AT&T (T 2.21%) took the wraps off of HBO Max at an event earlier this week, providing some early looks at the content coming to the service and the financials of the whole operation. Management has high expectations for the service, including reaching 50 million domestic subscribers by 2025.

But a key part of reaching that 50 million number will be converting the existing 34 million HBO subscribers to HBO Max subscribers. AT&T already said the 10 million subscribers through its various services will automatically see their subscription upgraded to HBO Max. But the company is still in active negotiations with other distributors to offer HBO Max for the same price they currently offer HBO.

The challenge is, AT&T doesn't seem to want to wholesale HBO Max for the same price it wholesales HBO. Management expects HBO Max to produce $5 billion in incremental revenue by 2020 between subscriptions and advertising (part of a future ad-supported version of the service). But 16 million incremental subscribers at an average revenue per user of $15 per month only produces $2.9 billion in incremental revenue. There's a big gap there, and distributors will be pressured to pick up the tab.

John Stankey presenting HBO Max on stage

AT&T COO and WarnerMedia CEO John Stankey speaking on stage. Image source: WarnerMedia.

The balance of power favors AT&T

When management was asked why distributors would be willing to negotiate new terms with WarnerMedia on HBO Max, AT&T COO and WarnerMedia CEO John Stankey responded, "Distributors would like to keep customers engaged on their platform and not others."

In other words, he suggests if a distributor doesn't offer HBO Max, their HBO customers are more likely to leave their service and find a service that does offer it. That could mean directly purchasing the $15 per month subscription from AT&T, or subscribing to one of AT&T's television services -- DirecTV satellite television or the software-based AT&T TV.

AT&T's ability to offer pay-TV service nationwide makes it a powerful competitor, and it looks like it's now using its vertical integration to sway the behavior of its competitors and consumers. 

AT&T is going to be very aggressive in its negotiations with distributors as well as its promotions for HBO Max. AT&T will bundle the streaming service with just about every other service it offers: Television, internet, and wireless packages are all in the works. If a distributor balks, it might find itself losing customers to AT&T.

Stankey noted some concessions the company will make in order not to seem too anti-competitive. He said HBO Max will be available to wholesale for bundling outside of pay-TV -- for example, with a home-internet service package. He also said user data on HBO Max will be available to distributors to inform their advertising, but only through AT&T's Xandr platform. 

He then compared an HBO Max wholesale deal as more favorable than the deals distributors currently have with popular OTT services, which may simply provide a one-time bounty for getting users to sign up for the service.

No free upgrades

AT&T's pitch to investors is that the 10 million HBO subscribers paying for their service through AT&T will get an instant upgrade to HBO Max at no added cost to the consumer. AT&T is bearing all of the costs involved with offering an objectively better service to its customers because it makes economic sense for the company to scale the service long term.

For other distributors, though, paying more for HBO Max and not charging its customers more doesn't make as much sense. Pay-TV distributors have consistently raised prices as the cost of content increases, and HBO isn't so special of a case that it precludes most distributors from charging more. Traditional pay-TV providers, which account for the vast majority of the other 24 million HBO subscribers, can simply raise the bundle price for packages including HBO and increase their promotional rates for adding HBO to optimize the economics of new distribution deals.

Price increases for bundles and promotions could negatively affect HBO's subscriber base from other distributors. That could be offset somewhat by increased subscriber retention from the added value of HBO Max, but relatively few HBO subscribers have expressed interest in HBO Max. That's not something management appears to have modeled into their forecast for 50 million subscribers by 2025.

One way or another, somebody is going to pay for upgrading the 24 million HBO customers paying through other distributors. Whether that's the consumer itself, the distributor, or a split, AT&T is practically forcing them to pay more for a service that's already one of the most expensive premium networks in the market. Even Netflix has a limit to its pricing power.