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AT&T Targets Digital Subscription Service to Help Defray Merger Costs

Leaders of AT&T have a daunting year ahead.

The company aims to reinvent the future economic foundation of the businesses it acquired from Time Warner — HBO, Turner and Warner Bros. — at the same time top brass is still getting its arms around how to operate those marquee properties. AT&T has also promised Wall Street that by this time next year, it will shave $20 billion from its $170 billion debt load and realize $700 million in post-merger synergy savings. What’s more, AT&T’s ambitious plans to capitalize on its $85.4 billion acquisition come as the competitive environment in TV, streaming, advertising sales, data mining and content production grows fiercer by
the day.

For one, Disney has equally ambitious plans to launch its Disney Plus subscription streaming venture by the end of next year. That’s the same time frame AT&T has earmarked for the debut (at least in beta form) of its still-unnamed SVOD platform fueled by WarnerMedia content assets.

“What you’re seeing are some significant business-model shifts as well,” Randall Stephenson, AT&T chairman-CEO, told Wall Street analysts Nov. 29. “These shifts are happening faster than we’ve [ever] seen them, particularly on the media side.” He added that media companies are “scrambling” and “working hard to figure out how to deliver their content directly to their audience, and how to have a relationship with their audience.”

AT&T closed its merger with Time Warner in June, after prevailing in a hard-fought antitrust trial against the Justice Department, which has appealed the ruling. HBO, Turner and Warner Bros. comprise AT&T’s second-biggest business unit, accounting for 16% of revenue and 17% of earnings in AT&T’s third quarter. AT&T Mobility, the core wireless telco and data services wing, still delivers nearly half of the company’s earnings (48%) and revenue (39%).

During the presentation to analysts, WarnerMedia CEO John Stankey offered a few details about AT&T’s own scramble to assemble a Netflix-esque streaming platform. He acknowledged that the swings in the business landscape would drive quite a transition in the next few years for WarnerMedia operations. At the outset, WarnerMedia’s streaming service will be available only in the U.S., but the long-term goal is to achieve a global platform à la Netflix and Amazon. To compare, Disney is also looking at a domestic-focused start for Disney Plus.

“This move into a compelling bundle of content at great value will help us take that first step into this journey,” Stankey said. The service needs to be a resource “that helps the customer navigate and find the right curated content.” Stankey noted that the WarnerMedia streaming service would offer library content initially, with third-party partnerships eventually augmenting the bundle.

The WarnerMedia service will have three tiers of subscription options for consumers at the outset. That’s a nod to the price sensitivity that has emerged in the pay-TV universe since Netflix barreled in with its cornucopia of content offered for $8-$10 a month, a far cry from the $100-plus cost of a typical traditional MVPD package just a few years ago.

WarnerMedia is clearly banking on its voluminous movie library to be a differentiator for its service. Thanks to wheeling and dealing in the 1980s and ’90s, the Warner Bros. vault now houses nearly 100 years’ worth of movies made under the Warner Bros. shield and associated labels ranging from Vitaphone to New Line Cinema, as well as the classic RKO Pictures trove (think “Citizen Kane” and “King Kong”) and the MGM library from that storied studio’s inception through 1948.

WarnerMedia has yet to divulge pricing specifics and a detailed programming slate for its three levels of service. The “entry level” and least expensive option will be movie-focused, undoubtedly culled from older titles. The second tier will feature what AT&T billed as “premium and popular original programming” and “blockbuster movies,” which probably translates to more recent movies. The third and priciest tier incorporates the first two services plus additional material organized around themes such as comedy, kids and family, classics and other niches. The level of wholly original programming that WarnerMedia will produce for the streaming service remains unclear.

The streaming service figures to be presented almost entirely in an on-demand format, allowing users to surf through a menu of options filtered by genres and themes. The only existing WarnerMedia channel that will be incorporated into the service as a live-streaming offering will be HBO, as part of the second and third tiers.

“Significant business-model shifts are happening faster than we’ve ever seen them, particularly on the media side.”
AT&T chairman-CEO Randall Stephenson

AT&T has said it expects HBO to be the initial draw, and that consumers will be further encouraged to subscribe by the wealth of additional content offered in the higher tiers. The service may feature some content tied to Turner cablers such as TNT and TBS, but those channels will not be made available in their entirety on the platform. Doing so would be a red flag for traditional MVPDs that pay WarnerMedia hundreds of millions of dollars each year to carry Turner’s advertising-supported channels. HBO, on the other hand, has always been an extra-cost offering that’s already available as a stand-alone streaming option dubbed HBO Now.

Stankey indicated that WarnerMedia would likely seek to license content from outside companies to ensure that its streaming platform is well stocked with programming. That could mean licensing a package of movies or TV series from a rival studio that complement the programming genres featured in the second and third tiers. Stankey emphasized the importance of using brands and smart curation to help consumers more easily navigate the ever-expanding number of entertainment options. “This is not a warehouse strategy,” he said, in what was likely a reference to Netflix.

In launching the platform, WarnerMedia will face the same dilemma as Disney in balancing the need to funnel high-end programming to its in-house service with the demands for turning a profit on its film and TV productions. Traditionally, studios like Warner Bros. made money by selling their content to buyers around the world, while programmers like Turner set carriage deals with cable operators and sold advertising.

Stankey made it clear to the Wall Streeters in the room that WarnerMedia has no intention of curtailing all of its licensing activity at once — not even in the U.S. As a public company, that’s simply not an option for either AT&T or Disney.

“We’re not going to take all of our content and hold it for ourselves,” Stankey assured.

Stankey sketched out a vision of WarnerMedia serving as a “flywheel” for creative content, technological capability and distribution muscle that will power the company and have benefits for the larger AT&T ecosystem. Using viewer data mined from WarnerMedia content and DirecTV to boost advertising rates through the company’s enhanced ability to offer digital-style targeted advertising buys is a big part of AT&T’s growth plan.

That vision makes sense on paper. It was mostly well received by investors, who nudged AT&T shares up about 2% on the day after the presentation, which was welcome movement for a stock that’s down about 20% for the year to date.

But plans are only as good as the execution, as AT&T discovered last month when Turner’s Bleacher Report unit had a technical streaming snafu that hurt the profitability of its Nov. 26 Tiger Woods-Phil Mickelson pay-per-view golf match. With so much at stake and so many moving parts at AT&T in 2019, the company will need to stay extra vigilant to make sure no bugs get into that flywheel.

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