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AT&T's New Financial Focus for HBO Max

By Adam Levy - Apr 27, 2021 at 12:00PM

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Management doesn't want to talk about one important metric anymore.

For investors who have followed AT&T's (T 1.67%) quarterly updates since the launch of HBO Max last summer, there was a noticeable missing metric in its first-quarter report. The company didn't provide a number for new HBO Max activations. In its place, investors received information about domestic average revenue per user and total international subscribers.

Here's why AT&T is changing the focus.

The HBO Max homescreen.

Image source: WarnerMedia.

From what's not working to what is working

Simply put, sharing HBO Max activation numbers merely highlighted a point of failure for AT&T. As of the end of 2020, just one-third of customers paying for HBO through their cable bundle had activated their HBO Max subscriptions. While that number was improving as the company added high-profile content to HBO Max such as its WarnerMedia film slate, it was still a big disappointment for many investors.

So the company is now refocusing on total customer relationships. As CEO John Stankey mentioned on the first-quarter earnings call, "We're encouraged by our momentum and how our management team is executing against our singular priority to grow customer relationships in our market focus areas."

Total HBO subscribers grew by 2.7 million, led by new HBO Max signups. Retail subscribers -- those who pay for HBO Max as a standalone service -- more than offset a small decline among customers paying for HBO through their cable provider. Management was also keen to highlight its average revenue per user, which should move higher as a greater percentage of subscribers pay directly for HBO Max.

HBO Max will launch in 60 international markets in the second half of 2021. The company's building on a base of nearly 20 million subscribers in markets outside the United States, but that number's down about 1 million since the first quarter of 2020. Disclosing international subscribers now is an indication that AT&T's confident it can produce consistent subscriber growth from here.

At its investor day last month, AT&T said it expects to end 2021 with between 67 million and 70 million global HBO subscribers. It had almost 64 million as of the end of March. Considering there were only three more weeks of data in the quarterly update from when AT&T provided that guidance, that seems extremely conservative. Management said it has no plans to update its guidance at this time during the earnings call.

Why HBO Max activations are still important

While AT&T is growing total subscribers and it looks poised to exceed its 2021 guidance, the company's activation rate was an important metric to follow. 

For one, it gave investors an idea about how much appeal streaming service's additional (non-HBO) content had for viewers. The only hurdle between current HBO subscribers and those expanded options is the meager effort of downloading a new app on their phone or connected TV platform and logging in. Because of that, those activations can offer provide some insight into how its additional content investments are working out.

Furthermore, one of the big reasons AT&T fought hard to get full control over its HBO Max subscribers was to control all of its users' data. Legacy HBO subscribers who don't activate HBO Max may not provide as much value for AT&T without the robust viewing data from the streaming service.

Another reason activations are a useful metric is because consumers subscribing to HBO through pay-TV that activate HBO Max are probably less likely to churn. That was one of the main reasons behind the HBO Max launch in the first place.

A legacy HBO subscriber who activates HBO Max may be one of the least likely customers to drop the service. Those subscribing directly -- retail subscribers, as AT&T calls them -- can cancel any month. Nearly 80% of domestic HBO subscribers do not subscribe directly to HBO Max.

Management remains confident in its low churn expectations. Stankey said churn is consistent with management's expectations heading into the year.

But it remains to be seen how many subscribers will stick around when Warner Brothers films no longer premiere on HBO Max. There's no doubt that its tentpole releases have been a strong driver for retail subscribers, but without a new release every month to keep them interested, it might not be as easy to keep them paying $14.99 per month.

There are still a lot of question marks around AT&T's ability to grow HBO Max subscribers to the 120 million to 150 million range by 2025 -- its expressed target. Removing HBO Max activations from its reports won't do anything to help increase investors' confidence.

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