A look at the Amazon & HBO Max stalemate
HBO Max launched last week and before I dive into why WarnerMedia would choose to launch a new service without Roku and Amazon – two of the most important Connected TV platforms, here’s a quick refresher of where we stand.
HBO Max, the new service WarnerMedia plans to invest $4 billion over the next three years, launched last Wednesday, but isn’t available for Roku and Amazon, the two biggest streaming distribution platforms with a combined 70% market share or 80 million users.
Roku had 39.8 million active users at the end of March and in January, Amazon stated that Fire TV had over 40 million active users. Both numbers are presumably higher now.
While HBO Max is not available for Roku and Amazon, the company’s previous OTT service, HBO Now, will continue to exist.
Eating my words
First of all, I’d like to extend a major congratulations to WarnerMedia on the launch. When it was reported a couple of weeks ago that HBO Max may not be available on Amazon Fire TV due to WarnerMedia seeking to pull out of the Prime Channels program in lieu of favoring more direct-to-consumer approach, I took to Linkedin and Twitter stating,
“HBO Max WILL be on Amazon Fire TV by launch. Please reference this post on May 27th if I’m wrong.”
I was wrong. My reasoning was:
I’ve seen similar negotiations play out behind the scenes and you absolutely can’t deny the leverage or Amazon and Roku given their respective user bases of 40 million and 39.8 million active users. Therefore, these companies typically win.
There’s Precedence. Last August, Disney announced its device lineup for Disney+ and Amazon wasn’t on that list. The Wall Street Journal reported that that standoff was about advertising, with Amazon apparently wanting to sell a “substantial percentage” of the available ad space on Disney apps, and Disney wasn’t accepting the deal. It wasn’t until November 7, five days before the Disney+ launch that the companies came to an agreement.
Let’s face it, WarnerMedia may be a new brand, but it still represents a legacy business. Is a legacy business willing to forgo the Prime Channels cash grab in favor of building a true direct-to-consumer service?
Last Wednesday, Jason Kilar proved me wrong and WarnerMedia chucked deuces to the number one and two streaming platforms (for now). And I ate my words like a champion.
By declining it’s legacy (cable and satellite revenue) and affiliate (Roku, Amazon, Apple TV Channels revenue), WarnerMedia is showing us how serious they are about direct-to-consumer video.
Don’t think for a second that WarnerMedia doesn’t understand the importance of being available via Amazon or Roku. But what’s happening, is companies like WarnerMedia, Starz, ViacomCBS are no longer competing with one other. Their biggest competitors have now become the platforms that also distribute their standalone OTT applications.
In order to be a consumer-facing brand, your goal is to prioritize direct-customers over subscribers, which builds long-term enterprise value and ultimately leverage. And without leverage, you’re dead in the water.
“Subscribers are not equal and only counting the number of catch-all subscriptions is playing the short game. In fact, this is exactly how premium networks have transacted over the past few decades. The ‘Streaming Wars’ is not only about subscriptions and shifting your traditional business into the digital age. It’s about the long-term and why every media and technology company is fighting over the same thing — the direct customer relationship.” — via my article“Direct-to-Consumer TV Apps vs. Streaming Service Aggregators: How to Compete… Against Yourself?”
To be clear, WarnerMedia isn’t concerned with day one or even year one success. The company’s looking for long-term success, which begins with achieving its goal of becoming profitable in 2025.
Colleague Evan Shapiro, President at National Lampoon, has likened WarnerMedia’s strategy to Kimberly-Clark’s “burn-the-mills” approach.
The Kleenex Axiom
After more than 100 years as, primarily, a B2B producer of paper in mills, Kimberly-Clark began a transition to consumer paper-goods, with the historic success of Kleenex.
Yet, the VAST majority of its revenue still came from turning trees into paper, for magazines, & newspapers.
But management, led by CEO Darwin Smith, did a LOT of long term strategery, and decided wholesale paper for periodicals was not their future (kinda prescient). Making & selling consumer paper goods (Paper Towels, TP, Tissues, Diapers) – products that would ALWAYS be needed – was.
They went all in. They sold off their namesake, the majority of their revenue. They “burnt the mills.”
The result: In 20 years, they owned their top rival (Scott), became the #1 consumer paper goods company on earth, and out-performed the Dow by 4X.
This is the lesson media companies need if they want to go all-in on direct-to-consumer, but it’s wrong to say that every OTT service should. For WarnerMedia, it was a must.
