October 16, 2018

Can AT&T Compete with Netflix?

AT&T’s WarnerMedia made headlines this past week by announcing plans to unveil a direct-to-consumer streaming service by the end of 2019. This subscription-based service will include high-profile content from HBO, such as Game of Thrones and Westworld, along with blockbuster movie titles from Warner Bros., such as Harry Potter and the Batman franchises.

Having content from HBO, Warner Bros., and Turner, in a unified service is a unique value proposition. But will it be enough to take on Netflix as the streaming wars escalate?

The answer is no, at least for the short term.

AT&T’s New Service Won’t Be The Company’s Exclusive Destination For Its Programming
WarnerMedia CEO John Stankey stated that “We are committed to launching a compelling and competitive product that will serve as a complement to our existing business…,” and that he is looking to expand reach at the cost of partially deferring licensing revenue.

The problem with this strategy is that, unlike Netflix, AT&T isn’t fully committing to making this new service the exclusive or even primary destination for all its content. Attempting to balance its existing relationships and preserve revenue streams with cable networks and other streaming services means not all key programming will be exclusive. While HBO’s OTT service, HBO Now, in theory, could be folded into the WarnerMedia service, it will remain as a stand-alone premium cable network.

HBO’s Dominance Of Premium Originals Is Over
John Stankey is counting on HBO, its premium brand, to anchor the new service. With HBO’s historical dominance at the Emmy Awards and track record of creating critically acclaimed original shows, it is easy to understand why. AT&T’s CEO Randall Stephenson even took a swipe at Netflix, stating that “if Netflix is the Walmart of direct-to-consumer streaming, AT&T-owned HBO is the Tiffany.”

Not so fast, John. While HBO has built a great reputation for premium original content, its reign of dominance is over. This year, Netflix received 112 Emmy nominations to HBO’s 108, breaking HBO’s 17-year streak of receiving more Emmy nominations than any other network, and won just as many as HBO (23). Moreover, Millennials are spending more of their TV time watching Netflix than other premium TV networks, hardly a good sign for HBO. A recent survey amongst this demo showed that 79% felt that Netflix had the best original shows and movies, while HBO came in at just 14%.

Curation Is Not Compelling
WarnerMedia is also touting that the value of having a single, unified service that curates the vast content libraries of its diverse networks. True, curation provides convenience and improves engagement, but by itself is insufficient to make a service a must-have subscription, especially when you can get that content through other services. As TDG has written about extensively, both HBO, Netflix, and others have demonstrated that high-quality, original content exclusive to a channel or service is the critical factor in attracting and retaining subscribers over the long run.

Price
While the price for this new service has yet to be announced, Mr. Stankey hinted that it will cost more than HBO Now, which runs $15 a month. This cost is relatively high given that Netflix and Hulu offer plans that start at just $7.99 a month. In addition, Disney’s DTC service, set to launch at the same time as WarnerMedia and at a rate less than Netflix, will provide consumers with a wide array of branded content and big-named franchises.

A cost north of $15 a month will also push this service  out of the range of most DTC services and into the skinny bundle realm (e.g., Philo at $16/month), making it more difficult to justify as a supplement to a pay-TV service, which is the role that most DTC services fulfill.

Conclusion
With AT&T’s acquisition of Time Warner, this ambitious, consolidated OTT offering is highly anticipated. However, it will require significant capital to get up and running, and as a legacy business with ties to traditional media, it is unlikely that it will be able to rival Netflix’s 130 million subscribers, at least in the foreseeable future. In the short term, WarnerMedia’s benchmark for success should be its ability to expand reach and drive more revenue from OTT subscriptions than current revenues from third-party licensing.

Brad Schlachter is a Senior Advisor for TDG and is a highly accomplished digital marketer and advisor for leading entertainment and technology focused organizations. Prior to TDG, Brad served as the marketing lead for Motor Trend OnDemand, the premier OTT destination for gearheads, and was the VP of marketing at Hallmark Labs for the launch of their family-friendly SVOD service. He currently lives in Los Angeles, CA.

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