It would be overstating matters to suggest AT&T's (NYSE:T) very survival hinges on HBO Max being a smashing success when it launches in late May. But there's no denying the media and telco name needs a big win on the television front. The company lost nearly 900,000 cable TV subscribers last quarter and more than 100,000 streaming video subscribers.It was the seventh consecutive quarter AT&T lost video customers, and broadly speaking, those losses are accelerating.
Investors expecting streaming newcomer HBO Max to beef up the parent company's customer headcount and subsequent revenue in a big way, however, may want to adjust their expectations. While the product will admittedly be a cool one, drawing content out of Warner Media's flagship HBO franchise, there's more publicity-grabbing bark than fiscal-growth bite with the planned streaming service. There are two big prospective pitfalls ahead that too many investors continue to ignore (although there is one upside to bear in mind as well).
It's a reality that's not been discussed much, but the advent of HBO Max could potentially cannibalize AT&T's current television business.
That might not have been the case several years ago when its DirecTV subsidiary was at least holding on to customers, as was its U-Verse branded television service. A streaming subscription was seen more as an addition to cable rather than a replacement for it.
Times have changed, of course, and cable just doesn't have the cachet it once did. Underscoring that idea is similar deterioration in the number of cable TV customers rivals like Comcast (NASDAQ:CMCSA) and Charter Communications (NASDAQ:CHTR) still have on board. Comcast lost more than 700,000 video customers last year, while Charter's Spectrum saw its residential television headcount shrink by nearly half a million. AT&T isn't alone in its plight.
It's bleeding more than its fair share of cable customers, though, suggesting its hold is weaker than other major names in the business. If HBO Max is all that CEO Randall Stephenson has suggested it would be, existing (and tepidly committed) AT&T cable customers could conceivably cancel their cable service outright and opt for HBO Max as a stand-alone service instead of cable.
Little fish in a big pond
The other detail more than a few investors haven't been interesting in thinking about? The plausible impact HBO Max could have on AT&T's overall results ... or lack thereof.
HBO Max will be priced at $14.99 per month. Ignore for a moment that the price tag makes it the most expensive non-live-TV streaming service available, and let's further assume HBO Max will actually achieve the company's suggested goal of 50 million U.S. subscribers -- and 80 million globally -- by 2025. At $15 per month, that ultimately translates into $14.4 billion in additional revenue per year. Not bad.
Except, even at that lofty, optimistic level of market penetration, that's still only less than 10% of the $181 billion worth of revenue AT&T generated in fiscal 2019. And that's a best-case scenario. The more plausible impact is even weaker, since many of AT&T's existing customers will be gaining access to HBO Max at no charge.
Simply put, HBO Max isn't going to meaningfully move the needle.
The perfect "add on" for AT&T's other services
With all of that being said, there is one way AT&T could leverage Warner Media's HBO Max into a big win for the company, and to some degree it's already doing so. One could argue it needs to do more messaging and think more generously on this front, however, to make full use of the idea. That is, HBO Max could make for a fantastic free "add on" to many of AT&T's other services to improve its overall retention.
Current subscribers to any of AT&T's television products will get HBO Max for free, as will some of its premium-service wireless customers. Still others will be offered free, limited-time trial of the new streaming offering. A bunch of its existing customers won't be getting anything extra for free, leaving them less inclined to stick around should a rival make a compelling offer. For instance, T-Mobile (NASDAQ:TMUS) is offering new customers a year's worth of access to new short-form streaming service Quibi.
Those deals may be coming, too. And while giving it away means the company will realize less than the full revenue potential of its targeted 80 million global subscribers to HBO Max, not losing a customer is just as good as gaining one. As it stands right now, though, AT&T hasn't moved too far down the freebie road.
The future isn't set in stone. AT&T could add or subtract HBO Max content, reprice it, or repackage it. Certainly, some sort of changes will be made once the company sees the initial response to its launch later next month. Business is largely the art of adaptation.
However, AT&T has appeared to be strangely committed to what it wants HBO Max to be, telling customers what they should be willing to pay for rather than delivering what consumers have confirmed they're willing to buy. That's fine. But given the two big downsides laid out above and fuzziness about the one way HBO Max could be a major retention tool, investors may want to keep their hopes for the new streaming service in check.