In early December, Warner Bros. made the surprising decision to release all of its 2021 films not only in theaters, but also simultaneously on HBO Max. Its 2021 lineup, including The Matrix 4, Space Jam: A New Legacy, and Suicide Squad, will appear on the platform for one month before returning to theaters exclusively.

The announcement and its communication were widely criticized by movie directors, including Christopher Nolan, the renowned Warner Bros. director of Inception, Interstellar, and The Dark Knight trilogy, who said that the decision “made no economic sense.” Following this rift, it appears that Nolan will no longer be working with the studio going forward.

Context

There are two important pieces of context to understand this move:

1. As a reminder, Warner Bros. and HBO Max are both owned by AT&T, who purchased the two in its acquisition of Time Warner’s content assets in 2018. Thus, AT&T is probably the one calling the shots here, diverting content and revenues from Warner Bros. to HBO Max.
   
2. Warner Bros. / AT&T’s decision to simultaneously release movies in theaters and on HBO Max may have been prompted by the flop of the August theater-only release of Christopher Nolan’s Tenet, which some fear may lose up to $100M. Given how poorly his last film did in theaters, it is a little surprising how angry Nolan was at AT&T’s decision.

Takeaway #1

While Warner Bros. was not the first to test this direct-to-streaming model, this decision is a major shift for the industry.

Other production companies began testing this direct-to-streaming model when the pandemic forced movies theaters to close. Comcast / Universal Pictures raked in nearly $100M over three weeks by choosing to release the movie Trolls World Tour only on streaming platforms for $20 / rental. Disney implemented a similar approach with the live-action remake of Mulan, releasing the picture straight on Disney+ and charging $30 / purchase.

While other media companies tested this idea, the Warner Bros. announcement is different for two reasons:

1. First, Trolls World Tour and Mulan were both released as premium rentals / purchases, meaning you had to pay an additional $20 – $30 on top of the cost of the streaming platform to watch the movies. For the Warner Bros. lineup, all of these movies will be free if you subscribe to HBO Max.
   
2. Second, AT&T / Warner Bros. are not testing this plan with a movie or two. They are doing it with their entire lineup of 17 films over the course of an entire year.

In my mind, there are two ways you could view this decision.

1. The movie theater optimist may say that this decision was prompted entirely by the pandemic / movie theater closures and that movie studios will return to the typical movie theater model post-COVID.
   
2. The movie theater pessimist may argue that this was inevitable, and that COVID has simply accelerated a fundamental shift in the business model of the movie industry towards primarily releasing movies directly on streaming platforms.

I tend to fall more in line with the pessimist. In my mind, there are just too many advantages of the streaming business model (and subscription models in general). Here are a couple of the most poignant for production companies:

1. Stronger business valuations: Experts estimate that businesses with recurring revenue models are worth up to eight times as much as comparable businesses with little recurring revenue.
   
2. More revenue for themselves: Currently, movie theaters take a portion of the revenues made by ticket sales. By distributing content on their own streaming platforms, production companies can cut out the middleman and own a greater share of the revenues.
   
3. Less downside risk: Movie companies are always worried about “flops” – movies that cost a lot but bring in little money. While that risk still exists in a direct-to-streaming model (in a different form), there is less downside risk as production companies have more predictable revenue.
   
4. More customer data: Production companies inherently get more data on customers through online streaming platforms. With this data, production companies are able to better tailor content to individuals to keep them engaged with the platform.

Takeaway #2

This decision makes sense for Warner Bros. (but only for Warner Bros.)

In October, AT&T CEO John Stankey said of streaming: “the customer acquisition game is an originals game. The customer retention game is the library game.” In other words, customers subscribe because of original content, but stay because of the strength of the rest of the content.

I think this is a great way to put it. Disney+ clearly took advantage of this strategy by marketing The Mandalorian as a way to gain subscribers around the release of Disney+. HBO (in its previous form) struggled with this strategy, as customers canceled their subscriptions after Game of Thrones ended.

John Stankey and AT&T are also executing on this strategy with the decision to put all of Warner Bros.’s 2021 movies on HBO Max. Make no mistake – this is AT&T betting on the depth of its library. They’re hoping that if they can get people to sign up to watch Warner Bros. blockbusters, they will stick around to watch the rest of its content (and they probably will when they realize where they can stream Friends…).

I think AT&T’s decision makes sense – I’m clearly more bullish than Christopher Nolan. However, I think there are three reasons why it may make sense only for Warner Bros. – not other production companies.

1. Subscriber counts: HBO Max has struggled to gain subscribers, especially compared to Netflix and Disney+. HBO Max needs an original content boost (like from blockbuster movies) to grow its subscriber base. Disney+, which has seen some of the fastest growth of any app ever, doesn’t need to spur new subscriber growth as HBO Max does.
   
2. Product strategy: HBO Max wants to differentiate itself with the quality of its content. Since the days of the HBO / Netflix streaming battle, HBO has made its strategy clear: while Netflix may choose quantity over quality, HBO has always chosen to produce high-quality shows (e.g., Game of Thrones, Westworld) at a higher cost. Thus, this decision fits well with its brand and product strategy.
   
3. Pricing: Clearly related to point #2, but this decision makes sense based on HBO Max’s pricing model. With Netflix starting at $9 / month and Disney+ starting at $7 / month, HBO Max is clearly positioned as the premium product with a $15 / month price point. HBO Max is literally making roughly twice as much money per subscriber as Disney is. Thus, for HBO Max, adding new subscribers is way more important than for Disney+. This direct-to-streaming decision would make less sense for Disney, who would get less upside from forfeiting theater revenues for Disney+ revenues.

Parting thoughts

Whether you agree with AT&T’s decision or not, you have to admit that this is a bold strategy that will have lasting repercussions.

What do you think? Should AT&T / Warner Bros. continue releasing movies straight to HBO Max after the pandemic? Should Disney or Universal Studios (with Peacock) adopt a similar strategy? Is the movie theater business model built to last, or is it destined for a fate like Blockbuster?

Build your point of view.