generate several billions of dollars per year in revenue. Unless management completely botches the rollout of the service and the original series it plans to launch, I don’t see how shareholders could likely lose from this move. More likely than not, they will see this as a win for the firm.
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.