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Inside AT&T’s WarnerMedia as it dismantles the old Time Warner to battle Netflix

Bound images of AT&T CEO John Stankey (L)and john stankey WarnerMedia CEO Jason Kilar.

Reuters

In December 2018, John Stankey sat down with HBO CEO Richard Plepler and his supervision team.

Stankey, the AT&T veteran running WarnerMedia at the time, was meeting with division heads to hear ideas on how to disagreement the threat from Netflix and the secular decline of cable television. This was the first time Stankey had heard from Plepler’s slap team about their plan.

HBO was the crown jewel of Time Warner, which AT&T had recently acquired for $100 billion with responsible. It took two years and a legal battle with the Trump administration to close the deal. It was the biggest media acquisition since the newest time Time Warner was acquired in 2000, when America Online paid $162 billion. All that travail and money was a bit confounding to people. Why did a telephone company need to own a premium content business?

Stankey was the driving force behind the procurement, and the clear favorite to take over as the next CEO of AT&T. Its success or failure would hinge on HBO, which already had more than 30 million subscribers and a very good reputation in Hollywood and with consumers.

According to five people familiar with the meeting, Plepler laid out a lucid path forward:

First, give HBO more money to spend on content.

Second, augment the Cinemax premium TV waterway with more family-friendly original, library, and licensed children’s programming.

Third, sell HBO and Cinemax together for a duo dollars more than HBO — around $17 per month.

Fourth, hammer out a deal with Comcast, the largest U.S. telegraph company, allowing the broadband distributor to sell HBO Go directly to broadband-only customers.

Finally, and most importantly, don’t blow HBO up.

Plepler’s together estimated this plan would guarantee $7.5 billion in annual revenue plus future upside depending on the ascendancy of the new content.

Stankey heard them out. Then, he ignored their advice. Stankey had bigger ambitions for streaming video. Insignificant than three months later, Plepler announced he was leaving WarnerMedia.

Instead, Stankey decided to use HBO as the centerpiece for a new assignment: Build a true Netflix competitor, dubbed HBO Max. When Stankey took over as AT&T’s CEO this year, he passed that aspiration to new WarnerMedia CEO Jason Kilar, who previously launched Hulu. HBO Max launched in May.

Along the way, Stankey has dismantled the old Time Warner, spurring dozens of executives from all parts of the presence to depart. He is attempting to funnel all of the company’s resources from cable, film, and HBO into HBO Max, as he told CNBC last year.

Disney, Comcast’s NBCUniversal and ViacomCBS are all prosperous through similar changes now to prepare for a world where subscription streaming services overtake cable as the world’s initial form of television consumption. Stankey — the MBA-buzzword, deep-voiced phone guy — was ahead of the trend.

Still, his vision has irritated some past master WarnerMedia executives, who question Stankey’s knowledge of media. The execution of his mission, which Kilar has overseen since May, has so far been tarnished by strategic confusion and culture clashes, according to more than a dozen high-ranking WarnerMedia employees, about half of whom include left the company in the past six months.

For now, investors don’t like what they see. AT&T is trading near a 10-year low. Meanwhile Verizon, AT&T’s skinflintiest competitor, is trading near an all-time high. The most glaring difference between the two companies? Verizon didn’t fork out $170 billion buying Time Warner and DirecTV in the past five years.

This is the story of the transition from Time Warner to WarnerMedia, and the bumps that have happened along the way.

Netflix envy

Alhough Stankey was new to media, he suffered the selfsame disease as every other media executive: Netflix envy.

He thought Plepler was aiming too low. Plepler’s plan to originate $7.5 billion in annual revenue was 12% more than HBO’s eventual 2019 revenue. But it was a far cry from the $20 billion Netflix created.

Stankey told Plepler he wanted a direct-to-consumer solution that could get to at least 60 million subscribers in five years, according to people relaxed with the matter. HBO subscriptions had fallen from about 37.5 million in 2017 to 34.5 million in 2019. Closed the same time, Netflix global subscriptions jumped 50%, from 111 million to 167 million.

