Why AT&T's ($T) Ad-Supported HBO Max is both "weird" & "an experiment worth trying"

An ad-supported HBO Max and other offerings in AT&T ecosystem may not help them get more customers

Bloomberg reported that AT&T Plans a lower-priced, ad-supported version of HBO Max:

“There is some content where you want the experience to be commercial free,” Stankey said.

The addition of commercials next year will mark another major change for HBO, a premium cable network that’s being asked to serve as AT&T’s online workhorse in streaming. It will also draw a clear distinction from its longtime rival, Netflix Inc., which has steadfastly refused to carry advertising. HBO Max will join streaming competitors like Hulu and NBC’s Peacock that offer consumers a lower price or free access if they’re willing to watch commercials.

“Virtually any fast-growing company that’s out there today, many of them have free services that are supported by data and advertising,” Stankey said. “Having an advertising option is going to be important to making sure the broadest cross section of content is available to people moving forward.”

Before that piece broke, journalist Matthew Keys broke an exclusive on the details of AT&T's plans for an ad-supported HBO Max:

New episodes of HBO shows would be displayed within the app, but that content would be “locked out” and viewers would be encouraged to pay more for the commercial-free version of HBO Max when they try to access those episodes, the source said.

Some executives feel the move would strike a balance between preserving their obligations with cable companies while bringing HBO and other WarnerMedia content to audiences who don’t want to pay $15 a month, the source said. Others take their hypothetical situation a step further, imagining a scenario where subscribers of the ad-free version become “hooked” on a series and are later encouraged to pay more for the commercial-free version of HBO Max.

Keys interviewed me for this piece:

“That’s a weird business decision,” Andrew Rosen, a former Viacom executive-turned-media analyst who produces the streaming TV research newsletter Parqor, said in a phone interview on Tuesday. “That’s a weird model. It’s not unreasonable, it’s just a weird model.”

Rosen says a cheaper version of HBO Max that doesn’t include current episodes of HBO content isn’t a good value for consumers “because you end up reducing your total addressable market for the content — and that’s the fundamental problem.”

“They need to know that someone watches the first season of Euphoria on the ad-supported service is going to convert to a paid subscriber [of HBO Max’s commercial-free tier],” Rosen said. “[T]hey don’t know that. They don’t know a lot of things right now. With the ad-supported version, they can run a trial and try to convert those subscribers to the paid version. But I don’t know how many people like that are out there.”

Still, Rosen said, it’s an experiment worth trying.

Why Ad-Supported HBO Max is both "weird" and "an experiment worth trying"

There is a big contrast in AT&T CEO John Stankey's quote above and my take on AT&T:

• Stankey: “Having an advertising option is going to be important to making sure the broadest cross section of content is available to people moving forward”

• Me: "...a cheaper version of HBO Max that doesn’t include current episodes of HBO content isn’t a good value for consumers 'because you end up reducing your total addressable market for the content — and that’s the fundamental problem.'"

I think Stankey is rephrasing an objective that drove AT&T's bet on Xandr in the first place: "to connect traditional TV, addressable TV, over-the-top streaming TV services and digital video inventory into a marketplace that's data-driven."

I had speculated about what AT&T's efforts in AVOD could look like without Xandr as the backbone of AT&T's efforts in advertising in last week's Monday AM Briefing:

The sale of Xandr in particular would be Stankey admitting failure in AT&T's strategy to construct a national TV advertising marketplace [NOTE: because selling Xandr is his decision, I do believe Stankey is implicitly admitting failure].

Financially, the failure would sizable: it cost AT&T $1.6B to buy AppNexus and Clypd, foundational pieces of the Xandr vision, but also $85.4B to buy WarnerMedia, the other key foundational piece of the Xandr vision. Xandr has already underperformed: CEO Brian Lesser left after less than two years and a lot of publicity about his "grandiose plans to upend the TV ad industry". Xandr has since been relegated under WarnerMedia Jason Kilar as a potential advertising solution for HBO Max's AVOD ambitions.

That means, if Xandr is now for sale, the odds of HBO Max offering an AVOD solution in the future should be discounted significantly. The Xandr tech was built for audience targeting on WarnerMedia content (and other publishers' content). If WarnerMedia is not going to use Xandr to target HBO Max audiences with ads, then what will it use instead to serve ads to HBO Max users?

Stankey is no longer admitting failure. But his rationale for keeping Xandr and building ad-supported services across the AT&T ecosystem is indeed weird. Why? Because it continues to reflect the failure of AT&T's management to understand basic DTC conversion funnels, a problem I wrote about back in July:

Conversion funnels matter because they are integral to how HBO Max is going to scale in 2020 and beyond. Focusing on them helps to understand if/how the business is going to scale. Right now, it seems like neither existing nor target AT&T Wholesale customers do not understand what the value proposition of HBO Max is relative to HBO. Nor does it seem like they understand how to sign up for the service.

Stankey failing on converting subscribers across AT&T’s operationally inefficient structure is one big tell about HBO Max’s ability to scale. WarnerMedia CEO Jason Kilar having success in Retail is another big tell.

There are operational and strategic disconnects between Stankey's plans for ad-supported services both in Wholesale and Retail, and the obvious, reasonable questions (like mine) those plans invite. Specifically, do they drive consumers into a larger ecosystem of monetizing their behavior? Or are you simply capturing marginal revenue from consumers who have no interest in signing up for AT&T or HBO Max?

Which all leads to this point: it is not yet clear what the value of an ad-supported HBO Max to consumers is. It is not clear they want free, ad-supported HBO before paying for HBO. Last, it is not clear what the value proposition of an ad-supported HBO service driven by Xandr offers for advertisers across the AT&T ecosystem, especially when 1MM DirecTV consumers cut the cord last quarter, alone.

Xandr has gone from a grandiose data-driven vision to an avatar for a messy ad strategy that betrays a continued lack of understanding of DTC funnels, too. This does not bode to play out well for AT&T.