Why HBO Max’s Potential Return to Amazon Prime May Be a Bad Idea | