The High Cost of Chasing Netflix

The High Cost of Chasing Netflix: Expect Big Losses for Years - Illustration by Victor Kerlow
Illustration by Victor Kerlow

NBCU’s Peacock and WarnerMedia’s HBO Max are touting notable subscriber gains but also forecasting billions in investment charges to establish a streaming presence.

After two months of fielding criticism from some of Hollywood’s top filmmakers, WarnerMedia executives finally had something to crow about when AT&T CEO John Stankey revealed Jan. 27 that the much-maligned plan to release its films in theaters and on HBO Max had helped to double the streamer’s audience to 17.2 million active users. But the good news came with a caveat: $520 million in losses due to the ongoing shutdown of many theaters and subsequent hybrid release plan for the 2021 Warner Bros. film slate.

The next day, NBCUniversal CEO Jeff Shell touted Peacock’s 33 million sign-ups but conceded that the 9-month-old streamer would lose $2 billion in 2020 and 2021.

The shift to streaming was always going to be expensive. When Disney revealed plans to forgo licensing deals with Netflix as it prepped for the November 2019 launch of Disney+, it forecast that it would miss out on some $150 million in operating income on top of planned investments into technology and content for the service. WarnerMedia, meanwhile, projected that it would record $2 billion in expenses in 2020 related to the launch of HBO Max.

Now, months into the biggest transformation that Hollywood has seen in decades, the entertainment conglomerates have shown that shoveling money into Netflix competitors can produce results, though it’s too early to know to what end. “I would still call this day one for streaming,” says LightShed Partners analyst Rich Greenfield. “The single biggest question for 2021 is, ‘Who’s going to commit the capital to be big enough to matter?’ Netflix is going to spend $17.5 billion. Who else is playing the game?”

Netflix has given Hollywood’s legacy businesses a road map. After years of burning through cash as it sought to produce enough programming to build up its subscriber base, the company disclosed Jan. 19 that it would have positive free cash flow in 2021 and would no longer have to incur debt to finance its day-to-day operations. Investors responded by sending the stock up 13 percent when markets opened the next morning.

At Disney, there’s little question as to whether its $2 billion investment into Disney+ has paid off. The service attracted nearly 87 million subscribers in its first 13 months, at the high end of the range that Disney executives were hoping to have signed up by 2024. At an investor day in December, Disney CFO Christine McCarthy said that content expenses at Disney+ would double to at least $8 billion in fiscal 2024 but that the company expected losses at the streamer to peak in 2021.

The chase is still on at WarnerMedia and NBCU. Both companies introduced their streamers as the pandemic raged and production delays left them without much of their buzzy launch-year programming. But the unpredictable year also gave them cover to enact large corporate reorganizations that placed streaming front and center. WarnerMedia went one step further, using the collapse of the box office amid coronavirus-related shutdowns to boost HBO Max.

“We felt like we had a little bit of a spoiling asset here that needed to be moved,” Stankey told investors after sharing AT&T’s fourth-quarter earnings results, noting that the company hoped to use “this unfortunate set of circumstances around the pandemic for an opportunity to make lemonade out of lemons.”

Make lemonade, they did. Sure, Wonder Woman 1984, the first Warner Bros. title to roll out on HBO Max and in theaters, grossed just $131.4 million at the global box office in its first three weekends, but it became a clear home-viewing hit during the week of Christmas. According to Nielsen, HBO Max users spent 2.25 billion minutes streaming the 151-minute film, the equivalent of nearly 15 million complete plays. Greenfield suggests that between its international and HBO Max audience, the film may have been viewed by around 49 million people in its first month.

Even so, Wonder Woman 1984 is largely being treated as an expensive marketing ploy for HBO Max, helping push combined HBO Max and HBO subscribers up past 41 million two years ahead of schedule. “I don’t think getting to a profitable outcome is achievable for Wonder Woman 1984,” says MKM analyst Eric Handler. “They’re using Wonder Woman as a loss leader for HBO Max, so that’s not a long-term sustainable business model.”

WarnerMedia’s goal is to retain enough HBO Max subscribers from Wonder Woman 1984 to make the experiment worth it in the long run. That could be challenging. A Deloitte study conducted last fall found that 46 percent of respondents had unsubscribed from a streaming video service in the previous six months. For now, most HBO Max subscribers seem to be sticking around. According to third-party analytics firm Antenna, nearly 85 percent of people who signed up for HBO Max during the first three days of Wonder Woman 1984’s availability remained subscribed as of Jan. 24.

If HBO Max can repeat that success with WarnerMedia’s 2021 film slate, that could eventually make up for the hefty box office losses it’s incurring. “There’s an arms race going on right now with the five streaming services,” says Handler. “There’s Netflix way ahead of everybody globally, and Disney+ has made a splash — and then there’s everyone else.”

This story appeared in the Feb. 2 issue of The Hollywood Reporter magazine. Click here to subscribe.