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Morningstar | AT&T/Warner's Planned Direct-to-Consumer Offering Likely of Limited Appeal in Proposed Form

AT&T’s WarnerMedia segment announced that it is planning to launch a comprehensive subscription video on demand product at a presentation at the Vanity Fair New Establishment Summit held on Oct. 10. AT&T’s move to offer a direct-to-consumer package of WarnerMedia programming isn’t surprising, as content owners of all stripes look to add distribution channels as a hedge against the potential demise of the traditional cable bundle. With its deep content library, we expect the new Warner service will carve out a niche in the market. However, we doubt AT&T’s approach to the offering will create wide appeal. We retain our narrow moat rating and our fair value estimate of $37 for AT&T.

The new service, set to launch in late 2019, will include HBO, surrounded by a variety of content from the rest of WarnerMedia and select third-party programming. The firm will likely roll up its current DTC offerings such as the recently launched DC Universe. The firm is home to some of largest and most televised programs in the world via linear channels and on SVODs. However, many of these shows like Big Bang Theory already have existing SVOD distribution agreements.

AT&T was quick to mention that it will work with existing distribution partners (that is, primarily cable and satellite companies) that want to use the package to increase the penetration of their current offerings. This explicit concern isn’t surprising: AT&T’s DirecTV is the largest distributor of the traditional cable bundle in the U.S. However, we also believe this concern has pushed the firm to contemplate an expensive offering that will have limited appeal for either those contemplating cutting cable or those who already find little value in the traditional bundle. Still, we believe Warner’s shift to the DTC market is wise, potentially allowing it to capture revenue from another content window, bolstering its ability to compete with Netflix and other entrants currently beholden to a single subscription price.

Concern for the traditional bundle appears in two key elements of the proposed service. First, AT&T explicitly mentioned that CNN’s programming will be excluded, outside of perhaps documentaries, which we would argue are not core to CNN’s offering. We suspect that all or most content that could be considered real-time, notably sports and news, will remain outside the new offering, preserving this advantage for the traditional bundle. Second, the service won’t be available without HBO, making it a premium offering likely priced at a significant premium to HBO’s $15 monthly list price. Ultimately, we expect Warner will need to create a service that opens non-HBO content up on a stand-alone basis to better capture the portion of the audience that simply doesn’t see value in super-premium content but would still occasionally like access to the more mass-market-focused programming available elsewhere in the Warner library.

We expect that WarnerMedia will start to create exclusive content for the platform, similar to Netflix and Disney. We also believe that planned increased investment at HBO is directly related to this announcement, and we expect that a larger-than-normal number of shows will carry the HBO imprimatur.

While Disney has a stronger current slate of movies, the WarnerMedia SVOD will benefit from HBO's current deals, which will provide the service with films from a number of third parties including Twenty Century Fox and Universal. We believe that Disney will most definitely not renew this deal when it expires in 2022, and we expect that Comcast will also pull back its slate in 2023. However, we expect that AT&T will ramp spending at Warner Bros. and the new SVOD will have a strong slate for at least two to three years after its launch.