AT&T (T -1.36%) reported its first-quarter results just a couple of days after Netflix (NFLX 2.86%) announced its first subscriber loss in over a decade. The quarterly report included details about HBO Max, one of Netflix's biggest rivals in the streaming industry. And while HBO Max is now part of Warner Bros. Discovery (WBD 0.87%), we got an early glimpse of its results, since the merger didn't close until the second quarter.
While everyone's focused on the headline number -- 3 million net subscriber additions -- diving into the details of HBO Max's results shows that its ad-supported tier is producing strong results for the company. Both Netflix and Walt Disney (DIS -0.15%) are planning ad-supported tiers for their global streaming services.
Digging into the numbers
During the first quarter, HBO Max added 3 million total subscribers to HBO, up about 4% from the end of 2021. Meanwhile, it saw its subscription revenue increase about 5%, leading to a slight increase in average revenue per user from $11.15 per domestic subscriber to $11.24.
Things get a little more interesting when looking at the content and other revenue line item, which includes advertising revenue. The $256 million the company generated was a 17% increase from the first quarter and a 115% increase from the first quarter last year (before it launched an ad-supported tier).
Importantly, the additional revenue, which was likely mostly generated from ad sales, led to total revenue growth of 16% year over year, while subscription revenue grew just 9% in the same period.
While the ad-supported tier has a lower subscription cost, it's clear the vast majority of HBO Max subscribers are still on the ad-free service. That said, the ad-supported tier appears to be providing much of the growth in both subscribers and revenue going forward. And it appeals equally to domestic and global subscribers. Retail HBO Max net additions were split nearly evenly between domestic and international.
Going forward, Warner Bros. Discovery investors should expect to see advertising revenue grow its contribution of total revenue for its direct-to-consumer business as a larger percentage of subscribers take the ad-supported tier (and it improves its ad sales capabilities).
What it means for Netflix and Disney
There were a lot of question marks about whether HBO Max would continue to show strong subscriber growth in 2022. Not only was it facing the same potential overhang of a pull-forward of subscribers from the service launch and the COVID-19 pandemic, but it was also losing its same-day film releases from Warner Bros. studios.
Likewise, Netflix, in particular, is facing a challenging environment as it appears to have reached a significant level of market saturation. It forecast a subscriber loss of 2 million for the second quarter, and it's just now getting to work on a couple of ways to reinvigorate revenue growth, including an ad-supported tier.
Disney+, while off to a spectacular start, hit a stumbling block in the fourth quarter last year, when it added just 2.1 million Disney+ subscribers. The result was extremely disappointing for investors, and it led Disney to look at the potential for an ad-supported tier as well. It will roll out an international version later this year, with a domestic ad-supported tier to follow in 2023. Disney, notably, already offers an ad-supported tier of Disney+ Hotstar.
If HBO Max's results are any indication, it's that some consumers are more than happy to sit through ads, even on premium content like HBO's. Netflix's content is most similar to HBO Max's -- a mix of high-end big-budget dramas or comedies with some content intended for a broader audience. That bodes well for the appeal of its ad-supported tier if and when it launches.
Another thing to note is that it seems as though most existing ad-free subscribers aren't switching to the ad-supported tier. HBO Max's average revenue per domestic subscriber has fallen just 4% over the past year, after introducing the ad-supported tier last June. So, while Netflix or Disney may expect some cannibalization from an ad-supported tier, it shouldn't have such a negative effect that it offsets the potential growth in the streaming services from offering it to consumers.