The stakes are suddenly much higher for WarnerMedia and Roku in their months-long standoff over HBO Max.
The clock is ticking for both companies, which — 191 days after HBO Max’s debut — still don’t have a deal for Roku to distribute the HBO Max service on its platform.
WarnerMedia substantially upped the ante Thursday, announcing that Warner Bros.’ current 17-movie slate for 2021 will hit HBO Max day-and-date with theaters. That came after the media conglom already announced that Gal Gadot-starrer “Wonder Woman 1984” will hit HBO Max and theaters simultaneously on Dec. 25.
So will Roku customers get “Wonder Woman 1984” by Christmas Day — and does the coming pipeline of WB movies like “Matrix 4” and “Dune” add new pressure for the streaming platform to clinch a deal? It’s unclear.
The studio’s surprise windowing move is designed to ratchet up the allure of HBO Max and help WarnerMedia monetize its blockbuster titles through streaming, given the uncertainty that remains about how soon U.S. theaters might return to pre-COVID audience levels. But specifically, it’s a big card up WarnerMedia’s sleeve in the poker match with Roku to try to win a deal. Roku has 46 million users — a sizable black hole in HBO Max’s distribution matrix.
Sources confirm to Variety that WarnerMedia and Roku are in active talks. But both sides have signaled that they are unwilling to budge on their positions: Roku wants to keep HBO/HBO Max as a channel it can sell directly to its own customers, while WarnerMedia is insisting that HBO Max be available as a standalone app. The companies are also hashing out the terms for how they will divvy up ad inventory for the ad-subsidized version of HBO Max, which WarnerMedia plans to launch for a reduced price later in 2021.
Each company is playing a long game, but both have a lot to lose by not settling their differences as soon as possible. For Roku, the 2020 holiday-shopping season is already in full swing, and consumers are making buying decisions about connected-TV devices now — and the absence of HBO Max will hurt. WarnerMedia, meanwhile, needs to gain more new HBO Max customers to make the economics of its model work.
Now WarnerMedia is making HBO Max much more of a must-have service by shattering theatrical windows for Warner Bros. movies. That may have been the deciding factor for Amazon to agree to an HBO Max deal last month for Fire TV, with the tradeoff being that Amazon will no longer have the right to sell HBO through the Prime Video Channels.
But the question in the WarnerMedia-Roku situation still remains: Which side needs the other more?
This summer, asked about HBO Max, Roku CEO Anthony Wood told Variety that the company offers comparable deal terms to all content partners. He’s also touted Roku’s role in fueling Disney Plus’ rapid subscriber ramp. “Fair and reasonable content distribution deals are how we finance the low-cost easy-to-use Roku platform that consumers use to access these services on their TVs,” he said.
As for why Roku wants to retain the ability to sell HBO through the Roku Channel, Wood claimed the model results in higher content viewing among Roku customers than via separate apps, “which benefits us and our content partners economically.” Needless to say, WarnerMedia hasn’t found that a persuasive argument at this point.
WarnerMedia CEO Jason Kilar recently engaged in a bit of saber rattling, when he suggested that device makers without HBO Max will see their sales suffer. “As we head into the fourth quarter, when gift-giving happens, it becomes a more material situation for a seller of hardware” to have HBO Max, he told Bloomberg in August.
But by moving the Warner Bros. slate to day-and-date on HBO Max, WarnerMedia has put itself under significant new pressure to grow the HBO Max base.
The shift will result in $1.2 billion lost revenue annually for WarnerMedia, per an estimate by Craig Moffett, founding partner of analyst firm MoffettNathanson. because it’s killing off exclusive theatrical windows, while at the same time putting movies on HBO Max also will depress revenue from home-entertainment releases.
As a result, HBO Max’s annual average subscriber base would need to be 8.4 million higher than its current pace of additions for WarnerMedia to make itself whole, according to Moffett. “The market has shown a clear preference for go-big-or-go-home digital strategies,” he wrote in a research note Friday. “The most obvious takeaway from yesterday’s news is that AT&T is, come hell or high water, going to drive traffic to HBO Max.”
And Roku, boosted by the COVID pandemic, has seen significant momentum. The company will close out 2020 with an estimated 52 million user accounts — with have a footprint representing around 40% of all U.S. broadband households, according to Rosenblatt Securities.
HBO Max gained a little over 3.6 million retail subscriptions from its late-May launch through Sept. 30. All told, 28.7 million customers were eligible to get HBO Max at the end of Q3 — but HBO Max had only 8.6 million total “activated” subscribers, or about 30% of the total potential customers. The deal with Amazon will help raise that number but WarnerMedia still needs Roku to turn the corner on getting more subs into the HBO Max fold.
Roku is driving a harder bargain for HBO Max than Amazon because, unlike the tech giant, Roku is entirely dependent on revenue-sharing deals and advertising. Amazon is a gigantic company that has significantly more diversified business model than Roku, said Joe McCormack, telecom and media analyst at Third Bridge. “Data and customer relationship ownership are of course themes as well, where HBO Max hopes to become a platform that owns customer viewership data as well as the billing experience,” McCormack said.
Another factor influencing Roku’s willingness to be patient: Its customers have some workarounds for getting HBO programming on their devices. Roku customers with recent-model 4K devices can now use Apple AirPlay 2 to cast from the HBO Max app to their Roku players, or use screen-mirroring from a Windows or Android device to do the same thing. Also, they can access HBO content (but not the full HBO Max lineup, which is roughly twice as big) through the current HBO app on Roku, using their HBO Max credentials.
Roku’s standard deal terms for content partners is to take 20% of subscription fees and 30% of ad inventory (if applicable). That ad split had been a nonstarter for NBCUniversal’s Peacock, which furnishes a lighter ad load than most AVOD services; Roku and NBCU worked out a compromise in September.
WarnerMedia is similarly balking at signing away a swath of HBO Max ad inventory to Roku. If HBO Max, as execs have indicated, eventually incorporates live programming from CNN or Turner Sports, WarnerMedia “would not want to be taxed again by Roku,” said McCormack.
Roku wants to hold the line in not making concessions to WarnerMedia, because any deal the streaming platform provider cuts for HBO Max would establish a precedent for other distribution agreements. But the sheer tonnage of first-run movies coming to HBO Max — and how loudly Roku customers will demand access to them — will weigh into how urgently Roku determines it needs to get the service up and running.