For years now, we’ve heard talks of streaming wars with the big tech companies such as Netflix (NFLX), Amazon (AMZN), and Alphabet (GOOGL) (GOOG) turning the content distribution system on its head and putting a lot of pressure on the incumbent names in the media/entertainment space to adapt. The over-the-top and direct-to-consumer distribution method has essentially ended the traditional cable market as we knew it. Quarter in and quarter out, there have been sub-losses in the cable/satellite market as consumers cut the cord. The cord-cutting phenomenon has served as a secular hurdle for old-guard media names to clear. They’ve certainly been slow to change their ways, seemingly attempting to hold onto the past and the legacy cash flows that the cable bundle produces for as long as they can. I’m sure that this has been a tricky problem for management teams to solve. You never want to bite the hand that feeds you. But, it’s been clear for a while now that the world has changed and if these media names are to survive, they’re going to have to change with it. And now, years into the streaming wars, we’re finally about to see legacy media names attempt to fight back directly. Several major companies are set to release their streaming services during the coming months. In this piece, I wanted to focus on AT&T’s (NYSE:T) attempt to carve out significant market share in the streaming landscape: HBO Max.
Earlier in the week, AT&T held WarnerMedia Day and offered investors an extensive presentation regarding its upcoming streaming plans. Here’s a link to the 2-hour+ video of the presentation. If you’re a content nerd like me, then you may enjoy watching the entire show. However, I’ll do my best to offer a quick recap here and break down what I believe these new steps in the company’s evolution mean for AT&T stock.
The presentation began with a rather awe-inspiring introductory monologue with Morgan Freeman’s voice telling the tale of WarnerMedia’s past as highlights from the company’s many hit shows and movies ran in the background. Frankly put, I was taken aback by the breadth of WarnerMedia’s content IP. It’s easy to forget which shows and movies come from the various content producers, but it didn’t take long to realize that I’d probably been underestimating the potential power of this brand. The company’s content dates back more than 100 years and includes many notable and nostalgic characters and storylines. Towards the end of his monologue, Freeman noted that “the biggest risks can yield the most magnificent rewards.” And then, he highlighted the pillars of WarnerMedia, the “four iconic and indelible visions” as he put it, AT&T, Warner Bros, Turner, and HBO, which were coming together as one to provide this over-the-top service.
When Freeman’s introduction ended, WarnerMedia CEO John Stankey arrived on the stage and began discussing the company’s plans and future outlook. One of the first trends that he highlighted was the continued strong demand for personal daily video consumption. If you’ve followed my writing here at Seeking Alpha over the years, you’re probably aware that this secular tailwind is the reason that I’ve built up overweight positions in various traditional media names (Disney (DIS) is my second-largest holding and AT&T is a top-5 position for me as well; Apple (AAPL) and Alphabet are also in my top-5 weightings and both of these companies benefit from this trend as well). In the past, I’ve based this accumulation of media shares on my Wall-E thesis (named after the Disney movie). In short, I believe that as time moves on and we move further into the digital age, technology will become more and more efficient, opening up more and more free time for mankind. While certain individuals will likely use this free time to be enterprising, I suspect that many will be content to sit back on their haunches, simply consuming content. In Wall-E, the robots basically ran the show as humans sat around getting fatter and fatter, enjoying the ease of their lives. While the scenario the movie presents is likely an exaggeration of what the future holds for our species, I think the general sense of the idea is real and it’s one that investors can capitalize on.
Stankey took this idea a step further, noting that as demand for daily content rises, OTT content is seeing the fastest growth, taking market share away from traditional media. Here’s a snapshot of the presentation, highlighting this trend and AT&T’s expectations moving forward.
Source: screenshot of WarnerMedia Day presentation; roughly 9:00 mark
Positive impact on the “stickiness” of T’s wireless, paid TV, and broadband offerings. He said that “heavily engagement across these products is directly correlated to lower churn, and we strongly believe that an hour a day of premium content viewing through a carefully crafted HBO Max offer will have a meaningful impact.”
