HBO Max Has Already Cost AT&T $1.2 Billion

AT&T (NYSE:T) already outlined its plans to invest heavily in HBO Max, the streaming service aimed at broadening the appeal of its premium cable network. But that reality really hit home in the company's fourth-quarter earnings report.

In its slide presentation accompanying the report, AT&T notes its WarnerMedia segment forewent about $1.2 billion in licensing revenue by holding back content for HBO Max. WarnerMedia previously sold those shows externally to competitors like Netflix (NASDAQ:NFLX).

At its investor day in October, AT&T said it would see incremental investments of just $100 million in 2019, stepping up to $2 billion in 2020. "Our incremental investment includes spending for new content, forgone licensing revenue of our content, and operating expenses for the direct-to-consumer platform and customer acquisition costs," AT&T CFO John Stephens said at the presentation (emphasis mine).

Even if AT&T pulled forward some of those forgone revenues from licensing existing shows, it might end up spending more than anticipated when you factor in its HBO Max originals and additional licensing expenses the service will start amortizing once it launches in May, plus the necessary investments in marketing and customer acquisition.

Hey big spender

Not only is HBO Max licensing a lot of content from its parent company, it's also investing in new originals exclusive to the streaming service while boosting the budget for its HBO linear network's programming.

HBO Max will launch with 31 original series in 2020. TV series have become increasingly expensive as competition in streaming ramps up. That's particularly noticeable at the top end of the market. "On very competitive shows, there's probably been 30% price escalation from this time last year," Netflix content chief Ted Sarandos said during the company's third quarter earnings call. With several big names attached to its Max Originals -- Anna Kendrick, Elizabeth Banks, and Ellen Degeneres, to name a few -- AT&T is probably paying a pretty penny to produce its new series.

On top of its Max Originals, AT&T is stepping up the budget for HBO. The content budget will rise to $2.5 billion in 2020, up about $500 million from 2018 and 2019. It's not clear whether management includes that number in its definition of incremental investments, but considering everything available on HBO will also be on HBO Max, and its plans to get all of its legacy HBO subscribers onto HBO Max, it very well should count.

With $1.2 billion in forgone licensing revenue, it's likely HBO Max's spending will come in over budget for 2020.

Don't forget about marketing

AT&T might have a built-in audience with its 34 million HBO subscribers and 170 million total direct customer relationships, but it's still going to need to spend money on marketing and customer acquisition for HBO Max.

Netflix has seen its marketing budget climb considerably over the last few years as it grows its original content library. The company has shifted from marketing what Netflix is to focusing more on marketing specific series, films, and comedy specials in order to attract new viewers.

Likewise, HBO is already a well-established brand. But AT&T will need to inform consumers of the new value HBO Max provides on top of HBO. That means highlighting new series and films available on the service and explaining how HBO Max is different from HBO.

That won't be cheap. Netflix spent $2.65 billion on marketing last year. Even Disney is spending hundreds of millions on marketing for Disney+ despite the media company's massive fan base and ability to promote the service at its parks and properties. AT&T will need to spend a comparable amount if it wants to see success with the launch of the new service.

Not too big in the grand scheme of things

Going over its planned budget of $2.1 billion in incremental expenses for HBO Max across 2019 and 2020 won't be the end of the world for AT&T. Ultimately, that's still a fraction of Netflix's budget, which will amortize about $12 billion in content expenses in 2020. Disney's budget for Disney+ content (licensed and original) and operating expenses is a bit under $3 billion for fiscal 2020.

The $1.2 billion in forgone licensing revenue that popped up on AT&T's latest report is a bit surprising given management's earlier guidance, but how big of an effect that'll have on AT&T's bottom line ultimately comes down to the consumer response to the launch of HBO Max later this year.

Adam Levy owns shares of Walt Disney. The Motley Fool owns shares of and recommends Netflix and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short April 2020 $135 calls on Walt Disney. The Motley Fool has a disclosure policy.

This article originally appeared in The Motley Fool.