Leading up to AT&T's (T 0.38%) launch of HBO Max in May 2020, the company said, "we expect HBO Max to achieve an impressive level of scale and reach at launch." However, HBO Max still isn't available on either the Roku (ROKU 1.22%) or Amazon.com (AMZN -0.64%) Fire TV platforms. AT&T's inability to negotiate a deal has essentially locked HBO Max out of roughly 70% of the domestic streaming market. This mistake is hurting HBO Max's growth potential, and its ability to be used as a retention and acquisition tool.
When free isn't enough
One problem in HBO Max's launch was the confusing upgrade path for millions of existing HBO customers. According to estimates, about 30 million HBO customers qualify for a free upgrade. However, in its first 30 days, the service signed up just 4.1 million subscribers. Considering that The Walt Disney Company signed up more than 10 million Disney+ subscribers in its first 24 hours, it seems HBO Max has a problem.
AT&T is investing a projected $4 billion to shift toward streaming video. HBO Max has expanded from about 10,000 hours of content in May, to 15,000 hours as of August. AT&T even offered a discounted deal: One year's subscription at $11.99 per month to subscribers who preordered on HBOMax.com before launch. This promotion undercut Netflix's most popular plan and was $3 cheaper than HBO Max's normal price of $14.99.
With all of these positive steps, why is HBO Max off to a relatively slow start? To be blunt, AT&T is playing a game of chicken with Roku and Amazon.
It's time to blink
At the beginning of this year, Amazon reported it had over 40 million users on its Fire TV streaming platform. As of Roku's latest earnings report, the company touted that active accounts grew to a new high of 43 million. As a quick point of comparison, HBO and HBO Max finished AT&T's most recent quarter with a combined total of 36.3 million accounts. HBO Max needs Roku and Amazon Fire TV -- not the other way around.
If HBO Max were to sign Roku's standard agreement, it would give up 20% of any subscription revenue, assuming those subscribers sign up for HBO Max through their Roku devices. This means a $14.99-per-month HBO Max subscription would net AT&T $11.99. If HBO Max attracted just 10% of Roku active accounts, it would gain 4.3 million additional subscribers.
At $11.99 per month, AT&T loses $51.6 million in potential revenue per month by not having these potential customers. Given that HBO Max has been on the market for four months, AT&T has already missed out on more than $200 million using these assumptions. The fact that these numbers don't include potential Amazon Fire TV subscribers leads to one inescapable conclusion: It's time for AT&T to blink and get a deal done.
How long must this last?
AT&T has big plans for HBO Max that it cannot yet execute because it's hoping to get a somewhat better deal from Roku and Amazon. In the meantime, AT&T is missing out on millions in potential cash flow from HBO Max customers who don't have access to the service. The issue has become even more pressing now that it appears that AT&T will hold what the New York Post calls a "fire sale" for its DirecTV unit.
AT&T's video business generated $7 billion in revenue last quarter, which made up 17% of AT&T's overall revenue. In AT&T's last quarter, DirecTV customers amounted to 17.7 million. Selling DirecTV could cost HBO the ability to market HBO Max to over 17 million previously captive customers. This is yet another reason to get HBO Max on as many platforms as quickly as possible.
AT&T carries a yield north of 7%, but investors hoping for growth and income are going to have to settle for just income for now. Analysts expect essentially zero earnings growth over the next five years. It does bear mentioning that a DirecTV sale could change the narrative, since this acquisition has dragged on results since day one.
In the end, AT&T will likely end up striking a deal with both Roku and Fire TV; it really has no choice. Spending billions to shift toward streaming, only to limit HBO Max's availability to 30% of the domestic streaming market, isn't a real long-term option. Where AT&T's stock is concerned, collecting a 7% yield in this low-interest rate environment isn't the worst way to deploy funds. If the communications giant can get a deal done with Roku and Fire TV, the company's revenue and margins could benefit. Though it does incur original content costs, HBO Max isn't as capital-intensive as laying and maintaining U-Verse's fiber-optic networks, and the additional subscribers HBO Max might gain from Roku and Amazon deals could add incremental revenue at little additional cost. Investors may eventually realize that this short-term mistake could still represent a long-term opportunity.