WarnerMedia: The Enemy of My Enemy Is My Friend
A New Era of Media
Formed in 1990 from the titanic merger of Time Inc. and Warner Communications, WarnerMedia is a leading global media and entertainment conglomerate in film, television, and publishing. Sub-divided into three primary divisions, the company operates leading news & sports channels including CNN and Bleacher Report, premium Direct-to-Consumer (D2C) entertainment networks like HBO and Cinemax, and “Big Five” entertainment production and distribution giant Warner Bros. Entertainment.
The most fascinating prospect for WarnerMedia’s continued expansion is now its Home Entertainment brand’s prize asset: HBO. Founded in 1972, HBO is the oldest pay television service in the U.S. and a leading premium network, with 34 million domestic subscribers. Available through Over-the-Top (OTT) consumer services and its proprietary HBO Now streaming service, which boasts eight million subscribers, HBO enjoys a reputation for quality programming, represented by its persistent success at the Emmys since the 1980s. HBO also proved capable of spawning major cultural events, including The Sopranos, with 302 award nominations and 118 wins, and most recently Game of Thrones, whose viewership skyrocketed from 2.2 million for its pilot to 13.6 million by the finale’s airing.
What Is HBO Max, And Why Is It Unique?
AT&T’s purchase of Time Warner in 2018 for $109 billion was the first major vertical takeover by a telecommunications giant. In 2019, Disney closed its acquisition of 20th Century Fox, reducing the number of film majors to just five as it prepared to enter the streaming business. The unique climate of the media space has created both unique opportunities and new obstacles. The affordability and convenience of OTT platforms has accelerated cord-cutting, as pay-TV penetration is down from 77 per cent in 2016 to 67 per cent in 2019. Meanwhile, Netflix usage has surpassed cable and satellite usage (67 per cent) for the first time. While the streaming market may not be a zero-sum game, the sheer size and experience of competitors highlights the challenge AT&T’s management faces in launching their own OTT platform. Facing rivals that are either well capitalized (Apple has $205.9 billion of cash in hand), incumbent market leaders (Netflix possesses 158 million subscribers), or dominant media giants (Disney assets have contributed over 36 per cent of 2019 North American box office sales), AT&T and WarnerMedia will need to carefully maneuver through the market to distinguish their offering.
In response to the forthcoming “streaming wars,” AT&T and WarnerMedia have announced their own offering: HBO Max, debuting in May of 2020. AT&T has grand plans for the streaming service, intended to become the company’s single OTT consumer platform. By 2025, the company intends to gather 75 to 90 million HBO Max subscribers internationally, including 50 million in the U.S. This represents a 47-per-cent uptick on the current 34 million domestic subscribers HBO currently counts among its user base. As media rivals crowd the arena with streaming offerings of their own, the consumer will find themselves in an environment similar to the one streaming initially disrupted—cable TV. Potential subscribers will shop streaming services with the intention of picking one or two that offer the best bang for their buck.
At launch, HBO Max will have 10,000 hours of content, including sitcom hits Friends and The Big Bang Theory, as well as premium content from HBO and Cinemax. HBO Max will also include new original series and films, recently signing a $250 million exclusivity deal with the director of the most recent Star Wars film, J.J. Abrams. Above all else, HBO Max should be able to differentiate itself through its flagship business and rich content library.
Future planned additions include an ad-supported version launching in 2021, with the eventual launch of live sports and news programming as well. In year one, 31 original series will be aired, with 50 new releases in 2021. To achieve these targets, AT&T intends to launch HBO Max in Latin America. There, consumers have a choice of free streaming from existing mobile and pay TV operators, local offerings such as Claro Video, and the usual North American competition. Furthermore, internet speeds in Latin America are only barely sufficient for streaming, meaning that a large portion of the market is simply inaccessible to streaming companies until infrastructure improves. This contributes to the low penetration of streaming in Latin America: although Latin America has a population of over 600 million, Netflix, the largest paid streaming service, captured a mere 20 million subscribers in the geography. HBO Now’s current count is only a fraction of that.
A Differentiating Partnership
Given the fall of pay-TV platforms, HBO Max’s success is extremely important. WarnerMedia and AT&T should seek to capitalize on HBO’s premium brand image, rather than attempt to match Netflix through sheer volume of content—an unsustainable strategy which Netflix has so far upheld through junk bond raises. The most natural partner for such a strategy may come from an industry once thought to be most victimized by the streaming market’s success: movie theatre chains.
AT&T and WarnerMedia should enter into an agreement with Cinemark Holdings, Inc. to license and distribute the launch of major shows in both North American and Latin American multiplexes. Under this agreement, pilot episodes and season premieres of all new major HBO and HBO Max originals would be released on Cinemark screens for a 72-hour period. Showings would be available to the general public at $6.99 per showing and to HBO Max subscribers at $3.99 per showing. These prices would be adjusted to match the ticket prices of the Latin American market.
