Breaking Windows, Breaking TV's Reach for Advertisers -- The Impact of Warner Bros.'s HBO Max News on Ad-Supported TV

The focus of the effort is primarily domestic as HBO Max39s presence outside of the United States is limited due to preexisting licensing arrangements for HBO content to other distributors and packagers however there will be international ramifications for TV markets around the world just as there will be an impact on the broader television universe at homeAlthough the news was announced in context of a single year rather than necessarily representing a permanent change it is clearly made in context of managing the business with an eye toward optimizing the longterm business proposition for the entire Warner Media portfolio which includes the legacy Warner Bros studio business HBO and Turner Networks businesses of Time WarnerHBO and HBO Max39s total content budget might amount to 67 billion in 2021 To convey the scale of this news the value of a year39s output from Warner Bros39 theatrical business before the ATampampT acquisition in 2018 typically amounted to 34 billion of cash costs with perhaps half of that value attributable to the US marketEven if the value of the 2021 slate is more like 12 billion that would be a significant amount in context of the HBO Max39s existing content costs On its own HBO was historically spending around 2 billion per year on content most of which would be attributable to domestic operations Last year ATampampT indicated its domestic expenses for HBO Max would add another 3 billion in content costs versus 2019 baseline levelsIt is unclear if the studio slate represents an incremental expense but it may very well be given the preexisting commitments that HBO Max may already have in place for next year Six to seven billion dollars would fall around a Netflixlike zoneamp8212Netflix39s allocated content expenses for the United States probably amount to similar levels on an accrual basisThe quotTVquothomebased video industry amp8211 including the appeal of advertising within the medium amp8211 is potentially impacted even more as knockon effects follow Putting the immediate impact on the theatrical business aside for a moment the news is potentially more significant for the longrun health of traditional TV especially as this news may catalyze an quotarms racequot of content investments by streaming servicesIn general we think that the share of spending in content investment by a video packager meaning a network or streaming service should over time roughly equal the audience share it can generate If that holds true billions of dollars of quotnewquot investment in content by one packager will lead to increased share of viewing for that company There would be a negative impact on packagers who merely maintain their content spending incenting them to follow suit as best as they can For advertisers this could lead to a significant reduction in quality advertising opportunities given many of these video packagers do not currently rely on adsupported business modelsAccess to theatrical content might be enough of a catalyst to cause more HBO subscribers to shift from the linear service to HBO Max Despite these spending levels HBO and HBO Max combined do not presently have anything like Netflix39s viewing levels which currently account for around a third of streaming content viewing which itself is nearly 20 of total TV viewing at present By contrast all premium pay TV from all networks delivered through traditional services accounts for less than 2 of all viewing in the United StatesDespite launching earlier this year HBO Max has relatively few subscribers so far between its newly acquired subs and those who have transitioned their accounts To the extent that access to the Warner Bros slate persuades legacy HBO subscribers to sign up for HBO Max amp8211 which is costless to traditional HBO subscribers but would lead to consumers using their internetconnected devices to access the service typically Of course to get there ATampampTWarner will still have some work to do in making it easier to access HBO Max whose distribution efforts and consumer electronics relationships have been misaligned with the product39s content launches to dateFurther Warner Media will also need to ensure that its financial outcomes are consistent with expectations from its parent company which historically deployed the bulk of its resources to support a dividend to investors capital expenditures for its phone network and pension expenses for its former workers Warner is likely making the right investments for a business that wants to be around in 50 years but to get there it must survive the next fiveSeveral companies are spending on content in a range that is similar to or superior to HBO39s Among quotupstartsquot without traditional TV properties Netflix Amazon and Apple have demonstrated a willingness to invest midsingle digit billions of dollars or more in annual content production or licensing feesDisney has demonstrated that it will be in that zone and likely will reiterate these plans during its own streamingfocused investor day next week But the scale of cordcutting and reduction in consumption of traditional TV would be multiplied if other traditional studio owners including Comcast and Viacom were to follow suit and significantly expand investments in original programming for their SVOD services This could occur in the form of a similar shift of access to theatrical slates in the form of new investments in exclusive SVOD content or in the form of a shift in greater volumes of toptier linear content from traditional networks to these new environmentsSo far we have seen an effort to balance nearterm financial goals and longerterm strategic flexibility but news like what we heard this week could shift that balance toward a more significant investment in SVOD sooner rather than laterInternationally the consequence of these investments could lead to significant financial pressure on single countryfocused TV network owners to combine operations with their peers from other markets Such