AT&T had shaken the media industry with its $85 billion acquisition of Time Warner back in 2018. And now, one of the largest carriers is going fully vertical and doubling down on streaming as a strategy, with an increased focus on the connectivity business and 5G. The US$43 billion merger of AT&T’s WarnerMedia and cable channel Discovery into a new company announced recently will create even more competition in the hypercompetitive streaming video on demand (SVOD) space. The combination of HBO, CNN and Warner Bros’ entertainment, news and sports content with Discovery’s documentary and lifestyle programming will create a diverse content portfolio and a more attractive streaming proposition over and above what is already provided by HBO Max, itself launched only in the summer of 2020.
Estimates suggest that the new entity will have a combined revenue of US$52 billion by 2023 and an adjusted EBITDA of US$14 billion. These bullish projections rely in no small part on solid growth for both company’s SVOD businesses. HBO and HBO Max ended 2020 with a combined subscriber base of 41m in the US and around another 20m worldwide. AT&T also has plans to launch an AVOD version of HBO Max in the second quarter of 2021 and ambitions to expand its global availability later this year.
A streaming version of Discovery – discovery+ – which debuted in the US in January 2021, costing US$5 a month or US$7 a month for a premium ad-free version, will also make a sizeable contribution. Indeed, its introduction appears to have driven a surge in new customers. Reports suggest Discovery+ amassed more than 13m paying direct to consumer subscribers in the first full quarter of its US existence.
Its growth was bolstered with partnership deals that saw it quickly made available on Comcast Xfinity and Amazon Prime Video Channels in the US, Starzplay in MENA, and Samsung Smart TVs and Amazon Fire TV devices in the UK and Ireland. There are also plans to extend discovery+ to 25 international markets in total by the end of 2021.
Including its existing Discovery channel, the company said it had more than 15m paying subscribers by the end of March 31st 2021. That rapid subscriber growth helped drive its FY20 revenue up 4% year on year to nearly US$2.8 billion, with US distribution revenue up 12% to US$796m primarily induced by the launch of discovery+ though offset to a certain extent by a parallel decline in linear TV subscribers.
US telcos split media from core network services
The move is just part of a more comprehensive shakeup for AT&T after it posted mixed financial results for 2020. Chief executive John Stankey is engineering a restructure designed to shrink the telco’s mounting debt, including the divestiture of assets such as its DirecTV satellite TV service.
Selling WarnerMedia splits AT&T’s media assets from its core telco business, just as Verizon announced divesting 90% of the media business, including Yahoo and AOL, to private equity firm Apollo Global Management for US$5 billion[i]. Both companies look like they will now hone their focus on growing revenue from fibre broadband and fifth-generation (5G) network connectivity provision and associated services in the enterprise IoT and connected future.
Curating unique SVOD content which will bring new subscribers onto the platform proved an expensive business for the telco. Its latest financial earnings reveal it invested US$800m in HBO Max in the fourth quarter and US$2 billion over the course of the entire year. AT&T also saw a hefty write-down on the value of its video business in 2020 as customers continued to abandon their cable subscriptions in favour of alternative OTT video subscription services.
The company lost a net total of 617k customers across its bundled premium video services (DirectTV and U-verse) in Q420 and ended the year with 3m less (16.5m) than it had in the fourth quarter of 2019[ii]. Its video segment revenue also declined 10.9% to US$28.6 billion during the year.
Content partnerships crucial for telcos
That doesn’t mean telcos will cease to bundle SVOD subscriptions with their fixed and mobile broadband and voice packages, only that they will need to establish and maintain close relationships with media companies to do it. The early success of discovery+, for example, is believed to have relied heavily on a promotion that delivered it for free to Verizon customers on an introductory basis.
Some reports go so far as to suggest there are more SVOD subscriptions in the US than there are people (328m), a direct result of consumers using more than one service simultaneously.[i] Kantar’s estimates are more conservative but confirm continued growth as Americans desert linear TV for streaming video platforms. First-quarter results from its Entertainment on Demand service reveal that over 7% of US households took out a new SVOD package in the three months ending March 2021, bringing the total number of subscriptions to 241m.[ii]
Of those new Q121 customer sign-ups, HBO Max is estimated to have attracted 14.4%, ahead of Prime Video (13.2%), Paramount+ (11.8%), Disney+ (11.6%) and Hulu (10.6%). The scale and intensity of the competition impact Netflix, which Kantar calculates attracted only 8.5% of new SVOD customers during the quarter. Meanwhile, Discovery+ took a 7.7% market share which, combined with HBO Max, accounted for almost a quarter of the total (22.1%).
Despite the abundance of providers, forecasts indicate there is a significant upside in converting cable-tv consumers. Statista calculates US SVOD revenue will expand at a compound annual growth rate (CAGR) of 9.3% over the next four years to be worth US$45.8 billion 2025, up from US$32.1 billion in 2021. User penetration rates will swell only marginally from 45.7% to 48.4% over the same period, however, indicating the market still has considerable headroom for growth.
US telcos may no longer be able to grab a direct share of that revenue. However, partnerships with SVOD providers can still deliver returns via direct carrier billing (DCB) arrangements that take a small percentage of each subscription fee. But perhaps more importantly, content bundling will help them attract and retain US subscribers on consumer mobile broadband packages earmarked to help them repay the high costs of 5G rollouts.
[i] Verizon sells media businesses including Yahoo and AOL to Apollo for $5 billion, CNBC, 3rd May 2021
[ii] AT&T takes $15.5B pretax write-down for its declining video business, S&P Global, 27th January 2021
[iii] SVOD subscriptions have surpassed population size in US, DigitalTV Europe, 12th April 2021
[iv] US closes in on quarter of a billion video subscriptions, Kantar, 15th April 2021