AT&T to Spend Upwards of $2 Billion on HBO Max in 2020

Todd Spangler

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AT&T is telling investors it has the intestinal fortitude to win in the streaming wars — even as its traditional TV business continues to crumble.

In guidance the telco provided Monday as part of its third-quarter earnings, AT&T said it will invest in the range of $1.5 billion-$2 billion in HBO Max next year. It will spend approximately $1 billion in both 2021 and 2022 before HBO Max is expected to become profitable in Year Four.

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“I would tell you we feel very comfortable at these investment levels that we can do something very significant in the market and drive some significant subscriber gains,” AT&T CEO and chairman Randall Stephenson said on the earnings call. “This is going to be a meaningful business to us over the next four or five years.”

Many key details and questions remain about HBO Max’s early 2020 debut. WarnerMedia plans to open the kimono Tuesday, Oct. 29, at a media event on Warner Bros.’ Burbank lot, where it will provide additional forecasts and info on pricing and availability for the streaming VOD service.

Stephenson tried to ratchet up expectations for HBO Max, promising that it will be unlike anything else out there. The company anticipates landing in the neighborhood of 50 million U.S. subs for HBO Max by 2025, he officially announced Monday. “This is not Netflix, this is not Disney… It’s going to have a very unique position in the marketplace,” he said.

HBO Max will become the main focus — the “workhorse,” Stephenson said, using one of his favorite analogies — for AT&T’s video business starting next year.

AT&T provided the HBO Max investment guidance as part of a three-year plan it announced making certain concessions to activist investor Elliott Management about running the business. That included a pledge to not engage in major M&A in the next three years, an aggressive road map to pay down debt, a potential sale of or partnership for DirecTV, and a commitment to split apart the CEO and chairman roles.

The arrival of HBO Max, as the hypothesized savior of its declining subscription TV business, can’t come soon enough for AT&T. The telco announced a total net loss of 1.36 million video subs for Q3, including a 1.16 million loss of DirecTV subscribers — about 5.4% of the satcaster’s customer base.

“We already knew that results in the Entertainment Group would be shockingly bad. But seeing them in print still makes one gasp,” MoffettNathanson analyst Craig Moffett wrote in an analysis of the earnings report.

The telco is trying to take cost out of the Entertainment Group business by standardizing its consumer videos offerings — eventually, all of AT&T’s over-the-top video and live TV services will based on HBO Max. Meanwhile, Stephenson boasted that DirecTV still throws off a lot of cash, around $4 billion a year, but that customer base is dwindling fast and it’s not clear that the company’s streaming products (AT&T TV, AT&T TV Now and next year HBO Max) will be picking up the slack. And he also said AT&T is considering potentially selling DirecTV or forming a partnership for the declining satellite business.

With the investment into HBO Max, the new subscription VOD initiative will in all likelihood be “costly” as well as dilutive to earnings, according to Moffett. And that comes as other parts of AT&T’s business are flagging: The consumer wireline unit continues to decline; commercial wireline is contracting; and the wireless division is seeing growth slowing. Next year “is likely to be worse for WarnerMedia as secular pressures mount and as spending on HBO Max kicks in,” the analyst wrote.

But industry trends have boxed AT&T into a strategy where it had no choice but to throw as much of its weight as possible behind HBO Max, given the hand it holds. And perhaps even that won’t be enough. Note that the $2 billion estimated investment in HBO Max compares with Netflix’s $15 billion in spending alone on content in 2019 on a gross-cash basis. For AT&T, HBO Max is just a portion of overall spending. In 2020, AT&T expects about $20 billion in gross capital investments.

Stephenson touted WarnerMedia’s decision to build HBO Max on the back of the strong HBO brand. That probably was its best option, instead of trying to build a new brand from scratch, and that “WarnerMedia” doesn’t really resonate for regular consumers. But that means it’s likely that HBO Max will need to priced north of $15 monthly (the price of HBO alone).

WarnerMedia is planning to give away HBO Max — initially, anyway — for free to AT&T customers who subscribe to HBO. Stephenson hinted that HBO Max will be pitched out on other AT&T-owned channels. The company has 170 million customer relationships across mobile, pay TV and broadband; that total is 370 million with digital properties like CNN.com and Otter Media, according to the CEO. “As we prepare to launch HBO Max, our direct-to-customer relationships are an asset that any streaming company would love to have,” he said. “I wouldn’t trade places with anyone.”

But if HBO Max will be free or discounted with other AT&T products, it raises the question of how much incremental revenue AT&T can really squeeze out of HBO Max and whether it will be able to make itself whole from the multibillion-dollar push.

Stephenson said he feels confident with the road map and the company’s financial models. “We’ll be investing to maximize the value of the service, which will drive growth and value to WarnerMedia and to AT&T as a whole,” Stephenson said. “We’ll make the significant investments required to win in the marketplace but we’ll also hit our numbers.”

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