'Streaming Wars' Is Heating Up

By Berna Barshay

Thursday, May 28, 2020
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► Does anyone need another streaming service?

Yesterday, AT&T’s (T) WarnerMedia launched the long-anticipated HBO Max. The telecom giant plans to invest $4 billion in the service over the next three years.

HBO Max has a deep catalog of some of the most enduring filmed content ever made (from Friends to Casablanca to the Wizard of Oz), a slate of new original series, and the marketing machine of its wide-reaching sister properties. These include everything from AT&T mobile stores… cable networks TNT, TBS, and CNN… and broadcast network The CW (which it co-owns with CBS).

HBO Max also has the branding and content of HBO, which even in the golden age of TV stands out for the quality of its programming.

As a late entrant into a crowded market, HBO Max is taking a risk with its $14.99-per-month pricing. That’s a $2 premium to competitors Netflix (NFLX) and Disney’s (DIS) Hulu/Disney+/ESPN+ bundle, and more than twice as expensive as a la carte Hulu or Disney+.

This premium pricing strategy is in stark contrast to how Disney+ launched last fall, which may have underpriced itself at $5.99 per month. Pricing aggressively low enabled Disney+ to surprise the market and attract more than 50 million global subscribers less than five months after its launch. Given the success of Disney+ despite already high expectations, it’s a bold move for WarnerMedia to price HBO Max so aggressively high for its launch.

HBO has 34 million existing subscribers…

Now, 10 million of them – who are already subscribers via AT&T, either through its DirecTV satellite business or the standalone HBO Now app – will get HBO Max included with their current subscription at no additional cost… so the service should launch with 10 million subscribers out of the gate.

Free subscriptions will also be available for cable customers who buy their HBO from one of a handful of cable companies. Some AT&T wireless customers will also get HBO Max for free with their premium plans.

With this built-in subscriber base that gets HBO Max for free, the service can conceivably amass 25 million or more subscribers in its first couple of years. So despite the initial “sticker shock” of $14.99, HBO Max will be available for way less than that for tens of millions of potential customers.

But the launch didn’t exactly go off without a hitch…

Upgrading your existing HBO subscription is tricky at the moment… and the app isn’t available yet on Amazon’s (AMZN) Fire TV or Roku (ROKU), which collectively own a 70% share of U.S. streaming-TV devices.

Still, the launch was well-timed. Though shelter-in-place orders are starting to lift, the past two months gave many people the chance to watch everything they wanted on Netflix. Professional sports are still suspended and the on-time start of television’s fall season is in jeopardy because of halted production.

► Netflix and Disney probably don’t have to worry too much about the new competition (yet)…

Netflix remains the 800-pound gorilla of the streaming space… and with its large lineup of original content, most subscribers are already hooked on its shows and eagerly await binging future seasons.

While HBO Max offers a compelling children’s lineup including the entire 50-year Sesame Street catalog plus Looney Tunes, families with small children will be hard-pressed to give up their Disney+ subscriptions, which include the entire catalogs of Disney, Pixar, and Star Wars, plus most of Marvel.

ViacomCBS (VIAC) probably has more to worry about. With just 4 million subscribers as of February, its CBS All Access product is off to a slow start, despite low monthly pricing.

More competition is also bad news for Quibi. The 10-minute scripted-video service, built for watching on a phone launched last month to much fanfare… and few customers. Despite a generous free trial offer and plans as low as $4.99 per month, it’s been almost two months and the company’s app has only been downloaded about 3 million times.

The fizzle of that launch is in stark contrast to the high profile of Quibi’s leadership and the massive amount of money the venture has raised from big-name investors – including some of the biggest media companies in the world. The brainchild of DreamWorks Animation co-founder Jeffrey Katzenberg and CEO Meg Whitman, who formerly led tech titans HP (HPQ) and eBay (EBAY), Quibi looks like a rare miss for the duo.

► Traditional TV will be the real loser here…

While much of the content that HBO Max offers was previously available on HBO or other streaming services where WarnerMedia has yanked back rights, it will be a hub for marquee properties like seemingly evergreen sitcom Friends and the wildly popular Harry Potter film series.

Between HBO Max, Netflix, Disney+, Hulu, ESPN+ and the upcoming launch of Peacock from Comcast’s (CMCSA) NBCUniversal, viewers will be able to stream virtually anything they want. What does TV have to offer?

Even subscribing to a handful of these apps will cost less than $50 per month, which is cheaper than most cable TV subscriptions. “Cord cutting” was already gaining steam… as the streaming offerings expand, this trend will only accelerate from here.

