AT&T Loses 1.16M Streaming, Pay TV Subs, HBO Max Hits WarnerMedia Earnings

Warner Bros. Pictures
'Joker' was one of Warner's key theatrical releases in the fourth quarter.

The telecom giant predicts further "pressure from heavy HBO Max investment" during the first half of 2020 and says the TNT and TBS networks would add more unscripted programming amid ratings challenges for general entertainment networks.

Telecom giant AT&T on Wednesday reported its fourth-quarter financials, disclosing that it lost 219,000 subscribers at its AT&T TV Now streaming service in the period and 945,00 premium TV subscribers at DirecTV and U-Verse, with WarnerMedia earnings in the quarter down amid investment and foregone revenue tied to HBO Max.

AT&T CFO John Stephens on an earnings conference call said that financial hit would continue as the company nears the May launch of HBO Max. For the first half of 2020, “we expect pressure from heavy HBO Max investment, which you saw begin in the fourth quarter," he said.

John Stankey, CEO of WarnerMedia and COO of AT&T, said WarnerMedia had made the “strategic decision” to keep such shows as Big Bang Theory for HBO Max instead of licensing them to other services, saying that was an upfront investment in HBO Max that would "pay off over the long term." Stephens later mentioned that AT&T's financial outlook for 2020, including revenue growth of 1 percent-2 percent, includes an additional first-half financial impact from further investment spending and foregone licensing revenue related to the launch of HBO Max.

The quarterly streaming user loss came after a 195,000 loss in the third, a 168,000 loss in the second and a 83,000 loss in the first quarter, as well as a 267,000 loss in the fourth quarter of 2018. AT&T TV Now had 926,000 subscribers at the end of 2019.

The company, led by chairman and CEO Randall Stephenson, also lost another 945,00 premium TV subscribers at DirecTV and U-Verse to end 2019 with about 19.5 million customers, following a 1.2 million drop in the third quarter, a loss of 778,000 in the second, a 544,000 drop in the first and a 391,000 decline in the fourth quarter of 2018. Management had previously said the peak of losses here had been reached in the third quarter.

Overall, AT&T lost nearly 1.2 million streaming and premium TV subscribers in the fourth quarter after losing 2.9 million in the first three quarters of 2019, bringing total losses for the year to nearly 4.1 million and bringing the firm's total number of video connections to 20.4 million as of the end of 2019.

WarnerMedia posted a 9.5 percent drop in fourth-quarter operating income to $2.4 billion amid investments and foregone licensing revenue for content it is keeping, instead of licensing to other parties, for the upcoming streaming service HBO Max, which is set to launch in May. Revenue fell 3.3 percent to $8.9 billion.

Warner Bros. posted lower theatrical revenue due to a stronger film slate in the year-ago period, which featured such releases as Fantastic Beasts: The Crimes of Grindelwald, Aquaman and A Star Is Born, compared with the final quarter of 2019, which included the likes of Joker, Richard Jewell, The Good Liar and Doctor Sleep.

But thanks to lower expenses, film unit earnings only fell 0.7 percent to $805 million in the fourth quarter on an 8 percent revenue drop "due to declines in theatrical revenues and foregone content licensing revenues, which were partially offset by higher television production revenues." Operating expenses were down 9.6 percent "primarily due to lower film and television production costs and marketing expenses."

HBO operating earnings fell 22.7 percent despite higher digital and international subscriber figures, which pushed revenue up 1.9 percent as operating expenses rose 16.4 percent "due to higher programming, distribution and marketing expenses related to the upcoming launch of HBO Max." HBO operating expenses of $1.2 billion in the fourth quarter were up 16.4 percent "due to higher programming, distribution and marketing expenses related to the upcoming launch of HBO Max." Management had previously signaled a $500 million cost hit in the quarter related to HBO Max. It said Wednesday that AT&T's overall fourth-quarter revenue totaled $46.8 billion, or "about $48.0 billion excluding HBO Max investment," suggesting a $1.2 billion hit from foregone revenue.

At Turner, where subscriber revenue increased, operating income of $1.3 billion was down 1.9 percent in the latest quarter as operating expenses climbed 3.9 percent "primarily due to higher programming costs and expenses in preparation for HBO Max launch, partially offset by lower operating expenses."

Stankey on Wednesday's call said the company was "right on track" with the May launch of HBO Max, saying its success was key to the company's performance in the coming years. He also told analysts that the company was in discussions with potential distribution partners for HBO Max, both digital platforms and pay TV companies, adding he expects deals to be unveiled before launch. "HBO Max will be a game changer for our customers" and the company, he said, expressing his "excitement and confidence" that he said has only grown further. "HBO Max will be the highest-quality SVOD [service] in the market."

He again highlighted that HBO Max would look to appeal to a broader audience than HBO and said the company would have some "pretty aggressive promotions" for HBO Max. 

Stankey predicted that HBO Max would also have a "positive and immediate impact" on the stickiness of AT&T's wireless, broadband and pay TV services. And he lauded WarnerMedia for its recent nominations for Academy Awards, for the likes of Joker, and Emmys. "Great content" is only going to improve the HBO Max service's appeal, he said, concluding: "We have very high expectations for HBO Max."

Management highlighted that specific spending on HBO Max will in the near-term depend on various decisions, including the possible acquisition of appealing content that becomes available and marketing to grow the subscriber base.

Stankey also mentioned that Turner’s TNT and TBS networks would add more unscripted programming to their schedules as general entertainment networks have seen ratings challenges. “We all know that general entertainment content in the bundle is not performing as well," he said, calling TBS and TNT hybrids of general entertainment and sports. "We will continue to invest in them, we will continue to make sure they are viable for our distributors, but you will see content shift start to occur a little bit" in an attempt to create more "water-cooler” interest with the likes of news, sports and content that is "socially relevant."

He said deciding what content goes to HBO Max and linear channels is an "important dance and choreography that we have to do."

AT&T shares opened slightly lower after the earnings call.