AT&T (NYSE:T) is planning to launch a new streaming service at the end of 2019 featuring content from HBO and other WarnerMedia properties it acquired when it bought Time Warner. Last month, management revealed plans to offer three tiers of service: HBO licensed films, HBO originals, and Warner Bros. and Turner content.

Despite plans to launch its own streaming service, AT&T agreed to license Friends to Netflix (NASDAQ:NFLX) for $100 million next year with an option to license it on a non-exclusive basis at a discount of about 25% in 2020 and beyond.

AT&T's streaming strategy varies slightly from Disney's (NYSE:DIS), which will also offer three streaming services. But Disney's strategy seems very clear, while AT&T's is much more confused.

A scene of a man and a woman on horseback from HBO's Westworld.

A still from HBO's Westworld. Image source: HBO.

Big differences between AT&T's and Disney's strategies

The biggest difference between the two strategies is that AT&T is forcing users to bundle content, as it's wont to do, while Disney is letting consumers pick and choose which services appeal to them most. Disney management said it may offer customers the option to bundle its services together at a discount if they want.

Presumably, AT&T will keep non-HBO WarnerMedia content like Friends or West Wing in the top tier of its streaming service. In other words, subscribers will have to sign up for all of the HBO content on top of everything in order to gain access to reruns of their favorite shows. While the bundle might seem like a great value to some customers who want a little bit of everything, it makes those who just want certain content feel like they're getting ripped off. After all, that's the whole impetus behind cord-cutting.

The push to bundle content on top of HBO may be a move by AT&T to get consumers to subscribe to HBO directly instead of through a cable provider. While AT&T is already the largest pay-TV provider in the country, it only accounts for around one-third of total subscribers. Forcing customers to subscribe to HBO directly in order to gain access to additional on-demand content means it can keep more of the revenue for itself instead of sharing with distributors. On the other hand, it could face antitrust backlash from such a move.

Additionally, the Friends contract with Netflix indicates AT&T is considering allowing Netflix to keep some of its best content. If Friends is already on Netflix, it brings the value of that same content on WarnerMedia's service down to nearly zero. WarnerMedia's (and Disney's) streaming plans are not a threat to Netflix.

Meanwhile, Disney has pulled back on all of its content licensing activity. Its contract with Netflix expires next year, and most of Disney's film releases will be off the service by the end of the year. Disney CEO Bob Iger notes the company will take a hit in the short run, but forgoing licensing revenue today increases the chances its direct-to-consumer business will succeed over the long term.

What about the HBO brand?

It's worth pointing out HBO Now is already a success. The service has over 5 million subscribers, and that's on top of the tens of millions of regular HBO subscribers who have access to the same content through the analog HBO Go service.

AT&T's streaming plans pose some risks to the HBO brand. While management hasn't specifically talked about branding, it wouldn't make sense for AT&T to move away from HBO considering how reliant the service is on its content library. The middle tier of the planned service is practically the same as HBO Now, so it would create a serious amount of confusion if it moved away from the HBO brand.

At the same time, sticking with HBO branding could dilute "HBO" by offering a version that only includes its licensed film library. The limited film library benefits from a direct relationship with Warner Bros. studios, but HBO could soon lose the rights to films from other studios including Twenty-First Century Fox, which Disney will soon own, and Comcast's Universal and DreamWorks studios.

Regular HBO subscribers might not mind too much, as it's HBO's originals that provide the real value for a subscription. But an HBO-branded service offering a small selection of on-demand films could hurt HBO's brand. AT&T will have to tread carefully with how it brands the service.

A better use of AT&T's existing assets would be to add content like Friends and West Wing to HBO Now without any price increase. At $15 per month for HBO Now, the company would only have to sign up an incremental half-million subscribers for a full year to offset the licensing revenue it's receiving from Netflix next year. AT&T's insistence on making things more complicated than that makes no sense.

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