Unwinding the Channels Business
WarnerMedia wants to unwind it’s OTT aggregator/channels business on platforms where the company has historically distributed its apps, such as Amazon (Prime Video Channels), Roku (The Roku Channel), and Apple TV (Apple TV Channels).
The process was always going to be extremely painful for WarnerMedia. But if it’s ever going to happen, it needs to be now, especially pay TV is bleeding subscribers right and left. If not, the power of Amazon only grows.
[Related: What OTT Programmers Can Learn From the Fall of Toys “R” Us]
Switching from a content distributor/wholesaler to direct-to-consumer service is absolutely one of the most difficult things for a publicly traded, traditional media business to do. First of all, these companies still make a very large percentage of their money from legacy carriage deals and you can’t just kill that overnight (or burn the mills). The challenge for publicly traded companies is to find a way to honor existing partners and contacts while also capitalizing on a direct-to-consumer future.
What’s a threat for companies such as HBO-parent, AT&T is they publicly announce their subscriber numbers such as stating that “HBO has 8 million OTT subscribers”.
This means at any point in time, Channel partners know exactly how important they are to these companies. Amazon can one day say “Oh, we account for 62% (5 million) of HBO’s OTT business? Perhaps we should demand a greater revenue share the next time our contract’s up for renewal?”
When that happens, your options become
Lose 62% of your OTT business overnight (though some will find a way to come back)
Concede, possibly give up more revenue share, lose leverage and only further empower the channel partners
Both of these options really suck, which goes back to my point on why I thought WarnerMedia would ultimately cut a deal with Amazon or Roku for launch. But they held firm, where most can’t or won’t.
AT&T and Amazon sound off
Last week, John Stankey spoke about the irony about the current standoffs, from where he sits, is that when the government sued to block AT&T’s acquisition of Time Warner over the concern that the telco would withhold content from distributors.
He added, “What we have now is we have new distributors, new technology distributors, who are electing to not distribute the product,” Stankey said. He also complained that the antitrust challenge to AT&T’s Time Warner bid set back the company’s ability to pursue its bigger direct-to-consumer strategy for a year and a half.
Amazon fire shots back for not agreeing to distribute HBO Max via Prime Video Channels.
“With a seamless customer experience, nearly 5 million HBO streamers currently access their subscription through Amazon’s Prime Video Channels,” an Amazon spokesman said in a statement.
Wait. Hold up
Yes, Amazon leaked that 5 million of HBO’s OTT customers are attributed to Prime Video Channels. It’s one thing for an outsider to speculate or leak these kinds of numbers, which by the way it was well-circulated that about 53% of HBO’s OTT business was coming from Prime Video Channels, but to have this come directly from the horse’s mouth is poor form, in my opinion.
The Amazon spokesman continued, “Unfortunately, with the launch of HBO Max, AT&T is choosing to deny these loyal HBO customers access to the expanded catalog. We believe that if you’re paying for HBO, you’re entitled to the new programming through the method you’re already using. That’s just good customer service and that’s a priority for us.”
I see Stankey’s point. It is ironic that, for example, an AT&T internet customer is denied access to the company’s own streaming service HBO Max on Fire TV, just because they happened to be gifted a streaming stick as a stocking stuffer.
This raises all kinds of antitrust and net-neutrality questions and concerns. Last Thursday, a day after the HBO Max launch, it was reported that Amazon was down, many of those reporting the issue were AT&T customers.
I joked on Twitter,
“Just heard #Amazon is down. A lot of issues being reported by AT&T customers. And with said, I think John Stankey just won the #streamingwars”
I don’t believe AT&T had anything to do with the Amazon outage, but imagine the potential implications if that would have been the case.
What HBO Max would look like on Amazon and Roku
To understand what the service would look like on Roku or Amazon, just take a look today at how HBO Max is integrated on Apple TV. HBO Now is no longer being sold as an Apple TV Channel and the only way to get the service through the device is to subscribe to the direct-to-consumer HBO Max app. Also, it should be noted that HBO Max is integrated with The Apple TV App, which is important as this will help drive discovery and new subscribers, benefitting both WarnerMedia and Apple. More on that later.
So Amazon leaked to use that 5 million HBO customers came in via Prime Channels. The service is priced at $14.99 per month, which would mean that Amazon generates about $75 million on HBO each month gross.
