Why WarnerMedia’s Blockbuster HBO Max Play May Not Boost Its Leverage in Roku Talks

The stakes are suddenly much higher for WarnerMedia and Roku in their months-long standoff over HBO Max.

The clock is ticking for both companies, which — 191 days after HBO Max’s U.S. debut — still don’t have a deal for Roku to distribute the HBO Max service on its platform.

WarnerMedia substantially upped the ante Thursday, announcing that Warner Bros.’ current 17-movie slate for 2021 will hit HBO Max day-and-date with theaters. That came after the media conglom already announced that Gal Gadot-starrer “Wonder Woman 1984” will hit HBO Max and theaters simultaneously on Dec. 25.

So will Roku customers get “Wonder Woman 1984” by Christmas Day — and does the coming pipeline of WB movies like “Matrix 4” and “Dune” add more pressure for the streaming platform to clinch a deal? It’s unclear.

The studio’s surprise windowing move is designed to ratchet up the allure of HBO Max and help WarnerMedia monetize its blockbuster titles through streaming, given the uncertainty that remains about how soon U.S. theaters might return to pre-COVID audience levels. But specifically, it’s a big card up WarnerMedia’s sleeve in the poker match with Roku to try to win a deal. Roku has 46 million users — a sizable black hole in HBO Max’s distribution matrix.

Sources confirm to Variety that WarnerMedia and Roku are in active talks. But both sides have signaled that they are unwilling to budge on their positions: Roku wants to keep HBO/HBO Max as a channel it can sell directly to its own customers, while WarnerMedia is insisting that HBO Max be available as a standalone app. The companies are also hashing out the terms for how they will divvy up ad inventory for the ad-subsidized version of HBO Max, which WarnerMedia plans to launch for a reduced price later in 2021.

Each company is playing a long game, but both have a lot to lose by not settling their differences as soon as possible. For Roku, the 2020 holiday-shopping season is already in full swing, and consumers are making buying decisions about connected-TV devices now — and the absence of HBO Max will hurt. WarnerMedia, meanwhile, needs to gain more new customers for HBO Max to make the economics of its model work.

Now WarnerMedia is making HBO Max much more of a must-have service by shattering theatrical windows for Warner Bros. movies. That may have been the deciding factor for Amazon to agree to an HBO Max deal last month for Fire TV, with the tradeoff being that Amazon will no longer have the right to sell HBO through the Prime Video Channels.

But the question still remains: Which side needs the other more?

This summer, asked about HBO Max, Roku CEO Anthony Wood told Variety that the company offers comparable terms to all content partners. He’s also touted Roku’s role in fueling Disney Plus’ rapid subscriber ramp. “Fair and reasonable content distribution deals are how we finance the low-cost easy-to-use Roku platform that consumers use to access these services on their TVs,” he said.

As for why Roku wants to retain the ability to sell HBO through the Roku Channel, Wood claimed the model results in higher content viewing among Roku customers compared with separate apps, “which benefits us and our content partners economically.” Needless to say, WarnerMedia hasn’t found that a persuasive argument to this point.

WarnerMedia CEO Jason Kilar recently engaged in a bit of saber rattling, when he suggested out that device makers without HBO Max will see their sales suffer. “As we head into the fourth quarter, when gift-giving happens, it becomes a more material situation for a seller of hardware” to carry HBO Max, he told Bloomberg in August.

But by moving the Warner Bros. slate to day-and-date on HBO Max, WarnerMedia has put itself under significant new pressure to grow the HBO Max base.

The shift will result in $1.2 billion lost revenue annually for WarnerMedia, because it’s killing off of exclusive theatrical windows while putting movies on HBO Max also will depress revenue from home-entertainment releases, according to estimates by Craig Moffett, founding partner of analyst firm MoffettNathanson.

As a result, HBO Max’s annual average subscriber base would need to be 8.4 million higher than its current pace of additions to make itself whole, per Moffett. “The market has shown a clear preference for go-big-or-go-home digital strategies,” he wrote in a research note. “The most obvious takeaway from yesterday’s news is that AT&T is, come hell or high water, going to drive traffic to HBO Max.”

At the same time, Roku, boosted by the COVID pandemic, has seen significant momentum. The company will close out 2020 with an estimated 52 million user accounts — with have a footprint representing around 40% of all U.S. broadband households, according to Rosenblatt Securities.

HBO Max gained a little over 3.6 million retail subscriptions from its late-May launch through Sept. 30. All told, 28.7 million customers were eligible to get HBO Max at the end of Q3 — but HBO Max had only 8.6 million total “activated” subscribers, or about 30% of the total potential customers. The deal with Amazon will help raise that number but WarnerMedia still needs Roku to turn the corner on getting more subs into the HBO Max fold.

Roku is driving a harder bargain for HBO Max than Amazon because, unlike the tech giant, Roku is entirely dependent on revenue-sharing deals and advertising. Amazon is a gigantic company that is significantly more diversified than Roku from a business model perspective, said Joe McCormack, telecom and media analyst at Third Bridge. “Data and customer relationship ownership are of course themes as well, where HBO Max hopes to become a platform that owns customer viewership data as well as the billing experience,” McCormack said.

Roku’s standard deal terms for content partners is to take 20% of subscription fees and 30% of ad inventory on partner channels. That ad split had been a nonstarter for NBCUniversal’s Peacock, which has a lighter ad load than most AVOD services; Roku and NBCU worked out a compromise in September.

WarnerMedia is similarly balking at signing away a swath of HBO Max ad inventory to Roku. If HBO Max, as execs have indicated, eventually incorporates live programming from CNN or Turner Sports, “they would not want to be taxed by Roku,” said McCormack.

Roku has shown a willingness to hold the line in not making concessions to WarnerMedia, because any deal that Roku cuts for HBO Max would establish a precedent for other distribution agreements. But the sheer tonnage of movies coming to HBO Max will weigh into how badly Roku needs to get the streamer on its devices — and how quickly.

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