The Ratings Game: Warner Bros. streaming shake-up praised by some analysts, while others say it won’t work

This image released by Warner Bros. Pictures shows a scene from the coming film “In the Heights.” Warner Bos. Pictures on Thursday announced that all of its 2021 film slate – including a new “Matrix” movie, “Godzilla vs. Kong” and the Lin-Manuel Miranda adaptation “In the Heights” – will stream on HBO Max at the same time they play in theaters.


AP

AT&T Inc. is the latest company to shake up the movie landscape during the pandemic, and analysts are divided on the company’s new strategy.

The telecommunications giant’s Warner Bros. unit announced Thursday that it would be making 17 movies from its 2021 slate available on the new HBO Max streaming service on the same day that they release to theaters. Subscribers will be able to watch these movies at no additional cost for 31 days, before the company reverts to a “windowing” strategy that will allow the movies to play only in theaters before they become available again for on-demand viewing.

Through the traditional notion of windowing, studios agree that their movies will be available only in theaters for a period of time before at-home viewers can begin queuing them up on-demand. But the COVID-19 crisis has limited theater viewing, prompting Warner Bros. and other media units to look for creative ways to get their movies out to customers without delaying their releases any longer.

Warner Bros. called the move a “unique one-year plan” that will allow people to watch films like “The Little Things,” “Godzilla vs. Kong,” and In The Heights” from home during a year when “most theaters in the U.S. will likely operate at reduced capacity.”

Citi Research analyst Michael Rollins said that he views the effort positively, since it could accelerate subscriber growth for HBO Max.

See also: Why cinema will survive the coronavirus pandemic

“The strategy is likely to raise awareness and the attractiveness of content available on HBO Max with plans for a steady stream of film releases (1 film released every 3 weeks, on average) combined with an accelerated pipeline of productions (series and specials) for HBO & Max,” he wrote. In Rollins’ view, investors may come to “value HBO separately using [Enterprise Value]/Subscriber values that we believe can contribute $1-$5 per share to AT&T’s valuation.”

He rates AT&T’s stock
T,
+0.80%

a buy with a $36 target price.

Bernstein analyst Peter Supino wrote that Warner’s move is “far bolder” than the agreement struck between Comcast Corp.’s
CMCSA,
-0.15%

Universal and AMC Entertainment
AMC,
-5.50%
,
which shortened the traditional window of theatrical exclusivity.

“We support any risk that AT&T and Comcast chose to take which invests film IP in vital direct-to-consumer (DTC) businesses,” he wrote, while maintaining a market perform rating and $32 price target on AT&T’s stock.

MoffettNathanson analyst Craig Moffett was less upbeat in a note titled “Suicide Squad?” in a play on one of the films that will eligible for release through this strategy.

“Indeed, this decision will be a very costly one for everyone involved: AT&T, participants/rights holders, and theatrical exhibitors,” he wrote. “It is hard to find any winners here.”

Moffett ran through the traditional economics of film releases for studios:


In the traditional accounting for film distribution, studios book much of their expense up front and monetize content effectively through windowing, starting with the box office, then home video, followed by the Pay 1 window (e.g., HBO) and other syndication windows down the line. For most studios – with the exception of Disney – most films do not turn a profit while in theaters; it is the Pay 1 window that typically (hopefully) gets a studio to breakeven on their original investment, and it is the secondary and tertiary windows that (hopefully) allow the studio to turn a profit.


— Craig Moffett, MoffettNathanson

In the case of Warner Bros., the approach to 2021 film release means that the Pay 1 window is now the HBO Max release, a move that “no longer generates cash” but instead “merely shifts content between WarnerMedia segments.”

He added that “there will no doubt be back-end and residual payments made by Warner Bros to the affected film talent and other rights holders, who will forgo material back-end window monetization” now that Warner Bros. is taking this approach to film distribution. “The mere appearance of self-distributing could be seen as running counter to the best-in-class culture that has long been Warner’s selling point to world-class talent,” he argued.

The theaters are in a tricky spot as well, he said, as they may be too financially strained to protest this strategy and hold off on showing these 17 Warner Bros. films at all, but they also risk setting a harmful precedent if they agree to work with Warner Bros. under these conditions. Moffett notes that Walt Disney Co.
DIS,
+0.22%

is expected to change up its own windowing approach when it holds an investor day next week.

He has a sell rating and $24 price target on AT&T’s stock.

Read: Disney shakes up streaming approach after losing nearly $5 billion due to pandemic

Wedbush analyst Michael Pachter wrote that AT&T’s approach “probably won’t play out as advertised” given expected pushback from theater exhibitors.

“We think the exhibitors will aggressively negotiate for far fewer films to be released day-and-date on HBO Max, based on the timing of vaccine distribution instead of the full calendar year,” he wrote. Ultimately, he expects the parties to reach an agreement similar to the arrangement on “dynamic windows” that Universal made with theater operators like Cinemark Holdings Inc.
CNK,
+8.26%

one, which create longer exclusive theater access for bigger films and a quicker move to at-home viewing for smaller ones.

Pachter has a neutral rating and $2.50 price target on shares of AMC Entertainment and an outperform rating and $15 price target on shares of Cinemark.

B Riley’s Eric Wold wrote that theater exhibitors “will only show films with favorable terms,” which “increases the risk on Warner Bros. into each film.”

AT&T shares are up 0.9% in Friday trading after gaining 0.5% in Thursday’s session. AMC shares are down 6.5% Friday after a 16% slide Thursday, while Cinemark shares are up 4.4% Friday following a 22% plummet Thursday.

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