Elliott Management Now Looms Larger in the Future of AT&T and WarnerMedia

HBO Max

A post on some HBO Max news since Tuesday’s mailing, and second, why Elliott Management looms large for Jason Kilar’s future at AT&T’s WarnerMedia.

First, WarnerMedia Reaches a Deal with Amazon for HBO Max

One big, new development this week: Variety’s Todd Spangler reported that stalled talks between Amazon and AT&T’s WarnerMedia produced some progress: Amazon Fire TV users who subscribe to HBO Now will continue to be able to access the service, which is being rebranded simply as HBO, as of Aug. 1.

That makes the conversion funnel on Amazon Fire devices a little clearer for HBO Now subscribers, and also makes those subscribers happier to know their service is not being cancelled. It now shifts the burden back on AT&T to figure out a better conversion funnel with Amazon for converting those subscribers to HBO Max users outside of Amazon Prime Channels.

And, no, still no update on WarnerMedia’s negotiations with Roku.

Follow-up to Tuesday’s Mailing on HBO Max (Or, Revisiting Elliott Management’s spin-off plan)

I wanted to quickly return to Monday’s mailing (purchase the entire mailing for $4.99 here) with an add-on point based on some conversations with readers (something I promised earlier this week but simply have not had the time for): if scaling HBO Max relies on Wholesale and Retail, and the conversion funnel for consumers in wholesale is too complicated to convert them from linear (something this Amazon HBO deal reflects), HBO Max initial trajectory is towards becoming almost entirely a Retail business.
Conversion funnels matter because they are integral to how HBO Max is going to scale in 2020 and beyond. Focusing on them helps to understand if/how the business is going to scale. Right now, it seems like neither existing nor target AT&T Wholesale customers do not understand what the value proposition of HBO Max is relative to HBO. Nor does it seem like they understand how to sign up for the service.
Stankey failing on converting subscribers across AT&T’s operationally inefficient structure is one big tell about HBO Max’s ability to scale. Warnermedia CEO Jason Kilar having success in Retail is another big tell.
I think I captured the basic “So what?’ of that in Tuesday’s mailing : Kilar and his team got a win in HBO Max’s first month, and implicitly, investors therefore should feel optimistic about its future. But I missed a key detail, as FierceVideo summarized:

[AT&T] said it’s seeing 70% more time spent on HBO Max verses HBO Now based on January 2020 HBO Now viewership. It also said HBO Max users are significantly younger than subscribers of traditional HBO, with 23% falling between the ages of 18-24.

70% more time spent implies that Kilar’s team is indeed doing a better job marketing the service than wholesale. It also implies Retail marketing efforts are also finding optimal users who deeply engage with the service, with “Friends” being the number one driver of consumption.

The Looming Presence of Elliott Management

I also did not ask an important question: if the trend lines of Kilar’s Retail conversion funnel strategy over-performing, and Stankey’s Wholesale conversion strategy underperforming continue, perhaps even at a 3-to-1 outperform (as Variety’s Gavin Bridge breaks down here), then what happens?
With a 2019 truce with Elliott Management after Elliott’s Activating AT&T Plan looming, I think that can be answered in two ways:
  1. What will happen to John Stankey?
  2. What will happen to Jason Kilar?

What will happen to John Stankey?

Elliott Management was no fan of John Stankey when it started the negotiations, as they were unhappy with his DirecTV and WarnerMedia acquisitions. As CNBC’s Alex Sherman wrote back in April:

Elliott was skeptical of Stankey’s decision-making as an architect of AT&T’s acquisitions of DirecTV and Time Warner. It advocated that AT&T focus on divesting assets and lowering debt, pushing the largest U.S. wireless company to sell DirecTV, one of the assets Stankey has steadfastly defended. AT&T has no plans to sell DirecTV, according to people familiar with the matter.

AT&T announced this week that it posted a net loss of 886,000 premium TV (DirecTV, U-verse) subscribers and a net loss of 68,000 AT&T TV Now subscribers. In other words, an entire universe of existing Wholesale subscribers is getting smaller while the HBO Max offer is being rolled out. If the free HBO Max offering for both new and existing subscribers has had any impact, it is effectively netted out to zero by the cord-cutting.
Given that Elliot believes WarnerMedia was a mistake for AT&T to have acquired, and if Stankey is unable to figure out cross company synergies, is AT&T going to hold onto WarnerMedia? Or is it likely to spin the unit off?

What will happen to Jason Kilar?

I do not want to make too much of a month’s worth of data, but given Elliott’s looming presence, Kilar is in a solid position if current trends continue (which, for the record, I believe they will given the scale and complexity of AT&T’s operating inefficiencies).

Meaning, he already has a win within an organization where lately it has been tough for divisions other than Wireless to find win. But let’s think bigger for a second.

Let’s say the growth of Retail subscribers continues to outperform the growth of Wholesale subscribers by some multiple – 3x or even 2x. In those growth scenarios, Kilar will have built a fantastic story for the WarnerMedia division to be sold or to go public, because he will have proved out his “the future is direct-to-consumer” vision. He will also have given Elliott Management a profitable version of its preferred outcome of a WarnerMedia spin-off.

So, if (really, when) Elliott Management decides over the next 12 to 24 months to push for a spin-off of WarnerMedia, Kilar will be both the visionary for that outcome and the future CEO of that independent or acquired company.

Whereas before I questioned why AT&T had hired Kilar when its focus was wireless growth, now I am anticipating a big exit event for WarnerMedia which will be win-win-win for AT&T shareholders, for Elliott Management, and for Jason Kilar.

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