efforts are already underway in many cases but those efforts might likely accelerate nowThe efficacy of advertising in adsupported television could be negatively impacted in a meaningful way Beyond the direct financial costs to drive all of these changes a significant expansion of investment in content in SVOD services could have a meaningful impact on the advertising industry accelerating preexisting trends This accelerated investment in content in SVOD environments will lead to consumers reducing their time with linear TVCordcutting will likely accelerate and channelsurfing of adsupported linear TV content will be negatively impacted as well This is partially because consumers might be more likely to spend more time navigating the content within any given SVOD appamp8212or otherwise consume content that it recommendsamp8212and only a small share of this viewing will ever be adsupported Additionally once consumers are in connected TV environments and away from their linear channel guides they are probably more likely to view content from other SVOD services as wellAll of this will limit the number of people who watch adsupported television and advertisers will find it increasingly challenging to accomplish the reach and frequency goals they set in order to optimally manage their TV advertising budgetsTangibly we could imagine the next upfront marketplace for the 202122 season to be highly constrained because of the increase in erosion of audiences Sports news and other live programming might become relatively more important versus general entertainment programming on adsupported networksTheatrical business is most impacted immediately Of course the initial impact of this action will be on theater owners and it could be severe Traditionally the most important distributors of films these companies will be negatively impacted on an ongoing basis if consumers are able to access content from home that they might otherwise have expected to see in a cinema The commercial terms under which Warner and cinemas operate will likely be affected if their new distribution model persistsAnd then there are knockon effects that might depend on what competitors do or do not doTotal revenues and profitability for Warner Media will be impacted perhaps negatively at first amp8211 higher revenues from new subscribers and reduced churn from existing ones at HBO Max might not offset lost revenues from theater owners whether because the quotsplitsquot the studio earns will fall or because theaters may be less likely to run Warner films amp8211 but positively in the long run if it helps to continuously build an everincreasing subscriber baseTheatrical marketing will likely be impacted as well To the extent that studios rely less on theatrical releases and opening weekend boxoffice results amp8211 typically a critical variable that can impact whether or not a studio further supports a title with additional advertising amp8211 much of the marketing that surrounds movie releases will changeStudios were already likely to see a shift of resources away from support of theatrical releases and toward gaining subscribers with more performance media but news like what came out today will serve to solidify the trendMore tactically SVOD service customer acquisition and specific title launches might be more tightly aligned Scheduling of launches may be less dependent on competitor actions with the elimination of constraints on number of available screens Additionally TV networks that have limited their ad sales to competitors39 SVOD services will find themselves having to make hard decisions about whether or not to turn down theatrical advertising when it is tied to a competitor39s SVOD offering or whether to take budgets regardless of what it promotesWhat should marketers outside of the studio business do Optimize but strategize Television remains a critical vehicle to support key marketing objectives for many of the world39s largest companies Its unique characteristics would allow adsupported forms of the medium to be disproportionately impactful even if consumer usage were half as big in the future as it is todayThere is still significant room for television to serve as an important component of any given advertising campaign and SVOD services will provide some new advertising and comarketing opportunities however these will be relatively small in comparison to the advertising inventory that will be lost from linear TV whose scale will continue to fallAs a result as time progresses the relative advantages of alternatives will continue to look better by comparison for most advertisers and so it remains critical that brands invest time exploring new and different ways to engage with consumers including alternative forms of media digital experiences or other touchpoints Establishing processes to assess the relative appeal of those alternatives under scenarios where television39s reach and frequency capabilities continue to erode will help to ensure that if the time were right to shift resources into different environments that alternative preferences are well understood across marketers39 broader organizationsEstablishing ideas around new ways to activate against those preferences can help ensure marketers are themselves wellpositioned to thrive This type of approach can help a marketer from any industry prepare to succeed during the next five years as well as the next fifty much as streaming services are preparing themselves by investing against their own longterm opportunities for growth with their own new initiativesREAD MORE OF BRIAN39S POVS HERECopyright and Republished with permissionPhoto courtesy of GroupMClick the social buttons to share this story with colleagues and friendsThe opinions expressed here are the author39s views and do not necessarily represent the views of MediaVillagecomMyersBizNetamp160

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Breaking Windows, Breaking TV's Reach for Advertisers -- The Impact of Warner Bros.'s HBO Max News on Ad-Supported TV

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