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Will HBO Max Grow Into Its Content Budget?

By Adam Levy - Oct 24, 2019 at 12:00PM

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WarnerMedia will have to overcome its pricing problem to do so.

AT&T (T 0.66%) is pouring a lot of money into content for HBO Max, the forthcoming streaming service from its WarnerMedia subsidiary. It committed to increasing HBO's original productions budget by 50% to about $1.5 billion. It's also creating original content exclusively for HBO Max, and it's licensing a lot of programming from itself and other media companies to provide "10,000 hours of premium content."

All told, the content on HBO Max will cost WarnerMedia between $2.4 billion and $3.9 billion per year, according to a recent estimate from Barclays analysts. That doesn't include the extra $500 million it's spending on HBO originals. 

For reference, Disney (DIS 1.64%) plans to have less than $2 billion in content expenses in its first year of Disney+, but that number will grow to between $4 billion and $5 billion by 2024. The company expects to reach profitability that year with 60 million to 90 million subscribers.

Barclays estimates HBO Max will need to attract 15 million new users on top of existing HBO Now subscribers in order to break even on its content spending. But with WarnerMedia's likelihood of pricing the product at a premium, that might be a considerable challenge.

The HBO Max logo.

Image source: AT&T.

Pricing for scale

WarnerMedia faces a unique challenge when it comes to pricing HBO Max. Its existing subscription video on demand product, HBO Now, costs $15 per month. Moreover, WarnerMedia still relies on pay-TV distributors for the majority of its HBO subscription revenue. 

It priced HBO Now at $15 per month largely to keep those relationships healthy, and now it risks disturbing its cash cow if its HBO Max pricing isn't amenable to its distribution partners. As such, most analysts believe HBO Max will cost the same or more as HBO Now.

Fifteen dollars per month would make HBO Max slightly more expensive than Netflix's (NFLX 4.15%) most popular option, more than twice as costly as Disney+, and three times as expensive as Apple's (AAPL 0.11%) Apple TV+. 

And while WarnerMedia is spending around twice as much as Disney on content, that doesn't mean it can expect consumers to pay twice as much for its service. Netflix, for example, is spending $10 billion this year on content ($15 billion on a cash basis). But it keeps its price relatively low compared to that content spend by spreading it across 160 million subscribers.

WarnerMedia wants to scale HBO Max -- management says it wants to reach 70 million subscribers -- but its pricing could prevent that. Price is far and away the biggest factor influencing consumers' decisions on which streaming services to subscribe to, according to a recent survey from Flixed.io. That may also be why Disney+ and Apple TV+ topped its list for new streaming services consumers intend to subscribe to.

Its parent company could play an important role

WarnerMedia's content budget necessitates much greater scale than it's likely to achieve anytime soon with its premium pricing. One way AT&T could help boost subscriptions is through bundling HBO Max with its unlimited wireless data plans.

Disney recently struck a deal with Verizon to offer a free year of Disney+ to Verizon's unlimited data subscribers. The pact could help lead to 8 million Disney+ subscribers within the first few weeks of the promotion, and 18 million by the end of next year, according to an estimate from MoffettNathanson.

Similarly, Apple is offering a free year of its streaming video service with every new device purchase. That could lead to tens of millions of subscribers in just a few months.

AT&T has been very aggressive with its bundling strategies in the past. It currently offers its high-end unlimited data subscribers several options for a bundled subscription. It could replace the HBO Now option with HBO Max, or replace the entire menu with a default subscription to HBO Max.

In order for that strategy to be successful, the bundle will have to boost the perceived value of HBO Max and improve subscriber retention for one or both services. Given AT&T's track record, a bundle isn't necessarily a home run strategy. But considering the competition has already struck their own bundling deals (Netflix is part of several distribution bundles), AT&T might not have a better option.

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