AT&T takes on a lot of risk with its OTT plans, analyst says

DirecTV Now HBO (AT&T)
DirecTV Now and HBO Now will likely still serve as AT&T's live over-the-top services while the new service gets library content. (AT&T)

AT&T this week said it’s launching a WarnerMedia streaming service in late 2019, and the plans could have a negative impact on the company’s licensing revenues and other over-the-top services.

Barclays analyst Kannan Venkateshwar pointed out AT&T’s implication that it would defer licensing revenue to later quarters when it would show up as increased subscriber revenues. He said selling content across multiple windows and distributors helps studios like Warner Bros. amass scale while also sustaining a larger volume of content than proprietary networks alone and diversifying their portfolio.

“Therefore, if AT&T does decide to limit licensing of content to third parties, there is likely to be a trade off in the form of either lower volume and/or lower margins over time, especially if its own service does not scale,” Venkateshwar wrote in a research note. He added Warner Bros. alone generates about $5 billion per year in television licensing revenues, and a significant portion of that comes from library content.

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If going forward AT&T plans to keep DirecTV Now and HBO Now for live content and use the new streaming service primarily for library content, Venkateshwar worries the company risks crowding out its own streaming services by providing many alternatives for consumers. He suggests adding HBO library content as a higher priced tier within HBO Now as a better strategy.

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“Overall, we believe the preliminary outline of the service is more likely to raise concerns around investment needs and revenue loss rather than generating excitement around the opportunity. It also raises the stakes for all companies trying to pivot their business models such as Disney,” Venkateshwar wrote.

WarnerMedia CEO John Stankey on Wednesday issued a statement outlining the new streaming service.

“This is another benefit of the AT&T/Time Warner merger, and we are committed to launching a compelling and competitive product that will serve as a complement to our existing businesses and help us to expand our reach by offering a new choice for entertainment with the WarnerMedia collection of films, television series, libraries, documentaries and animation loved by consumers around the world. We expect to create such a compelling product that it will help distributors increase consumer penetration of their current packages and help us successfully reach more customers,” Stankey said.

The timing of WarnerMedia’s streaming service launch competes with Disney’s plans to launch a branded streaming service. But WarnerMedia’s service will also be competing with subscription streaming stalwarts including Netflix, Amazon and Hulu (of which WarnerMedia owns 10%).