WarnerMedia’s HBO Max Gambit Overcame Internal Doubts at AT&T

During daily conversations with his deputies over the past couple months, WarnerMedia boss Jason Kilar drew up a plan to use the pandemic to his advantage.

Rather than wait for theaters to reopen worldwide before releasing the company’s biggest blockbusters, he would put them on HBO Max at the same time they hit the big screen.

The plan faced many obstacles, starting with theaters. Exhibitors opposed the idea out of hand, worried it would ruin their business. Many WarnerMedia employees fretted that it could damage the studio. There was no precedent for releasing a $200 million feature for free to customers of a streaming service.

But as rising coronavirus cases cast more doubt on the recovery of the movie business, Kilar decided at a late November meeting with top deputies that he would forge ahead.

The decision threatens to transform the way people watch the world’s biggest blockbusters, undermining a system that has been in place for decades. Theaters have traditionally had exclusive rights to new movies for up to three months before the films pop up on home video. Now, HBO Max will be the home to Warner Bros.’ most popular movies on day one. The plan, which extends through 2021, affects films such as “Dune,” “The Matrix 4,” “The Suicide Squad” and “Space Jam: A New Legacy.”

“HBO Max just laid down the gauntlet — there’s no other way to say it,” said Jason Blum, the horror-movie mogul who produced “Get Out” and “Whiplash.” The Warner Bros. films coming in 2021 are “big movies,” he said. “If you want to keep up with pop culture, you will want to see those movies and subscribe to HBO Max.”

The shock quickly reverberated through Hollywood and beyond. One industry executive was out for a walk when the news hit. He was stunned to come home to dozens of texts and missed calls. Actors, directors, producers and financiers who were promised a share of future profits from Warner Bros. films were now facing a smaller payday.

And the upheaval may just be beginning. Blum predicts that rival studios such as Walt Disney Co. will follow WarnerMedia in releasing more movies at home. “It’s very hard to put the toothpaste back in the tube,” he said. “You can’t tell the customer, ‘Now that the pandemic is over — you gotta wait four months to see it on HBO Max.’”

The move is the latest bold stroke since Kilar took over in May as chief executive officer of WarnerMedia, part of AT&T Inc. John Stankey, a career AT&T executive who became head of the telecom giant this year, picked Kilar for the WarnerMedia job in a clear signal that streaming was the future of the business. Kilar, 49, was the founding CEO of the Hulu online-TV platform and a former senior vice president at Amazon.com Inc.

Stankey has ruffled feathers himself ever since AT&T acquired Time Warner Inc. for $85 billion in 2018. He shuffled management and realigned divisions to reorient the company around streaming video, prompting an exodus of experienced executives at Warner Bros., HBO and Turner. But he believed it would all be worth it when people saw HBO Max — its effort to catch up with Netflix Inc., Amazon and Disney in streaming entertainment. HBO Max showcases all of the company’s programming, from HBO’s “Game of Thrones” to Looney Tunes cartoons, along with original content.

The pandemic hit just months before AT&T planned to launch HBO Max. Though AT&T went ahead with the rollout in May, Covid-19 tempered the company’s ambitions. Production delays postponed work on many of its high-profile original series, depriving HBO Max of new material to lure customers. The pandemic also pushed back the release of movies set to appear on HBO through deals with Universal Pictures and Warner Bros.

AT&T executives have remained positive about HBO Max in public, but many employees concede in private that the service has had a rocky start. AT&T’s introduction of HBO Max was seen as late and too expensive, especially since many viewers had already picked the $13-a-month Netflix and $7-a-month Disney+ as their lockdown essentials. Though Netflix has since bumped up its U.S. rate to $14, HBO Max remains the most expensive major service, at $15 per month.

In another blow, Amazon and Roku Inc. declined to carry the service on their TV platforms, limiting its ability to reach tens of millions of potential new customers. Amazon has since agreed to offer HBO Max, but market leader Roku still doesn’t.

