Finally, some good news for AT&T (NYSE:T) shareholders: T stock hit a seven-year low late last year, but it has rallied since. In fact, the AT&T stock price reached a 52-week high last week before a modest pullback.
However, I’m not buying the rally. I’ve long been a skeptic toward AT&T, and I see little reason to change. The merger between Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS) could provide some competitive help. But Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Dish Network (NASDAQ:DISH) reportedly are entering the market. Plus, AT&T continues to lose share to T-Mobile and Verizon Communications (NYSE:VZ).
Admittedly, a 6% dividend is nice. But AT&T also has some $200 billion in debt. We’ve seen low-growth, high-debt dividend stocks like Anheuser-Busch InBev (NYSE:BUD) and Kraft Heinz (NASDAQ:KHC) cut their payouts in recent years. AT&T’s dividend looks safe for now. But if the cellular business stumbles and DirecTV continues to decline, that may change.
The wild card here is WarnerMedia, built through last year’s $85 billion acquisition of Time Warner. WarnerMedia not only adds potential growth, particularly in its HBO and Warner Bros. Entertainment divisions, it gives AT&T control of both content and distribution. That’s something media companies increasingly have sought of late.
But for the AT&T stock price to move higher, the acquisition needs to be a success, and WarnerMedia must grow. The announcement of that unit’s plans for a new streaming service casts early doubt on those hopes.
The Pricing Problem for HBO Max
WarnerMedia’s new service will be called HBO Max, and that alone shows the problem here. WarnerMedia charges $15 per month for HBO Now, the unit’s streaming service. The new service will include HBO, along with content from its Turner networks, Warner Bros. studio, and other properties like Looney Tunes.
WarnerMedia naturally wants to price its new service in a way that captures the value of the non-HBO properties. But it has a problem. The standard plan from Netflix (NASDAQ:NFLX) costs $13. Disney (NYSE:DIS) is launching Disney+ in November for $6.99 a month.
Thus, HBO Max probably is pricing between $15 and $18, according to reports (AT&T hasn’t released an official figure yet). For the approximately 35 million existing subscribers, a shift makes sense. But WarnerMedia is then getting at most just $3 per month in incremental revenue from those subscribers.
That incremental revenue — at most slightly over $1 billion a year — isn’t much. And it isn’t even free. WarnerMedia is foregoing an estimated $80 million in annual licensing revenue from Netflix just to reclaim the rights to Friends. It ostensibly will compete with its own TBS and TNT networks, which will lose advertising dollars as cord-cutting accelerates. Any incremental revenue from the current HBO subscriber base and the associated profit, still seems to leave WarnerMedia cannibalizing itself.
So, the service must add new subscribers. But here’s the exclusive content on HBO Max at its launch next year: HBO, Friends, The Fresh Prince of Bel Air, Pretty Little Liars, and content from The CW. There are other original series and movies. But is any customer going to pay $18 for that bundle if she’s already passed on HBO? How many customers will pay a premium over Disney’s and Netflix’s cheaper content? Probably very few.
The HBO Max Problem for T Stock
WarnerMedia head John Stankey has said his goal is for the streaming service to reach 70 to 90 million customers. As The Motley Fool pointed out, Disney has targeted 60 million to 90 million within five years. Netflix currently has 60 million U.S. subscribers.
Even with an existing HBO base of 35 million, Stankey’s goal seems hugely optimistic. There’s little reason right now to see HBO Max outperforming those streaming rivals simply from a content standpoint. DirecTV Now subscriber numbers already are plunging, which bodes poorly for the new service. Execution, meanwhile, has been poor from the jump.
Stankey originally publicly floated a three-tier pricing structure which, as CNBC reported, had barely been discussed with other senior executives. That concept was axed later. The Hollywood Reporter detailed the confusing rollout (and the questionable logo) of the service, closing by asking, “what the h— is HBO Max, really?” That’s a question WarnerMedia hasn’t yet answered less than a year from the launch.
AT&T Has Yet to Address the Cord-cutting Crisis
And a failed streaming service is a big problem for T stock. It undercuts the entire rationale for combining AT&T with DirecTV and Time Warner. It very well may lead to declining earnings overall, as the mobile business stays sideways, profitable landline revenues continue to fall, and DirecTV and Turner both suffer from cord cutting. Without streaming driving growth, AT&T simply looks like a group of challenged business. Even worse, the company carries a debt load that is literally historic in its size.
Particularly with the AT&T stock price back at the highs, investors are betting on some sort of success in streaming. Right now, I don’t think that success is on the way. And I believe that, once again, T stock will give back its gains.
As of this writing, Vince Martin has no positions in any securities mentioned.