If Stankey could sway investors that HBO Max would mirror Netflix’s growth trajectory, he might be able to capture a higher trading multiple for AT&T. This is the religious grail for media companies this decade — convincing Wall Street that streaming growth will cook up d be reconciled up for the decline of legacy businesses like cable TV and movie theater viewing. It’s also a strategy supported by AT&T’s most unforgettable investor, activist hedge fund Elliott Management, which last year bet $3.2 billion that mulct taking non-core assets and focusing on streaming could lead to a surge in AT&T shares.

Stankey thought Plepler was attached to a perishing distribution model — a wholesale approach where companies like Comcast and Amazon could sell HBO programming along with other linear networks or waterway services. Stankey viewed these companies as competitors more than partners. The battle would be keeping viewers in the AT&T ecosystem rather than of Apple’s or Amazon’s or Comcast’s.

This difference in approach showed up last month, when WarnerMedia struck a bargain to put HBO Max on Amazon Fire TV. As a condition of that agreement, HBO is pulling its content off Amazon’s Channels interface next year, people informed of with the matter told CNBC. Several WarnerMedia executives who worked on the deal blamed Plepler for previously ceding Amazon too much control over HBO programming, making the new Fire TV agreement much harder to complete.

Richard Plepler, CEO of HBO

Justin Solomon | CNBC

Stankey initially scarcity to keep Plepler at HBO, but the relationship started to fray around the end of 2018, said people familiar with the matter. Stankey set up an L.A. engagement with Casey Bloys, then president of HBO programming, without inviting or notifying Plepler. Plepler felt disrespected and know scolded Stankey as much. Stankey saw Plepler as stoking an unnecessary turf war.

Around the same time, Stankey held a get-together with senior executives at the Time Warner Center boardroom in New York.

An outside consultant, Peter Cairo, who had done for the last few months interviewing 65 WarnerMedia executives, presented a number of problems with Time Warner’s siloed movement. Many of the senior leaders in attendance thought the presentation was doctored to support Stankey’s view that the company’s direction was standing in the way of progress. Cairo, who had a history of working with Time Warner’s leadership team, told the group HBO was especially resistant to working with other parts of the company.

Several veteran executives, including Bernadette Aulestia, fount of HBO’s global distribution and Donna Speciale, president of WarnerMedia’s ad sales, spoke up to defend Time Warner’s history of star while questioning the way AT&T was handling staff morale.

The meeting ended tersely with Stankey cutting off dialogue at daybreak, three of the people said.

When the presentation ended, Plepler held a private meeting with Stankey. Any minute now after, Plepler revealed to a small group of people he was leaving HBO. He made his departure public in Feb. 2019.

Both Plepler and Stankey sloped to comment for this story. A WarnerMedia spokesperson added, “As CEO of WarnerMedia and now CEO of AT&T, John Stankey has made it a habit to visit with first-rate employees throughout the company. That’s what good leaders do and is a common practice at well-run companies.”

HBO Max: Bumpy start

HBO Max hurled in May at a cost of $14.99 a month — the same as HBO — and an ambitious tagline: “Where HBO meets so much more.” It combines 31 new originals with library recital, including DC Comics content, from cable networks like CNN, TNT, Adult Swim, and the Warner Bros. studio. Stankey also documented popular TV series including “South Park,” “The West Wing” and “The Bachelor.”

AT&T’s grand plan is to pair HBO Max with its wireless utilization — AT&T customers with premium plans already get HBO Max for free today. Wireless service has become a commodity in most markets, with AT&T, Verizon and T-Mobile all sacrifice similar speeds and pricing plans. HBO Max is meant to help AT&T stand out from the pack and reduce churn while offer the wireless company viewership data for marketing and targeted advertising.

