Expense could slow achieving scale, increase churn

While the Walt Disney Co. basks in what appears to be the successful launch of Disney+ this week, Moody's is warning that AT&T's strategy to jump into the streaming market presents some problems.

In a report Thursday, Moody’s senior VP Neil Begley notes that at $14.99 a month, HBO Max will be the costliest of all the subscription video-on-demand services being launched to compete with Netflix.

“We believe this is an error in judgement,” Begley said. While AT&T has enough content to create a service that can compete with offerings from Netflix, Disney, Apple and Comcast, he noted that it won’t be as easy for consumers to compare the quality and volume of content HBO Max offers as it will be for them to compare price tags.

Related: AT&T Sets $14.99 Price Tag on HBO Max Streaming Service

“We think this misjudgment will undermine management’s stated goal of achieving scale,” Begley said.

The analyst said that AT&T management also appears to be concerned about cannibalization of existing HBO subscribers.

“We believe that is a mistake,” Begley said. "HBO Max will be a direct-to-consumer (DTC) platform. AT&T may get help from pay-TV distributors and other distributors, but we expect the revenue split on HBO Max will be less than that with pay-TV distributors. Therefore, we believe the company could charge less and still not lose profitability, even if HBO Max cannibalized HBO. It may even have produced more revenue with materially greater uptake.”

Begley notes that AT&T expects to have 50 million subscribers for both HBO Max and HBO in five years, only 16 million more than it has now.

“Quite underwhelming growth by comparison to peers, to say the least,” he said. In its first day, Disney got more than 10 million Disney+ signups.

“We believe the higher price will delay take up and result in greater churn,” Begley said. “We think scale is extremely important, because it lowers the cost per viewing hour, producing greater profitability and competitiveness when acquiring new content and gaining leverage and efficiency when it comes to owned production as well as licensed programming.”

Begley noted a few other concerns about how AT&T is introducing HBO Max.

He said that HBO Max will release its program on an episode-by-episode basis, rather than dropping an entire season at once as Netflix does. He said viewers prefer to binge watch and that while episodic release might be designed to keep subscribers loyal, it could backfire by prompting subscribers to churn in and out once full seasons are available.

Confusion around distribution of HBONow and HBOGo could be a short turn issue, as will the lack of pricing and other information about the ad-supported version of the AT&T streaming service.

“One might expect that this would have been decided prior to having a big coming out launch party, but we believe it will be sorted quickly,” Begley noted.

There is also uncertainty around international launch dates for the service.

“AT&T’s HBO Max analyst day was probably announced too early and the deadlines for establishing all the launch dates and pricing could not be met or moved. Overall, the most important features of the launch are present, but pricing, the all-important international launches and achieving scale may be problematic,” he said.