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WarnerMedia's Math Problem: It Needs 8.4 Million More HBO Max Customers

Wonder Woman 1984
(Image credit: Warner Bros.)

Phone company AT&T is once again making impactful decisions in the video business, disrupting the century-old theatrical distribution model by chucking out exhibition windowing altogether for its 2021 Warner Bros. slate. 

Also read: Stankey: HBO Max Added 4 Million Customers Since Q3

Never mind all the contracts that have to be renegotiated. Just what are the economics involved with steering the entire film slate to the new HBO Max subscription service, day and date with exhibitor release?

Of course, it’s vastly complicated. But MoffettNathanson boils it down this way: AT&T’s WarnerMedia division could lose as much as $1.2 billion in global box office revenue next year because of its decision. Notably, it’s not charging HBO Max subscribers a premium to watch 17 films that ostensibly should be in their theatrical window.  

Also read: WarnerMedia Mulling CNN and TNT/TBS Streaming Brands Outside HBO Max (Report)

In order to make that $1.2 billion up, WarnerMedia will need to add 6.7 million HBO subscribers in 2021, each paying the full $14.99 a month. With WarnerMedia offering a 20% discount to subscribers who pre-pay for six months of service, the nut becomes 8.4 million subscribers factoring in the promotion.

Updated 12/8/2020: AT&T CEO John Stankey told investors Tuesday that the company added 4 million HBO Max subscribers since the end of the third quarter. Although, it's not clear as to how many of those customers merely upgraded from legacy HBO after WarnerMedia secured support for its new platform on the No. 2 device platform, Amazon Fire TV, in November. 

In discussing the new growth benchmarks needed to make WarnerMedia's day-and-date distribution strategy work, MoffettNathanson was undoubtedly discussing aggregate HBO customers, not just those converting from the legacy app. 

HBO finished with 38 million total U.S. subscribers at the end of Q3, with only around 8.6 million upgraded to HBO Max. Ostensibly, HBO Max stands at around 12.6 million U.S. users now. But it's unclear as to how many total U.S. HBO customers there currently are. 

Stankey said the addition of day-and-date theatrical content would enable HBO to get to 50 million domestic subscribers, a company goal that seems to match the high end of the MoffettNathanson benchmark.

"The fact that we can get more market momentum faster to get to our goal of having over 50 million customers on the HBO Max platform domestically is important," Stankey said. "And this is one of those arrows in the quiver for us to be able to do that."

Also readHBO Max Gets WarnerMedia’s Entire 2021 Film Slate Day and Date

Overall, the mathematics behind WarnerMedia’s forecasts are challenging. 

The entire Warner Bros. theatrical product segment brought in revenue of $6 billion. 

It’s difficult to say with precision how the studio’s theatrical revenue will be impacted once a starved theater system reopens after the pandemic, with customers having access to Warner films at home, through their $14.99-a-month smorgasbord. 

Meanwhile, it’s also hard to project what happens to substantial costs associated with being in the theatrical motion picture business. To release a movie in a theater anywhere, Warner still must pay so-called “prints and advertising” costs, which mainly involve promoting the movie so people know about. 

Some of that promotional costs now gets defrayed through the streaming service, but again, the forecasting models involve tricky calculations. 

It should be noted that WarnerMedia has staunch defenders of its aggressive pivot. 

LightShed Partners analyst Richard Greenfield, posting an "open letter" to filmmaker Christopher Nolan, a staunch defender of traditional windowing, wrote Tuesday morning, "Forget about where Netflix is today (~$17 billion of content spend annually), think about the fact that by 2026, they could be generating over $70 billion of revenue and spending upwards of $40 billion annually on content. The risk of not pivoting to streaming is that studios wedded to the sequential release model will no longer be able to compete for the best projects outside of the IP they own and control, not to mention losing out on the best industry talent."