Insights

HBOMax: Max Shows, Humble Start

23 May, 2020

HBO Max is launching with a high demand content library, including marquee titles such as Friends, The Big Bang Theory, and Game of Thrones. The service will carry 14% of the top 50 titles by US demand over the past year, compared to 6% for Disney+. However, whereas Disney+ had The Mandalorian at launch, HBO Max appears to be light on new original tentpoles – a key subscriber acquisition variable particularly important for premium mass-market propositions. The industry-wide production delays caused by coronavirus will only exacerbate this. That means the service is likely to face an uphill battle at launch to attract subscribers beyond existing loyal fans (still in the tens of millions). Our data suggests in the foreseeable future, HBO Max is likely to compete near the top of the ‘chasing pack’ of streamers (alongside Disney+ and CBS All Access), behind Netflix, Hulu and Amazon Prime Video.

How to evaluate HBOMax's success?

HBO Max will bring in some existing 35+ million subscribers from HBO’s current streaming services, but issues with branding confusion and pricing are likely to impact their stats at launch. The service’s high price point, launched in the middle of a global pandemic that has wiped out tens of millions of jobs in an increasingly crowded market place, will prove to be an uphill battle for HBO Max to broaden its appeal and cut into Netflix, Amazon Prime and Hulu’s established market positions.

However, provided WarnerMedia goes “all in” on Max, existing demand for content rights owned by the company provides a good long-term outlook for the service, as it regains streaming rights to that content over time. It will, however, come at a significant license revenue opportunity cost. In the current competitive landscape, measuring and understanding this opportunity cost will be the key lever of value for the stock going forward.

In this article, we provide a quick analysis of HBO Max’s launch, market position, and longer-term prospects. There are four key content-related factors that will determine its ability to attract subscribers at launch and over time: 1) originals, 2) existing demand , 3) tentpoles, and 4) potential library.

Low Pre-Release Demand for Originals

HBO Max originals are drawing relatively low pre-launch demand compared to the originals launched by Disney+ and Apple TV+ ahead of their platform debuts. This low interest in their originals is problematic because demand for original programming is one of the key drivers of subscriptions for SVODs. If we rank originals based on their pre-released demand, we find that HBO Max titles lag others by wide margins – not an encouraging signal.

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Mid-Tier Total Demand

However, library demand for HBO originals paints a brighter picture for the service. The demand distribution chart over the first 4 months of 2020 shows how HBO titles perform compared to a dozen other streaming offerings in the US. While they have fewer titles overall than the big three of Netflix, Amazon Prime Video and Hulu, they have a strong percentage of titles in the ‘Good’ and above level (i.e. higher ‘slugging average’), and their top title is outdrawing the top series available on Disney+. Still, when it comes to its likelihood for mass market adoption, it appears that HBO Max will compete around the top of the ‘chasing pack’ of streaming services – alongside Disney+ and CBS All Access – well below the three leading incumbents:

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Diving into this on a title-by-title basis sheds more light on how each service is positioned in the marketplace from a consumer demand point of view:

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Outstanding Tentpoles

HBO Max has, however, also retained exclusive rights of high demand established comedies such as Friends and Big Bang Theory that rival even original tentpoles of other platforms:

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However, Parrot Analytics analysis of SVOD platforms globally shows that that two key success factors are needed to sustain growth momentum:

  1. High demand new original titles (tentpoles) that act as key subscriber acquisition drivers
  2. A large enough content library that, collectively, provides enough critical mass of demand to sustain subscriptions.

Without a combination of these two factors, the platform’s customer acquisition cost (CAC) to lifetime value (LTV) ratio for their subscribers will be suboptimal and will inevitably lead to shifts in strategy. If HBO Max aims to ‘cross the chasm’ beyond existing HBO subscribers and build a mass-market appeal service like Netflix, significant additional investment on both fronts is required. The return on that investment, which Parrot Analytics will track and publicly report on over time, will determine WarnerMedia’s prospects of owning a winning mass-appeal global SVOD product. As seen below, demand for HBO content currently places it in fourth place behind Hulu, Netflix and Amazon Prime Video, leading the rest of the chasing pack:

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Exceptional Library

Subscription video platform growth is a nuanced equation where the factors necessary to navigate each phase of growth are different from the prior phase. For example, we have seen that in Netflix's lower penetrated markets, demand for the overall content library as opposed to recent releases is more highly correlated to growth in subscriptions.

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Taking that into consideration, it is important to analyze the content libraries controlled by leading public media companies, including all titles they are able to regain once all licensing rights sold to third parties expire. Here, we find that AT&T has potential to attract demand in excess of most of its competitors with the exception of Disney.

This may be the reason why John Stankey remains optimistic and puts little weight on the performance during the day of release, “We don’t have to worry about one day’s worth of activity to say, ‘are we successful or not?’”. However, converting that leadership into a subscribers will not be an easy task and the jury is still out on HBO Max’s capacity to execute flawlessly which so far has seen some hiccups in the way they communicate their brand value which some analysts find confusing.

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