WarnerMedia's head of direct-to-consumer streaming, Bob Greenblatt, has a secret. "The dirty little secret is that HBO has hit a ceiling," the AT&T (NYSE:T) exec told Hollywood Reporter.

HBO was once the premier source for premium commercial-free content. But now there's Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN), and Disney (NYSE:DIS). HBO doesn't have as much pricing power as its $14.99 per month retail price suggests.

"In a world where there's Netflix and Amazon, the only way to grow, I guarantee you, is to bundle it with something else that's going to lift it," Greenblatt said.

Indeed, HBO has faced challenges keeping viewers engaged -- anecdotally experiencing higher subscriber churn rates coinciding with the end of each season of Game of Thrones. Meanwhile, negotiations with pay-TV distributors have gotten tougher. Greenblatt points to DISH Network's (NASDAQ:DISH) blackout of HBO and subsequent directive to subscribers to sign up for HBO Now -- the over-the-top service -- if they really want HBO.

Cord-cutting has taken hold of the pay-TV industry, and it's a very different competitive landscape than in 2017, when HBO added 5 million domestic subscribers between its flagship network and Cinemax.

HBO Max logo.

Image source: AT&T

HBO expects help from distributors

AT&T plans to make HBO Max available to all HBO subscribers at no additional cost when it launches in May. It can guarantee that for the 10 million or so HBO subscribers who pay AT&T directly either through its television services or HBO Now. It's still working on terms with other distributors, and WarnerMedia chief John Stankey expects those negotiations to go down to the wire. 

Getting other distributors on board is essential for AT&T's strategy if it expects to compete with Netflix and Amazon. The price for HBO Max direct-to-consumer is $14.99; that's considerably higher than competitors' pricing. But often that price is lower or otherwise abstracted through pay-TV distributors' bundles to make the pricing seem more in line with other streaming services.

HBO Max is in play to re-up negotiations with distributors at a higher price and to include HBO in more channel packages. That's a key part of WarnerMedia's strategy. It expects renegotiated rates and packages with distributors to drive around $2 billion in incremental revenue from existing HBO customers and help add another 16 million domestic HBO Max subscribers over the next five years. Meanwhile, it expects the retail price consumers pay to stay the same as before.

WarnerMedia's negotiations with distributors like DISH have fallen flat in the past. If it brings HBO Max to the table, it could be different. But management isn't providing many details on how negotiations are proceeding. If it can't strike deals with the major distributors representing some 24 million current HBO subscribers, it could be a major blow to the company's plans to grow the premium network.

HBO Max may still be too expensive to go it alone

HBO Max's $14.99 per month price tag is the same as HBO Now's, but offers "twice the content," as John Stankey points out. HBO Now has found decent traction so far, winning over about 8 million subscribers.

But AT&T expects HBO Max to reach 50 million domestic subscribers and 90 million global subscribers within five years of launching. Reaching that level will require a competitive price compared to Netflix, Amazon Prime, or Disney+, all of which have (or will have) a global presence.

HBO Max might have twice the number of hours of content as Disney+, but that doesn't mean it's worth twice the price. Both Netflix and Amazon offer even more content than HBO Max. Netflix is getting similar critical recognition for its television series as HBO, and Amazon offers Prime Video as a mere add-on to its oft-invaluable Prime shipping benefits. Not to mention, they're each priced lower than HBO Max.

Not only can AT&T not grow HBO without HBO Max, it can't grow HBO Max without the help of distributors. AT&T expects to see incremental revenue from raising its rates with distributors, but if it wants to scale the service, it may have to sacrifice its price per subscriber for more guarantees from its partners. A repeat of its negotiations with DISH Network when it comes to HBO Max could throw a huge wrench in the projections AT&T provided at its investor day in October.