AT&T (NYSE: T) revealed some key details about its forthcoming streaming service HBO Max earlier this year, but one key detail remains unknown. So far, nobody at AT&T or its WarnerMedia subsidiary has officially announced a price for the service, which includes everything on its HBO Now service and much more. But WarnerMedia chief and AT&T COO John Stankey is considering a price point of $14.99 per month, the same as HBO Now, according to a report from Dylan Beyers of NBC News.
That price point may seem strange to both consumers and investors considering that HBO Max promises much more content than HBO Now, but there are three good reasons for Stankey and company to price the more robust service at the same price.
Image source: AT&T.
1. HBO subscriber retention
We've entered a post-Game of Thrones era, and that's a stark reality for HBO. The premium network also saw or will see the finales of several other popular shows this year, including comedies Veep and Silicon Valley. There are a lot fewer reasons for subscribers to stick around this year than there were last year, when season 8 of Game of Thrones held so much potential.
The company saw a 16% drop in revenue the month after the series finale in May, according to data from Sensor Tower. That's a much steeper drop than in 2017 but significantly better than in prior years.
Adding a broad catalog of content to HBO's library ought to improve subscriber retention for the over-the-top service. It should also help reduce seasonality in subscriber growth, as the slate of original content releases can have a major impact on net subscriber additions, even for services the size of Netflix (NASDAQ: NFLX).
Overall, reduced churn could increase the average lifetime value per customer to the point where it practically offsets the increased investment in content.
2. Competition is priced to scale
AT&T is entering a market with a growing number of competitors that are all pricing their services in an effort to attract as many subscribers as possible. Disney (NYSE: DIS), for example, recently offered fans the option to pay just $141 for three years of access to the service once it launches. That's less than $4 per month, and it had millions of takers, by all indications.
Considering the value of Disney's content, even its standard $7 per-month price point is an absolute steal. Investors should expect a huge launch for Disney+, and for it to reach its goal of 60 million to 90 million subscribers in relatively short order.
There are merits to pricing a streaming service at such a value. Just look at the success of Netflix.
AT&T, however, isn't in a position to subsidize HBO Max's growth with a ridiculously low price point. Its agreements with pay-TV distributors, which still account for the vast majority of HBO's revenue, prevent it from pricing the service below $14.99 per month. So that's the best price it can offer in order to maximize growth in an increasingly competitive market.
3. The potential to raise prices later
By setting the price as low as possible to retain existing HBO Now subscribers and attract as many new subscribers as possible, AT&T can scale the service as quickly as possible. And if it can provide outsized value compared to its competitors like Netflix and Disney, it ought to be able to raise the price of HBO Max over time.
Consider the previously rumored price for HBO Max of $17 or $18 per month. HBO Now subscribers who were sticking around even after the Game of Thrones finale would certainly find that price point compelling, considering all the extra value they'd be getting over standard HBO. If AT&T continues to add value to HBO Max over time, it could justify increases in price.
Netflix has pulled off that strategy extremely well. The company has raised prices over the last five years as it builds out a robust catalog of original series that appeals to a very broad audience. Most subscribers stick around and pay the $1 or $2 per month more than they were paying the year before. Those who cancel often find themselves coming back to the service because they realize the value it provides.
Building a large audience is an important first step in that strategy, however, as that provides the ability to invest more in content to serve that audience. Thus, the $14.99 per-month price point is practically a necessity. As AT&T adds more content, increasing the value of the service, it can start to raise prices, too.
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Adam Levy owns shares of Walt Disney. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney and short October 2019 $125 calls on Walt Disney. The Motley Fool has a disclosure policy.
This article was originally published on Fool.com