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HBO Max Is ‘The Key Aspect’ of AT&T’s Video Strategy, CFO Says

AT&T’s multibillion-dollar bet on HBO Max, set to debut next spring, will anchor the telco’s video-entertainment strategy in 2020 and beyond, according to chief financial officer John Stephens.

HBO Max is “the key aspect of the video strategy going forward,” said Stephens, speaking at the Wells Fargo TMT Summit in Las Vegas Tuesday.

“This is a value-creating opportunity,” Stephens said, citing AT&T’s projection that it can get 50 million U.S. customers for HBO Max in the next five years. “We’re going to be a company that has a very significant streaming opportunity.”

AT&T anticipates spending up to $2 billion on HBO Max in 2020 and investing $1 billion in each of the following two years, before the product achieves profitability in 2025. HBO Max is slated to debut in May 2020 in the U.S., priced at $14.99 per month — the same as the standalone HBO Now service, a bid to grow its subscriber base with an expanded bucket of content.

HBO Max will face a tough competitive field, and it will be priced above rivals like Netflix ($12.99 monthly for the standard plan) and Disney Plus ($6.99 monthly). But, Stephens said, “We feel really good about the quality of the product the team has put together.”

At some point, WarnerMedia will introduce an ad-supported version of HBO Max, Stephens said, as AT&T previously revealed.

By 2025, AT&T believes it can notch 75 million-90 million HBO Max subscribers, including 50 million in the U.S. Those figures include the existing HBO subscriber base, which WarnerMedia said stands at around 34 million in the U.S. in 2019.

HBO Max will be free for one year to HBO subscribers who have one of AT&T’s TV services, while other AT&T customers will get promotional discounts. The company also is in talks with pay-TV affiliates to offer HBO Max to current HBO users for no additional charge.

But as it invests in punching into the streaming wars, AT&T’s pay-TV business has been crumbling: During the third quarter of 2019, it dropped 1.36 million video subscribers including 1.16 million DirecTV and U-verse customers and 195,000 for over-the-top service AT&T TV Now.

The company expects lower customer-acquisition costs with AT&T TV, an internet-delivered pay-TV service it began rolling out this summer in select markets and will launch nationwide in 2020, Stephens said. “We’re shifting from rolling out trucks to install a satellite dish on the side of your house… to rolling a UPS truck for self-install” with AT&T TV, he said.

Stephens reiterated that AT&T expects Q3 of 2019 to be its peak quarter of video subscriber losses, as it focuses on profitable subscribers. AT&T has about 400,000 customers left on highly discounted video plans, he said.

On the 5G wireless side, AT&T anticipates having deployed a network serving 200 million people in the U.S. by mid-2020. Initial 5G applications will be business-to-business use cases and deployments in high-traffic areas, before expanding to applications like virtual reality and gaming, Stephens said. What’s different with 5G adoption is that the availability of 5G-enabled phones is trailing network build-outs, according to the exec: “Previously, [with 4G] the phones were out there before the network was ready,” he said.

In October, AT&T announced a three-year capital allocation plan aimed at alleviating concerns raised by activist investor Elliott Management, under which the company said it will continue to sell off parts of the business to pay off debt and would freeze M&A activity until 2022. Next year, AT&T said, it expects to sell $5 billion to $10 billion of non-strategic assets.

By the end of 2019, AT&T will have paid down $30 billion debt, representing about 35% of the value of the Time Warner acquisition, according to Stephens. Additional assets the company is looking to sell off include regional sports networks and additional cell towers, he said.

For Q3, the telco’s total revenue was $44.59 billion, down 2.5% year over year and below analyst consensus estimates of $45 billion, while net income dropped 18% to $3.95 billion. WarnerMedia revenue in the third quarter was $7.8 billion, down 4.4% on a tough comparison with Warner Bros.’s stronger theatrical slate in the year-earlier period.

To hit its profit-margin targets over the next few years, Stephens said AT&T is planning layoffs in 2020 to cut labor costs by 4%, representing about $1.5 billion.

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