AT&T had to fight off the U.S. government in court before it was allowed to buy Time Warner. Winning, in this case, was far from easy. But still, governing is harder: There’s almost nothing in business that’s more difficult than successfully integrating two companies with vastly different cultures in vastly different industries.
That job—one of the toughest assignments in corporate America—has been given to John Stankey, the veteran AT&T executive who has been placed in charge of what used to be called Time Warner and is now called Warner Media. One of his many jobs right now is to communicate to Time Warner’s workforce what will stay the same, and what is going to change, under their new ownership. To that end, he’s been engaging in a series of town hall meetings, including one I wrote about with CNN, and another in midtown Manhattan with about 150 employees of HBO.
A recording of the latter meeting was obtained by the New York Times, and the message being sent was clear: Stankey wants HBO to change in significant ways. Specifically, he wants to pour money into the network so that it can, in the Times’ paraphrase, get “bigger and broader.” In other words, so it can compete with Netflix. “You will work very hard, and this next year will—my wife hates it when I say this—feel like childbirth,” Stankey said to HBO’s staff*. “You’ll look back on it and be very fond of it, but it’s not going to feel great while you’re in the middle of it.”
The big question now is: What kind of change is coming to HBO, and will it be good for the network?
AT&T certainly has a strategic interest in competing with Netflix. As Stankey said at the town hall, “I want more hours of engagement. Why are more hours of engagement important? Because you get more data and information about a customer that then allows you to do things like monetize through alternate models of advertising.” Stankey wants to be able to deliver Warner Media content directly to AT&T telephones without going through any intermediaries, and he wants to be able to target ads along with that content without having to go through Google or Facebook. For that, he needs as much engagement as he can get; he doesn’t really care about the inherent quality of the content.
So long as HBO is just one part of a multipronged strategy, with Warner Brothers and Turner and even CNN all doing their bit to drive total engagement, then HBO chief Richard Plepler and his staffers will probably be happy with their ability to use increased investment to make more hours of programming. The big worry, though, is that Stankey is looking to HBO to be the main engine of that engagement. If Stankey really wants HBO to achieve Netflix-level engagement on its own, that would involve tearing up the very recipe for HBO’s success. And no good can come of that.
In January 2013, Netflix content boss Ted Sarandos told GQ, in a now-legendary formulation, that “The goal is to become HBO faster than HBO can become us.” Netflix, famously, achieved that goal: It started out with House of Cards, and now produces the same sort of prestige television (The Crown, Stranger Things, Master of None) that HBO does. What’s more, Netflix’s value proposition is clearly more compelling than HBO’s. Netflix plans cost from $8 to $14 per month and include just as much premium content as can be found on HBO, which costs $15 per month. On top of that, of course, Netflix has an almost limitless array of non-premium content, from Fuller House and a large suite of Adam Sandler movies to bottomless wells of reality TV and kids’ content. It also has similarly large libraries in many non-English languages, which has helped to make it the one-stop TV option of choice for millions of American households with family members whose native tongue is not English.
Netflix is also significantly more valuable than HBO: Its market capitalization of $180 billion is more than double the amount that AT&T paid for all of Time Warner, which includes Warner Brothers, Turner, CNN, and many other non-HBO properties. It’s no wonder Stankey wants his acquisition to be more like Netflix.
Still, there’s one measure where Netflix remains behind HBO, and that’s profit. Netflix recently announced record quarterly earnings of $290 million for the first quarter of this year, with a forecast of an even higher $358 million in the second quarter. HBO, by contrast, has been earning more than $500 million every quarter for years and doesn’t have to shovel cash out the door to do so. (Netflix is expected to spend $13 billion on programming this year, much of it allocated to future years’ programming, and it can’t come close to paying for all of that out of its revenues. HBO’s content budget, by contrast, is just $2 billion per year.)
This, then, is where Stankey starts sounding like he wants to both have his cake and eat it. On the one hand, he seems to have decided that HBO should try to become Netflix. When it comes to the amount of time that people spend watching HBO, Stankey told the HBO staffers, “We need hours a day, not hours a week, and not hours a month. We need hours a day.” Hours a day is currently Netflix’s thing.
On the other hand, Stankey also said that he wants more profits from HBO—that while HBO is currently making money, it’s not making enough. The problem is that if he starts ploughing billions of extra dollars into the HBO budget—the kind of money that would enable the unit to put out more content and get more hours a day—then that will bring the unit’s profits down, not up.
Spending more money on premium content will probably bring in some new subscribers, but not nearly enough to cover the cost of the new content. That’s why the old Time Warner never did it. Lowering the cost of a subscription would also bring in new subscribers, while reducing profits and angering many cable operators. HBO was the crown jewel of Time Warner precisely because it was so incredibly profitable, year in and year out. If Stankey wants higher revenue, he can get that through investment. He can get more engagement, too. But he’s probably deluding himself if he thinks that he can hit the trifecta and get higher profits to boot.
Stankey’s comments have been met with a substantial degree of consternation because HBO staffers and viewers are deeply connected to the network’s consistent quality, in a way that Netflix subscribers are not. HBO is a high-end brand: A new HBO series like Sharp Objects will always be received with the assumption that it’s a major cultural event, just because it’s coming from HBO. The same cannot be said of Netflix Originals because Netflix Originals need to appeal to a much broader range of audiences to make a dent in all that spending.
It makes sense for Stankey to want to compete with Netflix, but HBO is simply not the best platform to use to do so. HBO cares about nothing more than its reputation for quality: It will make Veep, but it would never make Fuller House. That obsession has turned it into one of the most valuable brands in the media world. HBO is worth much more than the $4 billion that Disney paid for Lucasfilm, plus the $4 billion Disney paid for Marvel, plus the $7.4 billion Disney paid for Pixar: The New Yorker estimated it was worth more than $30 billion in 2015, and it has surely increased in value since then.
The best move for AT&T is, then, is to take a page out of the Disney playbook and leverage the HBO brand by playing to its strengths without trying to turn it into something it isn’t. If Stankey wants to reach the kind of people who watch Adam Sandler films on Netflix, he should find a vehicle whose entire value proposition isn’t built on quality.
Correction, July 10, 2018: This piece originally misattributed a quote about the next year at HBO feeling like childbirth to HBO chief Richard Plepler. It was John Stankey who said that.