Presuming that HBO was able to negotiate a rev share of 80%/20% in their favor (typical is 70%30%), the breakout would look something like this:
Gross revenue: $75 million/month
HBO receives $60 million/month
Amazon receives 20%: $15 million/month
For Amazon, HBO Now is set to generate $180+ million for Amazon over the next 12 months via Prime Channels. Amazon’s not wrong when they say “we believe that if you’re paying for HBO, you’re entitled to the new programming though the method you’re already using. That’s just good customer service.”
And certainly, Amazon could just release the HBO Max app, but doing that risks Amazon losing HBO Prime Channel customers to HBO Max and puts their revenue stream at risk. It’s worth pointing out that by distributing the standalone Max app, Amazon stands to get a percentage of all new subscribers that sign up to Max via in-app billing. More on that later.
And for other media companies, most would embrace $60 million of “found money” by simply just being available as an add-on Prime Channel, but WarnerMedia’s thinking bigger. HBO’s content helped Amazon build up its Prime Video Channels program and at the end of day, HBO doesn’t own the relationship and gets very limited insights on how subscribers are engaging on the platform.
This is not a fight over customer experience. Customers always lose in these negotiations anyway. What’s being fought over is who’s going to own that relationship with the customer.
WarnerMedia’s big miss last month with HBO Now and HBO Go
In early April, HBO began offering over 500 hours of its best TV shows and movies for free across all HBO Now and HBO Go properties on all platforms – web, mobile, or connected TV in response to global stay-at-home orders due to COVID-19.
They said the plan was to provide the free content for a month in order to attract fans to HBO Max which would launch the following month. While I wholeheartedly appreciated the gesture of goodwill, it was a miss to not collect a single email address in exchange for free HBO.
“Give us your email for free HBO”. I’m fairly confident most people would be fine with that value exchange. We’re not talking about a no-name steamer here. It’s HBO!
I wrote this blurb in a newsletter last month, and given the current situation, it’s pretty spot on.
“Considering a majority of HBO Now subscribers are sold through Amazon Channels, HBO’s already relatively light on customer data (because Amazon owns it). This campaign was an opportunity to ultimately drive more pure direct-to-consumer subscribers.”
But the company’s done well on its first-party data strategy with HBO Max
The above screenshots represent the user flow of the HBO Max app on Apple TV. And yes, the company is using iTunes billing (like Disney+) for any customers that onboard directly via the “Subscribe Now” button, thereby handing off the billing relationship to Apple. Typical in-app purchasing fees (“platform tax”) generally range from 15-30% per subscriber.
WarnerMedia’s done a really great job at making sure that while it’s not processing its customers’ payments directly, they still know the email address, first name, and last name of its customers, information that a Channels partner would never give up.
“These brands are confusing”, explained
I get it, it’s confusing. Is HBO Max the same thing as HBO? Or HBO Go? Or HBO Now? How are regular people supposed to understand this? Even WarnerMedia put out an explainer video highlighting the differences.
Before you blame WarnerMedia for this, you need to understand how we got to this confusion in the first place. In 2010, HBO created its first TV Everywhere app, which they were not allowed to call “HBO” due to MVPD distribution agreements. So they called it “HBO Go”.
Five years later, HBO launched a direct-to-consumer offering. “HBO” was not an option and they wanted to differentiate it from the cable-authenticated product, so “HBO Now” was created.
Give it a couple of years, but HBO Now and HBO Go will be sunset over time, leaving only HBO Max. The app will look similar to STARZ, which allows customers to login with their STARZ account or authenticate their cable subscription.
“HBO Max wasn’t downloaded as much as Quibi, it must be doing terrible”, debunked
Last week, several outlets cited statistics from app store intelligence company, Sensor Tower, reporting that the HBO Max app was downloaded only 87,000 times on launch day, comparing that to the 4 million first-day app downloads for Disney+, or even the 300,000 downloads for Quibi.
Sure, counting app downloads is great, but by no means do they measure the success or health of a streaming service. They’re fluff metrics. What many failed to acknowledge is that from an app perspective, HBO Max isn’t an entirely new service. On supported devices, users that already had the HBO Now app installed received HBO Max as an update, and those users aren’t counted in the report, meaning any headlines claiming HBO Max is a flop solely based on app downloads, is just meaningless.
Friend and colleague, Andrew Wamugi points out that we can expect “the same thing will happen when ViacomCBS relaunches whatever they end up calling CBS All Access.”
[Related: HBO Max Ranks No. 1 in Apple TV App Store]