Hollywood Cashes in as Mobile Providers Ante Up to Hook Customers With Free Programming

Season two will find Brown’s newly

Consumers who line up for the new iPhone this week will once again get seemingly irresistible offers from the big carriers. But this time around, telcos have something more to offer than just lucrative trade-in deals and deeply discounted iPads: “Game of Thrones,” “Stranger Things” and other hot TV shows, for free.

Both AT&T and T-Mobile are betting on the power of content to lure new subscribers to their services and keep iPhone upgraders from switching to the competition. T-Mobile announced an exclusive deal with Netflix earlier this month, and is offering free access to the video-streaming service to those who buy T-Mobile’s unlimited family plan.

“Free is our favorite price,” quipped T-Mobile chief operating officer Mike Sievert at last week’s Goldman Sachs Communacopia conference.

Christoph Hitz for Variety

AT&T countered the move days later, expanding its existing HBO promotion to a larger number of its wireless customers. “It really is a response to what consumers want,” said AT&T Entertainment Group senior VP Vince Torres, telling Variety that just offering wireless is not enough anymore. “They want the premium video content to go with it.”

In April, AT&T brought free HBO only to its higher-end, Unlimited Choice Plus plans. “The engagement has been strong,” Torres said. On Sept. 15, it began to offer free access to HBO’s streaming service to anyone with an Unlimited Choice plan — Plus or not — just in time for iPhone pre-orders. “The timing is good,” the exec admitted.

It’s easy to see what entertainment companies like HBO and Netflix get out of these partnerships. Details of neither deal are public, but T-Mobile is said to be paying Netflix a premium price for each subscriber, with just a small discount.

And Netflix doesn’t just get to count its cash — it also grows a key customer base. “The next 100 million subscribers are far more likely to be watching content on mobile than the first 100 million,” said Netflix content chief Ted Sarandos during a recent earnings call. Partnering with carriers can help Netflix gain access to those valuable mobile users.

HBO is set to similarly benefit from its relationship with AT&T — even more so when the merger between the telco and HBO corporate parent Time Warner goes through. AT&T’s HBO giveaway is part of  a multifaceted deal struck between the network and the carrier in August of last year, but AT&T is clearly looking to make use of its own assets to augment services with content as well.

Yet Verizon CEO Lowell McAdam threw some cold water on the burning need for content ownership, making clear last week that for all the anticipation on Wall Street that his company is going to acquire a content company the way rival AT&T did HBO, he doesn’t feel ownership is necessary for him to compete on this front of the wireless war.

“If we wanted to offer something like HBO, we can call [CBS CEO] Les [Moonves] and get Showtime in a commercial arrangement,” McAdam said in an appearance on CNBC. “I don’t need to own the content in order to prove that to customers.”

AT&T also extended a promotion for its DirecTV Now service to its Unlimited Choice tier earlier this summer, giving qualifying subscribers access to the live-TV streaming service for as little as $10 a month. Without that discount, DirecTV Now would cost at least $35.

Some have wondered how T-Mobile and AT&T can make the numbers work for these content giveaways. “It’s big and expensive and looks crazy at first,” Sievert admitted.

The answer is simple: It’s all about churn, the mortal enemy of the mobile business. Phone carriers nowadays pay more than $300 for every customer they acquire, be it through that free iPad that comes with your phone or that offer to pay your termination fee with another carrier. Then they aim to make their money back over time.

Customers who stay longer are a lot more profitable than those who jump to the competition at the next best chance — say, a new iPhone release. Adding Netflix or HBO to a subscription makes the jump that much harder, argued T-Mobile chief financial officer Braxton Carter at the Goldman Sachs conference. “It’s one more thing that you would have to change.”

In a recent note to investors, Barclays analyst Amir Rozwadowski offered a similar observation. “Churn reduction is likely to be the biggest potential opportunity” of bundling content with cell phone plans.

And AT&T CEO Randall Stephenson echoed the concern over subscriber loss. “If you drive churn down in the mobile environment, the benefit of that is dramatic,” he said at the Goldman Sachs event.

But do mobile networks have the bandwidth to handle all the binge-watching these deals are set to unleash?

“There is a limited amount of capacity on a network,” explained Kevin Fitchard, lead analyst for the wireless performance company OpenSignal. “If you add traffic, the typical consumer experience will degrade if you don’t also boost capacity. That said, operators do have room to grow.”

Over time, telcos could just use additional spectrum to enable further video streaming, Fitchard said.

And with that, they may also grow their content bundles. Verizon’s McAdam recently suggested he may opt to use Verizon’s Oath assets — which include video content acquired in its buy-up of Yahoo and AOL — for an answer to AT&T’s and T-Mobile’s initiatives. Sprint spent a reported $200 million earlier this year to buy a one-third stake in music-streaming service Tidal, and is offering its customers six months of the service free, with additional bundles in the pipeline.

AT&T’s Torres made it clear that his company, too, isn’t done with bundling video. “You can expect us to continue to look at additional content,” he said.

For Hollywood, that’s sweet music indeed. And it means it’s likely that the mobile video dollars will continue to roll.

Correction: 9/21: An earlier version of this story started that AT&T had introduced a $25 rebate for DirecTV Now for Unlimited Choice customers last week. The carrier actually began making that rebate available on June 1.