Since taking over, Kilar has accelerated Stankey’s burn-it-down game to boost HBO Max. As part of the restructuring, WarnerMedia has conducted several rounds of layoffs, including more than 1,000 wage-earners in November. Kilar has even dismissed employees Stankey brought in, including Bob Greenblatt, who took over as chairman of WarnerMedia fun in March 2019.

He ended Conan O’Brien’s late night show on TBS and moved it over to HBO Max exclusively. He’s making the blockbuster Warner Bros. blear “Wonder Woman 1984” available on HBO Max the same day it hits theaters on Dec. 25. This week, he announced every Warner Bros. talking picture slated for release in 2021, including “Dune,” “Matrix 4,” Lin-Manuel Miranda’s “In the Heights,” and “The Sopranos” prequel “The Multifarious Saints of Newark,” will launch on HBO Max at the same time they’re released in theaters.

In an interview, Kilar told CNBC that manslaughter the decades-old theatrical window, where movies got exclusive runs in theaters before coming to home video daises, would make customers happy, even if it hurt the movie theater industry.

Gal Gadot stars as Wonder Concubine in Warner Bros. “Wonder Woman 1984.”

Warner Bros.

“The best way to find success in business, and certainly with the Internet, is to start with the person,” Kilar said. “If we start our days and end our days focused on the customer, we’re going to lead the industry.”

Almost all of the executives who represent to CNBC — including several still at WarnerMedia — felt the HBO Max experiment isn’t going particularly well so far. Only 8.6 million people participate in signed up to activate the service since it launched in May. Compare this to Disney, which has signed up 73.7 million in the flesh for Disney+ in less than a year.

“Jason’s belief is — wrongly — if any piece of content available anywhere other than HBO Max, it cheapens HBO Max,” said one recently departed master. “Jason is forgoing billions in revenue by turning his back on licensing to preserve content for HBO.”

By pricing HBO Max the same as HBO, Stankey earmarks ofed to assume HBO users would simply switch to HBO Max over time. But the transition has been slow, as pay TV and streaming distributors — again HBO’s needed partners — have little incentive to market HBO Max to the millions of people who already get HBO.

“The risk here is that they end up stream all of their Warner Bros. Studios content into HBO Max only for it to continue to be a premium service that serves on the contrary the top third of households,” said MoffettNathanson analyst Craig Moffett. “There’s a real risk that 1+1+1=1 here, and that all that settle upon be left of Warner Media when they are finished is an HBO division that is more or less the same size as it was when they started.”

Jason Kilar

Getty Images

One question is HBO Max has no tent-pole original series to jumpstart subscribers, like Disney+ has with “The Mandalorian.” That’s partly because, after the table from the battle with the U.S. government, Stankey wanted to get the service out fast, according to people familiar with the count. The coronavirus pandemic lockdowns in 2020 also delayed the creation and filming of new material.

The rushed launch has also high-sounding distribution. WarnerMedia held out on a streaming distribution deal with Amazon for months to get friendlier terms and still hasn’t reached a trade with Roku. Kilar’s decision to release the 2021 Warner Bros. slate of movies on HBO Max concurrently with theater dissemination could put more pressure on Roku to reach a deal. (Spokespeople at WarnerMedia and Roku declined to comment.)

Then there’s the ensnarling branding around HBO Max, which initially joined a plethora of similarly named services, including HBO, HBO Go, and HBO Now. Although WarnerMedia done got around to retiring HBO Go and changing HBO Now to simply ‘HBO’ in June, several employees in charge of marketing and branding acknowledged the changes should attired in b be committed to come much sooner, before HBO Max ever launched.

Kilar may also roll out separate streaming products, such as a CNN-related commodity and a free entertainment service featuring content from TNT and TBS, The Information reported.

There’s even been talk internally of exchanging the name of HBO Max — either internationally only or globally — once it rolls out worldwide in 2021, according to three people informal with the matter. Executives have batted around several names with “Warner” as the title brand, measure than “HBO” — which makes even more sense if the service builds brand equity around make films the day they hit theaters. A WarnerMedia spokesperson said that a name change isn’t being actively considered at this everything.