In other words, in the short term, HBO Max isn’t expected to be the star of the show for AT&T, but it will broaden the base of its ecosystem and give consumers a reason to stick around. Stankey said that a reduction of 1 basis point of wireless churn is equal to $100m of wireless revenue to the company. Stankey mentioned that in the digital age, scale is no longer determined by U.S. households, but instead, the entire globe. He noted that internet penetration continues to increase and the “ubiquitous connectivity” across the world will only increase as the 5G revolution plays out over the coming decade. T believes that the vertically integrated nature of its business will allow for it to benefit from a virtuous cycle of content supplementing, experiencing, augmenting and increasing user engagement, that ultimately results in unique insights into what will drive more users to the platform (not to mention the fact that advertising firms will likely find the targeted, personalized nature of the platform attractive, helping to offset the ad revenues lost from the negative growth being seen in the traditional cable model).
To me, when AT&T made the Time Warner acquisition a few years ago this was the vision: a differentiated wireless network that offers a variety of ancillary services that not only contribute to cash flows, but help to stabilize and grow them over time. Admittedly, it’s taken a bit longer to arrive here than I thought it would, but throughout the WarnerMedia Day presentation, I got a clear sense that T shares the same bullish sentiment that I do regarding the vertically integrated nature of its business and this potential that this has to set it apart from peers over the long run.
I suppose that now is a good time to mention that T’s biggest rival in the wireless space, Verizon (VZ), recently made a deal offering Disney+ to its subscribers free of charge. It appears that Verizon is also acknowledging the importance of adding differentiated content to the “pipes” when it comes to creating an ecosystem and attractive consumers. It will be interesting to see if Verizon sticks with this partnership plan and whether or not it ultimately proves to be cost-effective, rather than buying/owning the content production segment outright. Only time will tell in that regard, but I’ve always been a fan of the diversified, conglomerate-type model when it comes to defensive cash cows, and it appears that’s the direction that T is headed in the media space.
During the presentation, Stankey mentioned that T has 170m direct customer relationships and interacts with this consumer base more than 3.2b times annually. Management believes that this consumer reach gives the company an advertising advantage over “most” of its streaming competitors and with this in mind, I think it’s realistic to expect to see HBO Max’s sub-base grow quickly after launch. T expects HBO’s sub-base to hit the 10m market very quickly after launch. It has a 50m sub-target for 2025. The company’s primary focus is on the U.S. market, though Stankey acknowledged the importance of international growth in terms of creating economies of scale that allow it to best compete with other global streaming platforms. He said that T plans to focus on the Latin American and European markets heavily as well, due to its existing HBO, telecom, and television exposure within these markets.
Source: screenshot of WarnerMedia Day presentation; roughly 1:36:00 mark.
Stankey left the stage and was then followed by a handful of top executives at the company who highlighted important bits and pieces of data and the plans that their respective segments of the company have moving forward. They spoke about specific content and platform features. And, they highlighted the potential advantages that they believe T will have against the competition.
One of the major themes was the platform/search engine itself. Neilson data shows that the average search time across existing streaming video platforms is 8-9 minutes. Management brought up the idea of “paradox of choice,” which essentially states that an individual is going to be less happy with their final choice when surrounded by so many potential options than they would have been if their selection was smaller. This is human nature and HBO Max hopes to combat long search times and unsatisfactory decisions with a focus on the high quality and carefully curated content that the brand is already known for. However, that isn’t to say that the company is trying to skimp on content. HBO Max is slated to start with roughly 10,000 available hours of content.
Throughout the presentation, production talent was highlighted (J.J. Abrams made an appearance on stage), new shows/movies were previewed (House of the Dragon, the next Chapter in George R.R. Martin’s Game of Thrones universe content was probably the highlight here), and news of content deals was broken (for instance, HBO Max will be the exclusive home of South Park, moving forward, joining the likes of Friends and The Big Bang Theory, which will also be provided exclusively via this platform). Management was able to name-drop a myriad of award-winning films that fall under the Warner umbrella, making it clear that this is going to be a service that any true film buff is going to need to subscribe to.
