AT&T (NYSE:T) boasted that it surpassed its 2020 goal for HBO Max in its third-quarter earnings release. The company counted 38 million domestic HBO and HBO Max subscribers as of the end of September, exceeding its stated goal of 36 million. But when it comes to the actual number of subscribers watching the HBO Max streaming service, AT&T counts just 8.6 million activations.

Three reasons activations are the number to watch

AT&T's goal of 36 million subscribers by the end of the year was always an easy target. AT&T already had 34.6 million subscribers at the end of 2019.

But there are three key components to HBO Max that are important to investors.

1. Subscriber retention
First is the ability for HBO Max to retain existing HBO subscribers. Keeping the 34.6 million subscribers it had last year can be just as valuable as adding 34.6 million new subscribers. 

Subscribers have more reasons to tune into HBO Max's expanded library every single night instead of just Sunday night for HBO's primetime shows. Indeed, subscribers who have activated their HBO Max account display very strong engagement relative to traditional HBO and other streaming services. That kind of daily utility leads to greater willingness to pay month after month.

But if subscribers never activate their HBO Max subscription, then there's no increased utility and no uplift in the retention rate. With just 30% of the eligible subscriber base activating their account, HBO Max is only working at 30% capacity to improve retention. 

A man reclining on a couch streaming video on a tablet.

Image source: Getty Images.

2. Viewer data
The second strategic component of HBO Max is to control more viewer data. You can only access HBO Max content through the HBO Max app. AT&T has renegotiated agreements with several digital distribution partners to ensure it controls 100% of its viewer data, and it's a big point of contention with Amazon (NASDAQ:AMZN) and Roku (NASDAQ:ROKU).

Viewer data is a useful asset for advertising, programming decisions, and improving the user experience in the app. With plans to launch an ad-supported version of HBO Max next year, viewer data and control over the user experience becomes even more important in order to maximize ad revenue.

3. Expanding the subscriber base
The final component for HBO Max is the potential to expand HBO's audience. New library content and several new originals are aimed at demographics outside of HBO's core. This broader appeal could help HBO break through the plateau it's seen in domestic subscribers over the last decade or so.

So far, just 3.6 million households have signed up for HBO Max directly with AT&T's WarnerMedia. It added just 650,000 new retail subscribers in the third quarter. The appeal of subscribing directly to HBO Max doesn't seem to have taken a meaningful step up from HBO's previous direct-to-consumer offering, HBO Now. 

AT&T CEO John Stankey pointed to a lack of planned original releases for the HBO Max launch due to production shutdowns from COVID-19. It's an important number to keep an eye on in 2021 as productions ramp up and new originals hit the platform.

Two big barriers to improvement

It's been five months since AT&T launched HBO Max and it's still not available on Roku devices or Amazon's Fire TV. That appears to be a strong impediment to wider adoption, considering most people stream content on their TVs.

The early response from HBO subscribers won't sway Amazon or Roku to change their positions, either. As of the end of the second quarter, AT&T counted 5.9 million HBO subscribers ineligible for HBO Max. The vast vast majority of those subscribers likely pay through Amazon Prime Channels or Premium Subscriptions in The Roku Channel. That number fell by just 300,000 in the third quarter as consumers looked to gain access to HBO Max.

Until AT&T strikes a deal with Amazon and Roku, it's going to have trouble growing HBO Max activations. Considering the company is on track to spend $2 billion on the platform this year alone, it's having a big negative drag on its operating profits. AT&T reported HBO operating profits of just $60 million last quarter on $1.8 billion in revenue. That number's only going to get worse as content production ramps back up if AT&T can't strike a distribution deal with the tech companies.