The march to the launch of HBO Max in May is driving changes across WarnerMedia.
John Stankey, AT&T chief operating officer and WarnerMedia chairman, told investors on Wednesday that cable powerhouses TNT and TBS will lean into more unscripted programming as WarnerMedia steers its investment in high-end scripted programming to the nascent subscription streaming platform.
Stankey described the balancing act within WarnerMedia to keep TNT and TBS healthy as a linear offerings carried by MVPDs and the need to spend big bucks on original content for HBO Max. TNT, TBS and CNN drive the bulk of profitability among WarnerMedia’s ad-supported channel group.
WarnerMedia’s “pivot” for the linear cable offerings and Max amounts to “an important dance and choreography that we have to do to get that right,” Stankey said. He said that viewers would “probably see a little more unscripted content” on TNT and TBS that will “supplant hours that might have been more general entertainment content that will show up on HBO Max going forward.” TNT and TBS will put renewed emphasis on sports and other shows that drive urgency to view live, or what he described as sparking “water cooler” conversation the next day.
WarnerMedia is in active discussions with traditional and digital MVPDs about distribution pacts for HBO Max, which the company sees as a big carrot for cable operators to help market broadband service. “We’re making progress and we expect to have deals ready for the launch,” he said.
The ramp up of HBO Max cost WarnerMedia $1.2 billion in foregone revenue and $500 million in lost earnings before interest, taxes, depreciation and amortization. Without the HBO Max investment, revenue for the last quarter of 2019 would have been up 10% and EBITDA would have spiked 11%. Warner Bros. likely would have realized a big payday from an outside streaming service had it auctioned off “The Big Bang Theory” rights to the highest bidder last fall, but HBO Max stepped up with a commitment valued at around $600 million to keep the show in the family.
“We see this as an investment that makes HBO Max even stronger and will pay off in the long run,” said AT&T chief financial officer John Stephens.
Stankey sought to assure investors that the short-term hit is worth it for the long-term value of building HBO Max as an in-house SVOD platform amid the seismic shifts under way in the pay TV marketplace — which AT&T knows all too well given the hemorrhaging of subscribers at DirecTV and its offshoots over the past few years.
HBO Max will be an important hedge for WarnerMedia and Warner Bros. in particular, Stankey said. If the marketplace for content licensing among rival media giants tightens up, HBO Max’s subscription business model still gives WarnerMedia an outlet to monetize the rerun rights to its movies and TV shows.
“We’ll have a place to market through [third-party] distributors in the traditional fashion or direct-to-consumer constructs where we have a direct relationship with the consumer,” Stankey said.
Stankey reinforced AT&T’s plan to market HBO Max as a broad-based served that aims to have “something for everyone in the family,” he said. The company’s goal is to deliver “the highest quality premium SVOD in the market” that will deliver “a higher percentage of culturally relevant offerings that competing products.”
AT&T is banking on the expansion of advanced 5G cellular service this year to drive many smartphone users into AT&T’s 5,500 retail stores for device upgrades by the end of the year. AT&T hopes that this wave of upgrades — after three years of sluggish turnover for new phones — will create good conditions to drive subscribers to HBO Max by upselling consumers to high-end wireless and data plans that will be bundled with a free HBO Max subscription.
“At a time when people are coming to our stores to upgrade, it’s a natural opportunity to further the distribution of HBO Max,” he said.
AT&T brass ran down the company’s achievements in 2019 as investors digested the bad news of AT&T subscriber losses for the fourth quarter and the expected dent that the HBO Max launch put in WarnerMedia earnings. HBO Max is “right on track” to launch in May, although AT&T has yet to specify the date.
AT&T chairman-CEO Randall Stephenson pointed to the company’s success in chopping down $30 billion of the $170 billion-plus in debt that was racked up by the acquisition of DirecTV in 2015 and Time Warner in 2018. Last year, AT&T sold off some $18 billion worth of assets to generate cash to help pay down debt and bring the company’s leverage ratio down to the 2.5 times earnings level.
Assets sales last year generated “more than double” the cash that AT&T had expected to drum up in 2019, Stephens said. This year, AT&T expects asset sales to deliver another $5 billion to $10 billion in cash for debt reduction. The company is planning to spend $20 billion in capital investments across AT&T, and that number does not include content costs for HBO Max.
Stankey reiterated AT&T’s previous guidance that WarnerMedia spending on HBO Max this year would be in the $1.5 billion to $2 billion range. The hope is that having HBO Max as a sweetener helps make AT&T’s wireless and data plans “stickier” with consumers. A 1% decline in annual wireless customer churn is worth about $100 million to AT&T, Stankey said.
(Pictured: John Stankey)