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Apple Will Sell AT&T's Upcoming HBO Max

By Evan Niu, CFA – Apr 29, 2020 at 9:15AM

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Ma Bell also eased its restrictions on free upgrades, suggesting that the two companies inked a special distribution deal.

The launch of AT&T's (T -1.22%) hotly anticipated HBO Max service is just about a month away on May 27, and the telecommunications and media conglomerate is hard at work inking distribution deals to grab as many subscribers as possible. HBO Max is the successor to HBO Now, the current over-the-top (OTT) version of the premium content service. AT&T subsidiary WarnerMedia is banking on HBO Max for growth, with exec Bob Greenblatt recently conceding that "HBO has hit a ceiling."

The upcoming debut comes as COVID-19 has created a boom in demand for video-streaming services. Housebound consumers are starved for entertainment in the wake of widespread stay-at-home orders. AT&T has also scored Apple (AAPL -3.00%) as a key distribution partner with its Apple TV platform.

Showtime on Apple TV

Apple sells subscriptions to third-party premium channels through Apple TV. Image source: Apple.

AT&T and Apple probably negotiated new terms

Deadline reports that Ma Bell and the Mac maker have inked a new deal that will make HBO Max available across Apple devices and integrated within the Apple TV app that has evolved into the tech giant's hub for video streaming services, aggregating and curating content inside a single interface (for better or for worse). The agreement will also include in-app purchases for signing up new subscribers, often a point of contention since that entitles Apple to a share of that revenue.

The typical arrangement gives Apple a 30% cut of subscription services, with that commission dropping to 15% after the first year. However, there's a good chance that the companies negotiated different terms, considering that HBO is such a prominent content provider and Apple is keenly interested in growing the number of paid subscriptions that are billed through its platforms.

It's worth noting that WarnerMedia initially said that only HBO Now subscribers that billed directly through HBO would get a free upgrade to HBO Max, an overt effort to cut out middlemen and nurture direct relationships with customers. However, the company has now walked back those terms and is offering that upgrade for anyone who has subscribed through Apple's App Store, according to the report. Earlier this month, AT&T inked a similar deal with Charter, granting free upgrades to customers that subscribe to HBO through the cable provider.

That all suggests that AT&T was using conditional free upgrades to HBO Max as bargaining leverage, as the company knows how strong HBO's brand is in premium content. Apple probably agreed to a smaller cut in order to sell more subscriptions through in-app purchases. Getting a smaller cut of more sales is better than getting no cut of no sales.

AT&T just needs to balance the costs of revenue-sharing with the upside of subscriber growth, as the blue chip company has already promised investors that it can grab 75 million to 90 million global subscribers by 2025, of which 50 million are expected to be within the U.S.

At the end of 2019, Apple had 480 million paid subscriptions across its digital platforms and likely already hit its target of 500 million in the first quarter. The company reports earnings on Thursday, so investors will soon find out whether it has hit half a billion paid subscriptions.

Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.

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