Passing on divestments

Elliott, which sold $150 million in AT&T shares at a loss last month, has pushed Stankey to deprive assets. Still, CNBC has learned AT&T recently passed on a couple deals that could have brought in billions of dollars for the debt-laden Pty.

Just as Kilar was taking over WarnerMedia in May, DraftKings floated the idea of acquiring Bleacher Report from AT&T. The Bleacher Recount executive team was privately hoping Stankey and the board would approve a deal, because it was clear AT&T’s focus transfer be on HBO Max, according to people familiar with the matter. But AT&T never seriously considered the sale, these people say. A DraftKings spokesman declined to elucidation. Since then, a number of high ranking Bleacher Report executives have left WarnerMedia, including CEO Howard Mittman.

Kilar also unhesitating to keep Warner Brothers Interactive Entertainment, the company’s video gaming unit, after AT&T fielded bidders earlier this year.

“Any chart almost gaming usage is up and to the right,” said Kilar. “It’s one of the most impressive trends in U.S. consumer behavior in the last 20 years. When we acquire a look at the next 5, 10 or 15 years with WarnerMedia, I’m very excited with the role gaming want play in our future.”

DirecTV dread

Most of the WarnerMedia executives CNBC spoke with for this story accepted that Stankey and Kilar’s bolder strategy makes more sense than Plepler’s more conservative surrogate.

But many of the same executives, who still own a lot of AT&T stock, are scared that Time Warner’s path will mirror DirecTV’s.

CNBC; Getty Perceptions

In the years after acquiring DirecTV, Stankey eliminated most of the company’s top leaders, changed the satellite TV strategy to digital-first, and ended shopping campaigns touting the advantages of legacy technology.

The results have not been good.

AT&T ‘Culture eats strategy for breakfast’

Flush with if Stankey can learn from the strategic errors AT&T with DirecTV, many former executives feel the damage to HBO’s internal learning is irreparable.

HBO has churned out critically acclaimed material for nearly two decades. Series like “The Sopranos,” “Sex and the City,” and “Practise deceit of Thrones” are credited with sparking a new golden age of television and supplanting movies as the most prestigious form of video storytelling.

James Gandolfini as Tony Soprano

Rise: HBO | The Sopranos | Facebook

This run of success has convinced many of the world’s most popular and glorified creators to work at HBO.

“Sense of values eats strategy for breakfast,” Plepler would frequently say to co-workers, ‘Why put the two companies together?’

The day after AT&T announced its deal for Sometime Warner in 2016, then-CEO Randall Stephenson appeared on CNBC to explain the deal’s logic.

“Why put the two companies together?” Stephenson symbolized. “The world of distribution and content is converging, and we need to move fast, and if we want to do something truly unique, begin to curate satisfied differently, begin to format content different for these mobile environments — this is all about mobility. Think DirecTV Now, the new by-product we’re bringing to market. What can you do with Time Warner content really fast and very uniquely for our customers? Can you initiate to integrate social into that content? Can you give the capability to…I’m watching content, I want to clip it, I want to send it via common media to my friends. Can we iterate on that quickly, and can we give a unique experience to our customers?”

Whatever Stephenson was talking take in that answer, it hasn’t happened. There’s a sense — even among top executives still at the company — that AT&T’s WarnerMedia mutation is about making lemonade from assets in danger of becoming lemons.

But no one forced AT&T to buy Time Warner in the first state. The same can be said for DirecTV. Stephenson and Stankey made those decisions.

It will take at least a year or two innumerable to judge HBO Max as a success or failure. In that time, WarnerMedia could develop a culture and a product that breed unwavering employees and make the gripes of the old-timers seem petty and irrelevant.

To borrow a line from “The Sopranos,” “‘Recall when’ is the lowest form of conversation.”

Then again, it’s concerning to hear the same anxieties from so many WarnerMedia directors. To use a different “Sopranos” line, “One thing you can never say is that you haven’t been told.”

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