Warner Bros., a nearly century-old studio, hasn’t had a good time of it either. As most of its peers delayed their summer blockbusters or sold them to streaming services, Warner Bros. proceeded with plans to release “Wonder Woman 1984” and “Tenet” in theaters before the end of the year.

After three delays, the studio released “Tenet” in theaters Sept. 3. The movie, directed by Christopher Nolan, has grossed $300 million overseas, but just $57 million at home. It is certain to lose tens of millions of dollars for its studio.

In the failure of “Tenet,” Kilar and Stankey saw an opportunity to take a more bold approach with their upcoming slate. With many theaters either shuttered or drawing tiny crowds, the studio could use its trove of big-budget movies to promote HBO Max.

“We wake up every day thinking, ‘How can we increase the value of HBO Max?’” Kilar said. “When we thought about the film slate as part of HBO Max at no additional cost, we thought it did a lot for the value proposition.”

The move is still fraught with risk. Movies like “Wonder Woman 1984” and “The Matrix 4” were once guaranteed to gross hundreds of millions of dollars in movie theaters. But Stankey has been telling investors for months that the pandemic has forced the company to consider a new approach.

“We’re rethinking our theatrical model and looking for ways to accelerate efforts that are consistent with the rapid changes in consumer behavior from the pandemic,” Stankey said on an April earnings call. The comments came a day after the company announced that it would premiere “Scoob!” exclusively on HBO Max.

Moviegoing in the U.S. was already plunging before the pandemic thanks to the proliferation of alternative forms of entertainment, including streaming TV, video games and social media. Theater chains, burdened with debt, worried the coronavirus could be the end of their business. While moviegoing will no doubt survive the pandemic in some form, there’s no telling how soon people will feel safe in theaters — and how many theaters will remain open.

“Based on all the epidemiologists and medical experts we have access to, our view is things won’t snap back nearly as quickly as we’d all like,” Kilar said.

When Kilar pitched the straight-to-streaming plan to the board in detail — and presented a trailer similar to a video that was released to the public this past week — he was able to win them over.

“The room got it and was fully supportive,” Kilar said.

The response in Hollywood has been colder. Many of the company’s biggest partners, including producers and filmmakers, were blindsided by the move. Companies like Legendary Entertainment and Village Roadshow Pictures, backers of “Godzilla v. Kong” and “The Matrix 4,” rely on their biggest movies to fund all of their smaller projects.

WarnerMedia had already planned to release “Wonder Woman 1984” on HBO Max the same day as the film’s theatrical debut on Christmas Day. But theater owners saw that as a one-off — and Warner Bros. as a key ally. The studio had helped them out by releasing “Tenet,” and they were still desperate for new product.

Now the outlook looks bleaker. AMC Entertainment Holdings Inc. CEO Adam Aron, head of the largest move exhibitor, questioned why the studio would take the step when drug companies are on the verge of releasing a vaccine. He wouldn’t commit to showing any of the movies next year. Cinemark Holdings Inc. took a similar stance. But negotiations continue, and chains are still hoping they can hammer out a compromise.

Investors, meanwhile, have run for cover. Shares in both companies dropped at least 16% Thursday.

Theater operators worry that this could set a precedent for other studios, which have already been pushing to trim the delay between a movie’s release in theaters and at home. Universal reached a deal with chains to send its movies to home video as soon as 17 days after they debut in theaters.

Disney, the king of the box office in recent years, has already shifted a couple of its movies to Disney+. It’s expected to give more information on its plans at an investor meeting next week.

Blum tipped his cap to Kilar for making such a bold move, but also expressed regret that theaters and studios couldn’t come up with a common solution.

“It’s a fragile ecosystem,” Blum said. “Exhibition is left out to dry.”

Kilar has countered that his company remains supportive of theaters, predicting that Warner Bros. will still be showing films on the big screen 50 years from now.

Even so, he isn’t saying the industry will return to its old days after 2021. “The only thing we can count on is change.”