AT&T's Plan to Take on Disney and Netflix

AT&T (NYSE: T) is the largest pay-TV provider in the United States. Subscription video on demand services like Netflix (NASDAQ: NFLX) and the trio of services in the works at Disney (NYSE: DIS) represent a major threat to its business.

But with the recent acquisition of Time Warner, now WarnerMedia, AT&T is in a position to compete with a direct-to-consumer service of its own. And that's just what it intends to do.

AT&T plans to launch a new direct-to-consumer streaming service that combines HBO and other WarnerMedia assets in the fourth quarter of 2019. That timeline coincides with the launch of Disney's branded streaming service.

Another big bundled streaming service

AT&T didn't provide many details on pricing. But with HBO anchoring the service, consumers can expect to pay more than the $14.99 per month the company charges for HBO Now. The service will also include WarnerMedia's film library; television content from networks like Cartoon Network, TNT, and TBS; and content from the DC Universe.

HBO Now is already one of the most expensive subscription video on demand, or SVOD, services on the market. AT&T is betting that it can grab a larger share of the market by bundling -- a strategy it's taken across other segments of its business.

AT&T's strategy is in opposition to Disney's. Disney CEO Bob Iger said the company will price its Disney-branded service below Netflix's $10.99-per-month plan. Hulu has a hybrid model, but its commercial-free plan costs $11.99 per month, only slightly more expensive than Netflix. ESPN+, Disney's sports streaming service, costs just $5 per month, but the content isn't nearly as premium as Hulu or the forthcoming Disney-branded service.

Disney management did mention the possibility of offering a bundle for all three services, but it's still offering consumers the option to subscribe to just one or two as well. AT&T gave no indication that it would offer consumers the option to take everything new WarnerMedia has to offer but leave HBO out of the bundle. That might mean the additional content WarnerMedia is offering isn't compelling enough to support a stand-alone streaming service.

Can a high price point compete?

There are a growing number of SVOD options for consumers on the market already, and more are coming in the next few years. The average American has three streaming subscriptions. With 57 million U.S. households subscribed to Netflix, the market leader is likely one of those three for most SVOD customers.

While there's plenty of room for competition, the value of services like Netflix and Hulu are that they allow customers to access video entertainment similar to cable TV without having to pay for channels they don't watch. As such, new competitors entering the market may find it difficult to price their services at a premium to Netflix.

HBO Now, which has a ton of brand recognition, pent-up demand, and great content, has managed to attract 5 million subscribers at its $14.99 price point in three and a half years. Still, that's better than competing services like Showtime's or Starz's direct-to-consumer products, despite lower price points.

In effect, AT&T is selling its planned direct-to-consumer WarnerMedia bundle into the consumer base that already subscribes to HBO Now. And that's a very small market relative to the overall market for SVOD services. Consumers it attracts from outside that base are more likely to cannibalize its main pay-TV businesses than they are to add incremental revenue to AT&T's bottom line.

AT&T's plans could change over the next year or so, but with the details it has provided, investors shouldn't expect it to seriously compete with Netflix or Disney's direct-to-consumer efforts.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.