AT&T's (NYSE: T) WarnerMedia will launch its new streaming service later this year in an effort to take on Disney (NYSE: DIS), Netflix (NASDAQ: NFLX), and numerous other companies in the increasingly crowded market.
The media company won't pull any punches, either, throwing everything in one mega bundle: HBO, Cinemax, Warner Bros. movie output, Turner Networks programming, a back catalog of Warner television content like Friends and ER, and a slate of exclusive originals. Consumers will reportedly pay between $15 and $18 monthly for the service at launch, with a less expensive ad-supported version of the service to come later.
WarnerMedia CEO John Stankey says the goal is to reach at least 70 million subscribers (but didn't say how long it would take to hit that target). At its investor day, Disney laid out plans to reach 60 million to 90 million subscribers with Disney+ within five years, and Netflix already has 60 million U.S. subscribers and another 90 million internationally.
Here's how WarnerMedia plans to reach that subscriber scale.
Image source: HBO.
Starting with HBO
WarnerMedia won't be starting from scratch per se. It already has 8 million HBO Now subscribers (as of March). HBO Now currently costs $14.99 per month, so for just a few extra bucks those subscribers could get access to a much bigger library of content. WarnerMedia should see a high take rate among HBO Now subscribers.
HBO Now offers an excellent starting position for WarnerMedia to grow its service. That said, it's cannibalizing itself. It's offering additional value at below-market rates to those customers already paying $15 per month for its most premium content. The bundled package will have to appeal to a much broader audience than HBO Now subscribers in order for WarnerMedia to come out ahead.
That presents a major challenge for WarnerMedia. The HBO subscribers that want a big bundle are the 27 million that subscribe to the premium cable network through their pay-TV provider. Those subscribers are already paying WarnerMedia (and likely its parent company, AT&T) for a lot of other stuff, too. It's possible some will make the switch, but WarnerMedia doesn't want to shake things up with cable providers too much as it has other properties -- like the Turner Networks -- that rely on a good relationship.
HBO gives the company a head start in streaming, but the legacy distribution model also presents a major challenge.
Adding in bundling options
One solution Stankey and WarnerMedia propose is bundling WarnerMedia's streaming service with DIRECTV Now, AT&T's virtual pay-TV service. That would provide subscribers with some of the best of live television and a deep library of quality on-demand titles.
Considering all DIRECTV Now bundles already include HBO, it's tough to see AT&T and WarnerMedia charging a big premium for adding on the WarnerMedia streaming service content. Additionally, DIRECTV Now and WarnerMedia will compete with Hulu + Live TV, which bundles Hulu's on-demand service with its live TV service for $45 per month, less than DIRECTV Now's $50 per month.
Another bundling option is with AT&T's wireless service. AT&T has bundled all sorts of video products with its wireless service over the years. Last summer, the company introduced a couple of new unlimited wireless data plans, with the higher tier including a subscription service of the customer's choice. The best value of the group was HBO Now.
Bundling WarnerMedia's streaming service with AT&T's other services ought to draw in more subscribers, but the incremental revenue from those subscribers will be minimal, and marginal profits could take a hit or even go negative when you factor in the additional costs of content for the service.
What's the end goal?
AT&T and WarnerMedia might be able to grow the streaming service to around 70 million subscribers through upselling existing HBO customers and bundling the service with other products, but is it worth it if there's not much profit?
If WarnerMedia reaches its 70 million subscriber goal, it would consider letting other streaming services "latch on," CNBC reports. In other words, it wants to become a content aggregator, not unlike parent-owned AT&T U-Verse or DIRECTV.
Becoming an aggregator would make WarnerMedia's service harder to cancel while providing it a lot of useful data on its subscribers' viewing and spending habits. But not only would WarnerMedia come up against several well-established competitors in the space by the time it reaches 70 million subscribers, it could also face resistance from the most popular streaming services.
Netflix has notably resisted including itself in aggregation services. Disney's Hulu has resisted as well, and it's likely Disney+ and the bundling options that come with it will only reinforce that stance. User data is extremely valuable to those services, as it can inform pricing and content decisions. And those with scale aren't going to sacrifice that data for a few potential incremental subscribers.
Growing WarnerMedia's streaming service to reach a significant scale might be the easy part. Finding a way to make it profitable, even at scale, is the bigger challenge.
10 stocks we like better than AT&T
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and AT&T wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of March 1, 2019
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.