Management also believes that the existing distribution platforms and personalization algorithms are unsatisfactory and hopes to offer not only higher quality content than its peers, but a higher quality viewership experience via a more advanced and effective dashboard. T hopes to improve on the algorithms and it also plans to add a human touch to the curation process, creating playlists of favorite episodes, trending content, and content recommended by top talent. In short, the company wants not only use data to connect users to shows, but also the best people who may recommend appealing content. The company highlighted the mobile capabilities of the platform, mentioning on the go playlists and podcasts, that further set it apart. And, it closed this segment of the presentation talking about the child settings available to parents and families who may be concerned that young minds wandering off into areas of content should be forbidden.
This bit, combined with the earlier Max Originals segment, where management touched upon its desire to be a leader in family and young adult content production with roughly 75% of its planned originals falling into either of these two categories, seemed to highlight the fact that Disney+ isn’t going to be the only family-friendly streaming service out there.
In fact, HBO Max may be more attractive to the overall family (parents included) due to its wide assortment of high-quality programming available. Not only is HBO going to cater to kids, but it hopes to lock in eyeballs across a variety of generations with leading content across many classic, niche, emerging, and growing genres (comedic animation via Adult Swim and anime, being examples).
Granted, HBO Max is going to be quite a bit more expensive than Disney+ (at launch, at least; I fully expect to see the prices of all of these services rise over time once market shares are determined). Because of the low Disney+ price point, I suspect that many families will simply sign up for both. Due to the overall growth in this space, I don’t think the streaming wars are going to be a winner-take-all battle situation. There is certainly enough room for a handful of big platforms to survive and even thrive. Yet, throughout this presentation, WarnerMedia executives certainly did their best to present themselves as the premium option relative to their peers.
Lastly, we’ll use this transition to arrive at probably the most important part of the presentation: price. HBO Max will start off with a $14.99 price tag, which is the same price as HBO currently. This is a higher price point than its peers, though I think the focus on high quality and premium content here will justify the premium price (using the HBO brand name in the title already implies the premium nature of the product and consumers have been willing to pay up for HBO for years now). Furthermore, existing HBO subscribers will have access to the service at no extra charge. The company plans to offer bundles to existing TV, mobile, and broadband customers, with no extra charge. This falls back to the idea of a vertically integrated company and the unique opportunities that T has to leverage its existing consumer base with trials and bundling to spark interest in its new streaming platform.
A couple of days ago I posted an article which highlighted AT&T’s 2020 guidance and 3-year capital allocation plans. The HBO Max launch was considered when making these predictions, so this presentation shouldn’t have any impact on short-term earnings/guidance. Management did project incremental revenues from the HBO Max platform alongside the expenses associated with it looking out a few extra years during the presentation (to 2025) and this projection was increasingly bullish. Management believes that necessary investments will fall as the platform matures, yet incremental revenues will continue to rise. Only time will tell if this is true or not (up to this point in time, that certainly hasn’t been the case for Netflix, HBO Max’s largest competitor). But being that the men and women running HBO and Time Warner have long histories of operating strong, profitable companies behind them, I’m willing to take them at their word here.
In closing, I came away from this presentation bullish on the prospects of the HBO Max streaming platform and AT&T overall. I’m looking forward to comparing HBO Max to Netflix and Disney+ once all of the services are up and running, but for the time being, it appears that this service has the capability to be a real winner. Prior to the details, I wasn’t sure if I was going to be a subscriber, but now, I’m fairly certain that I will be.
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This article was written by
University of Virginia, class of 2011 B.A English
Senior Investment Analyst at Wide Moat Research.
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I am a young investor focused primarily on dividend growth stocks. Seeking Alpha, and more specifically, the dividend and income community that exists here, has played a significant role in my development as a portfolio manager. I am not a professional, though I do manage my family's finances. I enjoy the process; the research, the decision making, the strategic planning...and not paying a financial adviser to do the work for me.
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