As AT&T executes the largest strategic transformation of the Fortune 500, part of what opponents have warned is coming true.
The company is in the process of transitioning from a phone company to a giant media conglomerate, having bought DirecTV in 2015 for $ 67 billion and then Time Warner in 2018 for $ 109 billion. The vision was for AT&T to “control your fate” by owning “a large portfolio of premium content”, as former CEO Randall Stephenson explained to Fortune in 2019. The centerpiece of this plan, the project on which the fate of the whole grand strategy will depend, is the streaming service HBO Max. It went live last May and hit the headlines again this month with an ad that shocked Hollywood.
AT & T’s WarnerMedia division, home to HBO Max, Warner Bros. movie studio and Turner Cable Networks (CNN, TNT, TBS, others), said Warner Bros. ” whole list of 2021 movies, including big budget blockbusters Dune and Godzilla vs. Kong–will debut on HBO Max the same day they arrive in theaters. The subtext: HBO Max needs more subscribers. With 12.6 million at the start of December, it is far behind Disney plus, with 74 million, and far behind Netflix, with 193 million.
The news blew up Warner’s relationship with theater chains, already devastated by the pandemic. AT&T CEO John Stankey tried to appease them, saying that at least Warner is “giving room owners a predictable flow of content over the next few months that they can schedule,” unlike postponements and Chaotic film cancellations in 2020. The CEOs of the movie channel were not grateful. “Warner Media intends to sacrifice a considerable portion of the profitability of its film studio division, and that of its production partners and filmmakers, to subsidize its startup HBO Max,” AMC CEO Adam Aron said. “As far as AMC is concerned, we will do everything in our power to ensure that Warner does not do it at our expense. We will aggressively pursue economic conditions that preserve our business. “
The change has also increased the risk of piracy, especially overseas, where hackers routinely point a video camera at the screen from a theater seat and then sell copies. With major movies on HBO Max on day one, hackers can stay home and produce much better scams.
But the announcement’s most damaging long-term effect may well be the damage it does to Warner’s relationships with the directors, actors, writers, and others who make great, quality films. The best of them are the profit participants; their contracts give them a cut from a film’s many sources of income, and all of a sudden a major theatrical exhibition has to be decimated.
Worst of all, Warner didn’t tell them in advance. They heard about it like everyone else. “The importance of how this is handled cannot be overstated,” analyst Craig Moffett told clients in a note. “Warner has long enjoyed a reputation as the best independent studio, where talent can go for both creative freedom, arm’s length rights negotiations and profit maximization. The simple appearance self-distribution could be seen as going against the best-in-class culture that has long been Warner’s selling point to world-class talent.
Or as indicated by Christopher Nolan, 10-time Oscar winner, a director whose relationship with Warner dates back 18 years: “Some of the greatest filmmakers and most important movie stars in our industry went to bed at night before they thought they were working for the biggest movie studio and woke up to find they were working for the worst streaming service. “
Some longtime players in the industry saw it coming. AT&T “has no faith in dealing” with creative professionals and their agents, said a former senior executive at Time Warner. Fortune in 2019. “Those [AT&T] guys are a running team. Our business is a game of chance. The greatest creative professionals want more than freedom; they also want their work to be sold to the highest bidders, who will ensure that it is seen the most widely. If not, the problem is certain. Or as the former Time Warner executive put it, “If they think you’re under-optimizing by selling to your own network, the game is over.”
This is exactly what AT&T does. Trying to grow HBO Max by showing all of the company’s 2021 films on the service “will result in a loss of revenue of $ 1.2 billion,” Moffett estimates. It’s under-optimizing, to the detriment of the filmmakers. The danger for AT&T is that it can easily calculate the increase in revenue from growing HBO Max subscribers, but it cannot easily measure the cost of broken relationships, which could be much higher. Christopher Nolan warned, “They don’t even understand what they’re losing.”
More must-read stories of Fortune:
- The future 50: 2020 companies with the best long-term growth potential
- Theirs effectively canceled the tax break that made PPP loans so valuable
- Battery boot backed up by Bill Gates’ claims major breakthrough
- Why are we not in another great depression?
- Nestlé CEO: the laggards of climate change put the planet and their businesses at risk