With Disney, the leading incumbent, charging movie theatres as high as 65 per cent of revenues, HBO could afford to net a significantly smaller fee given the significant promotional and marketing benefits it will bring for HBO Max as a result. Consequently, HBO should charge 35 per cent of screening revenues and aim to launch major releases at times when there are no major releases from other Big Five studios. HBO will not be reliant on the box office as the primary source of revenue for their content and can therefore charge lower licensing fees. This will ultimately result in lower, more affordable ticket prices for end consumers.
The partnership is strategically significant for HBO as it provides a major differentiator, uniting the cinema and home viewing experiences. Prior partnerships, such as IMAX screening Marvel’s superhero series “Inhumans” and Cineplex screening the Game of Thrones Season Finale , indicate that there is value in providing a cinematic viewing experience for TV content. The advantageous timing, with oncoming launches of Game of Thrones spinoff House of the Dragon, Westworld Season 3, and His Dark Materials Season 2, provides a wealth of popular, cinematic television events to drive interest. Further, the additional revenue generated from these licensing fees can be used to drive further reinvestment and improve offerings through continued budget expansion for successful series. These showings provide a unique benefit to consumers who have stopped visiting theatres due to the growing availability of streaming alternatives and increasingly unaffordable movie tickets. HBO has an extensive content library boasting numerous awards, a factor that competitors will find difficult to replicate and movie theatres will look to leverage. This would not only increase the adoption rate of HBO Max within the North American market, but also lay the foundation for entry in Latin America.
A distinguishing feature of Cinemark is its considerable market share in Latin America (with a 30 per cent market share in Brazil). The partnership would enable HBO Max to capture significant consumer interest as AT&T prepares to fully launch the service in 2021. Though Latin America is a large and growing economy, streaming has not taken off like it has in North America or Europe, with less than 4.5 per cent of the population subscribing to a paid Subscription Video on Demand service like Netflix. In fact, Brazil was the biggest illegal downloader of Game of Thrones Season Seven episodes, showcasing the potential existing demand for HBO’s quality content in the region. With improving internet speeds, superior OTT platforms can reach an increasingly large Latin American audience. HBO’s partnership with Cinemark would develop an awareness of its flagship shows before the rollout of HBO Max in the region. In this sense, HBO will be able to cultivate its brand image and enter the Latin America market as a leading and differentiated service.
Cinemark’s Side of the Equation
The HBO partnership will be beneficial to Cinemark as well, especially in comparison to blockbuster films. Traditionally, content is held ransom by distributors and producers, with consequently high licensing fees reducing movie theatres’ profits. Film distributors wield a disproportionate amount of power, especially in the case of must-see blockbusters like Star Wars. Alongside huge 65-per-cent revenue shares, Disney is known to impose strict marketing rules and a minimum screening duration of four weeks on theatres; for Star Wars, any violation of the contract would result in the revenue share being upped to 70 per cent. As a result, most theatres view the movie itself as a loss-leader—the costs of showing a two-hour long movie usually outweigh the theatre’s share of box office revenues, which is made up by concessions and other add-ons.
In contrast, a partnership with HBO is a far lower commitment. Cinemark will find HBO’s ask of 35 per cent of revenues to be reasonable compared to the minimum of 50 per cent other film producers charge. Big budget movies also typically run for over two hours, as compared to about an hour for a typical HBO episode. This is easier to slot into Cinemark’s screening schedules and is unlikely to hurt concession revenue—patrons are likely to buy their choice of snacks and drinks regardless of the length of the movie or show they are seeing. The partnership gives Cinemark a low-risk platform to increase concession revenue while adding a compelling and high-quality content brand to its portfolio.
Quantifying the Launch
HBO will gain direct revenues from the Cinemark partnership, as well as additional marketing benefits that will reinforce the company’s differentiating factor as a service providing cinematic features. Assuming the average user uses the offering only once in a given year, HBO can expect to earn an additional $119 million in direct profits. Cinemark, meanwhile, can achieve an additional $519 million in revenues from its portion of the proceeds and concession sales, resulting in a 16-per-cent gain to Cinemark’s total revenue over the last twelve months.
A Transformed Model
While WarnerMedia is indeed a collection of valuable entertainment assets, AT&T’s late release of streaming platform HBO Max into an already-saturated market threatens the viability of the nascent service. In Cinemark, HBO would find a partner to reinforce the central brand image of the HBO name, building a unique, profitable, and self-sustaining marketing model. Collectively, these two industry giants have an opportunity to pair premium content and a legacy of entertainment excellence with a vast network of theatres both domestically and in the rapidly-growing Latin American market. In the cutthroat streaming wars, strategic alliances will be necessary, and an AT&T-Cinemark partnership is a stellar opening salvo.