May 27, 2021

HBO Max with Ads – Success or Strategic Blunder?

During its virtual upfront meeting last week, WarnerMedia CEO Jason Kilar announced the much-anticipated launch of “HBO Max with Ads”, a lower-priced, slimmed-down, ad-supported version of the HBO Max Streaming Service. The service will be priced at $9.99 per month and is touted as the most “brand-safe, elegant experience for advertisers.”

At a price point 33% lower than HBO Max, will this ad-supported tier convince more price-sensitive consumers to subscribe to the HBO Max Service? Or will it just cannibalize higher-priced HBO Max subscriptions?

The Cost of Saving $5.00

Cost to Consumers
Besides the addition of advertising, the HBO Max with Ads tier will not debut Warner Bros. films on the same day they are released theatrically. This day-and-date premiere concept is one of the key differentiators that HBO Max highlights as justification for the premium price of the service.

Cost to HBO
Launched in 1972, HBO is the longest continuously operating subscription television service and is the first to be distributed as a pay television service sold to subscribers for an extra monthly fee. HBO NEVER accepted traditional advertising. While WarnerMedia has clearly stated that ads will not be shown during HBO original programs, the mere idea of putting the word “ad” next to the HBO name is negligent.

Another cost to WarnerMedia is the very real possibility that many HBO Max subscribers will switch to HBO Max with Ads. If an HBO Max subscriber cares little about the same-day movie premieres and subscribes primarily for the HBO content, there will be no downside for them since WarnerMedia has promised not to interrupt HBO programming with ads. According to Kilar, however, WarnerMedia makes the same margin, regardless of the tier to which someone subscribes.

Advertising Innovation & Strategy
HBO Max also claims that they will have the lightest ad load in streaming, averaging just under four minutes of ads per hour, and will limit consumers seeing the same few ads too often. HBO Max with Ads will also feature newer ad formats, including an ad unit that will enable advertisers to sponsor a program with limited commercials, insert “pause ads,” (i.e., ads that appear when a viewer pauses the content), and post “branded discovery ads “ which allow advertisers to buy ad space that viewers will see when searching for a show to watch.

How HBO Max with Ads Stands up to its Competitors
At $9.99 per month, HBO Max with Ads is still the most expensive AVOD Service. Its competitors, Hulu, Peacock, and Paramount+ are all priced between $5.00 and $6.00. Furthermore, at $10.00 per month, a consumer can purchase any of these competing services, as well as Basic Netflix, without ads for less. This does not appear very competitive.

A Bullish Sign for HBO Max with Ads
According to published reports, HBO Max with Ads already has $80 million in Upfront ad commitments for its ad-supported tier, making it the top overall AVOD service in terms of revenue. WarnerMedia also expects that combined subscription and ad revenues will climb to $15 billion by 2025.

Merger with Discovery
It cannot be overlooked that the WarnerMedia-Discovery merger will make the combined company an even bigger player in the streaming field. It is not yet understood what the new entity will look like in terms of streaming services, but what we do know is that the merger marries a leading scripted content company with a leading unscripted media juggernaut. The global potential of the organization immediately makes it a force to be reckoned with. We can assume that the Discovery Team had some insight into the HBO Max with Ads announcement; but, then again, HBO Max with Ads may be completely restructured in a short amount of time.

Conclusion
HBO Max with Ads is a much-needed tier to lure price-sensitive subscribers to the high-priced HBO Max Service. The $80 million in Upfront commitments plus the lower ad loads, and the promise of no ads on original HBO programming is smart.

There are, however, already a few missteps. First, the timing of the announcement was strange considering the pending merger with Discovery. This could be confusing for consumers. The name HBO Max with Ads is horrible at best, and the price point of $10 per month, while better than the $15 per month ad-free service, is still too high relative to the competition.

Finally, and most importantly, HBO Max, like all streaming services, will be judged by its quality of content and user experience. The current library of content this service supports is world-class, but there has not been a Max Original release that has made an impact.

Once the merger with Discovery is complete and the combined unit is named, I believe that the newly merged entity will be one of the leaders in both SVOD and AVOD services. Further, I believe the new management will properly address the branding and pricing issues and clearly articulate the value of its content. While Disney and Netflix have stubbornly stuck to their guns in terms of rejecting ad-support, this newly combined AVOD service will have a clear path to revenue success.

Stick with TDG to Stay in front of the Curve.

   

A 20-year veteran media executive, Rob Silvershein’s success in today’s competitive media environment is a direct result of his unique experiences spanning traditional, emerging, and startup media platforms. He is an accomplished strategist and spends most of his time advising media companies on how to structure themselves for long term success. He currently lives in Manhattan Beach, CA.

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