Ad-Based HBO Max ‘Pairs Well’ With AT&T’s ‘Prepaid Offers,’ Says CEO

The ad-supported version of HBO Max is on track for June launch, said AT&T CEO John Stankey on a Q1 call Thursday, but he again refrained from discussing how AT&T would price the service. AT&T closed Q1 with 44.2 million HBO and HBO Max subscribers in the U.S., compared with 33.1 million in the 2020 quarter, before HBO Max launched May 27. AT&T doesn't break out HBO Max subscriptions from those of the legacy HBO service.

“For market reasons,” AT&T hasn’t “entirely disclosed everything” about the ad-based VOD service, including pricing, said Stankey. It will do so “right before the launch so that we get the maximum benefit of coming into the market,” he said. There’s a “segment of the base” that’s more “price-sensitive,” especially when there are “multiple streaming services out there, and people are making decisions to reorder their investment in in-home entertainment,” he said, when asked to describe the AVOD service's addressable market, and why consumers who shun ad-free HBO Max would sign up.

Though commercial-free HBO Max, at $14.99 a month, is “a premium product and warrants what we charge in the market today,” the service doesn't fit everyone's wallets, conceded Stankey. “We believe that the AVOD product actually pairs well with some of our prepaid offers and how we might position it, because it tends to line up on a more price-sensitive socioeconomic dynamic.” As consumers make “portfolio decisions of multiple services in the household,” having the option “to be at a lower price point allows somebody to stick with the service,” he said. “We just think it’s a really smart place to be for that segment of the market.”

AT&T has been “really, really careful” about picking its “channel partners” for HBO Max, said Stankey. “The direct-to-consumer business should be a direct-to-consumer business. It should be a business where we have the opportunity to have a direct relationship with a customer, market and sell to them, and work with them in a way that we feel is appropriate.” AT&T unfairly was “criticized for taking a long time to get certain agreements worked out” with distribution partners, he said.

Stankey dismissed one analyst’s question seeking more color on HBO Max viewing hours and customer engagement. “We’re not going to give you any more guide publicly on hours of engagement” beyond what AT&T discussed at its March 12 investor day event, when it said HBO Max is “well up over two hours” a day of viewing per account, he said. “That’s a really good place to be,” and higher than “our engineered expectations when we launched the product,” he said.

HBO Max customer “behaviors” are not “dramatically different” than those of other subscription VOD services, said Stankey. “We clearly have a good reason for them to come in. We’re seeing in the customer data that many are opting to come in because of the theatrical-slate opportunity.”

WarnerMedia’s strategy of releasing the full 2021 Warner Pictures film slate to stream exclusively on HBO Max for a month at the same time it releases the titles theatrically worldwide (see 2012030053) is “playing out exactly as we kind of laid out for you,” said Stankey. “We’ve got more of the year to get through to see what that balance is between theatrical revenues versus SVOD. But when you look at the customer growth on SVOD, and you see some of the early data coming back on movies like Godzilla vs. Kong in theaters, I think you can all see that there’s probably a pretty compelling rising tide lifting all boats in this case. We feel it was the right call for the moment we were in with the pandemic.”

The same-day release of movies in theaters and on HBO Max "has been a success," said Chief Financial Officer Pascal Desroches."It has provided theaters with a steady flow of content in a pandemic-challenged environment, and it has also been a great catalyst for subscriber growth at HBO Max." Godzilla vs. Kong "had the largest domestic box office of any other movie in the last year, while also having the largest viewing audience of any other film or show on HBO Max since launch," he said.

AT&T had a wireless growth surprise in Q1, with 595,000 postpaid phone net adds and postpaid churn of 0.76%, better than analyst expectations. Its wireless adds were the best for a Q1 in more than a decade, said Stankey: “Our subscriber momentum is strong, and we're taking share.”

Stankey warned that supply chain issues could complicate AT&T's C-band deployments. Pressed on the C-band buildout, Stankey said there are unknowns, but the first markets will come online this year. AT&T was the No. 2 bidder in the record auction, behind Verizon (see 2102250046). The technology “is relatively new," he said. "Vendors have commitments. We're waiting on specific units. Global supply chains are stressed right now across the board.”

The supply chain issues have Stankey feeling "a little skittish," he admitted. "We're seeing dynamics that are occurring in the global supply chain where unexpected things are popping up." It's possible "we could see certain element shortages that start to crop up as everybody is racing to put stuff up on towers in May," he said. AT&T made $23 billion in payments for C-band spectrum in Q1, said CFO Desroches.

Q1 results for AT&T were better than expected, especially for wireless, New Street’s Jonathan Chaplin told investors. Management attributed the wireless improvement to “lower bad debt and lower acquisition costs (both industrywide themes),” he said. “We are surprised these were sufficient to offset retention efforts. Strong adds with better margins and a return to EBITDA growth this quarter certainly doesn’t support our dim view of their strategy in Wireless; however, it is early days.”

AT&T's results “provide more fodder for the bulls,” MoffettNathanson’s Craig Moffett told investors: “HBO Max is growing nicely, Mobility margins held up and Warner Media is poised for at least a cyclical recovery.” The analyst said he wants more focus, noting that wireless, HBO Max and broadband require big financial commitments: “Does AT&T have the resources to fight three wars?”