But don’t shed any tears for the cable companies. They’re doing just fine. Piping in all this streaming programming means using a lot of data, so what the cable companies lose on video, they more than make up for with Internet services.

An update on Carl Icahn’s stake in Hertz (HTZ)…

About an hour after yesterday’s Empire Financial Daily hit inboxes, the famed activist investor disclosed that he had exited his entire position in the rental car company.

Icahn sold his 55 million shares for an average of $0.72 per share. He had owned 39% of the company’s shares and first invested back in 2014. Six years later, his stake was down nearly $2 billion.

Icahn may want to check in with the bankruptcy experts over at Robinhood… More than 11,000 users bought HTZ shares yesterday, making it the second most popular stock on Robinhood.

At least one industry expert blamed the company’s downfall on Icahn, not the coronavirus. As auto-industry consultant Maryann Keller told Bloomberg, “It’s a saga about gross mismanagement. It could have been salvaged had [Icahn] picked the right management.”

In related news, the fourth-largest North American rental company, Canadian-owned Advantage Rent a Car, filed for Chapter 11 bankruptcy late last night. In addition to the Advantage brand, the company also operates E-Z Rent a Car.

This is your final reminder…  

Tonight at 8 p.m. Eastern time, my colleague Whitney Tilson is appearing on the Recovery Investing Event.

Whitney pounded the table, telling his readers to buy stocks during the March lows. In fact, the day the market bottomed – March 23 – he announced that this was the biggest buying opportunity in a decade.

Just as he predicted, stocks began to recover. As we go to press, the Dow and S&P 500 are hitting their highest levels since early March.

Tonight, Whitney will share his latest outlook on the market, as well as a free stock idea – what he believes should be No. 1 on your “buy” list right now – for free, just for showing up. Click here to register.

In today’s mailbag, readers weigh in on the ‘low-touch economy’…

I’m curious to hear which streaming services you subscribe to now, and what you think of yet another one joining the market. How much is too much? Do you use them all? Do you have one absolute favorite that you would never quit? Please share your thoughts by sending an e-mail to [email protected].

► “Dear Berna, Thank you for your excellent analyses. The ‘low-touch economy ‘concept highlights how significant seniors are to the revival of American economic life. While my wife and I feel flattered to know of our importance, you are right to be cautious about the impending economic recovery, for the months of isolation have left us pretty self-sufficient and most unwilling to assume any more risks to our health by enthusiastically returning to the worlds of travel, public entertainment, restaurants and shopping.” – John F.

► “This is spot on. I am 70, just retired. My plan was to spend 4-5 months a year (total time, not consecutive) visiting 3 children and 6 grandchildren, where I would spend money on a short term local rental, taking them on weekend trips, going to local attractions, spending money at age appropriate stores (Lego, American Girl doll for younger kids; Vera Bradley and other teen mall stores for the older ones.) Then I’d go on 2-3 cruises a year, have 1-2 family vacations where we all get together, and 5-6 long weekends pursuing my hobbies. All of that is out the window. I don’t feel safe flying. A lot of the places to go are closed now anyway and everything I had planned from March on has been cancelled. I’m not sure if I’ll ever board a cruise ship again after reading about the horrors on the many infected cruise ships. I hope I can resume my plans in a year or two, but who knows?” – Susan W.

Berna comment: These sound like great plans, Susan… I hope you can get back to them as soon as possible!

► “Berna, I don’t know what group my family fits in – we won’t go out to restaurants or retail as long as masks, social distancing, plexiglass, etc… is part of the experience. We went out to a restaurant Saturday night and decided we will just eat at home from now on and wear our old clothes no matter how out of style. Not because of fear – we won’t go because of the hassle and it is not an experience we enjoyed. Not the fault of the restaurant or the staff, but all the rules imposed by the government made the meal unenjoyable. If I cannot try on clothes, shoes etc… no need to shop. I will just save my money until either the government relents, or businesses just ignore the government mandates as I already see happening in many parts of the U.S.

“Yes, I don’t trust the government (btw I was a senior federal government official) to make the correct decisions. They (federal & state) have relied upon flawed models, given contradictory guidance, and bumbled their way along the last 6 months. I cannot help thinking that all we have to do is substitute coronavirus for bomb and the movie Dr. Strangelove would be perfectly appropriate. I just can’t figure out if Dr. Fauci is Gen. Jack D. Ripper or Buck Turgidson.” – Dustin S.

Regards,

Berna Barshay
May 28, 2020

Whitney Tilson
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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

Click here for the full bio.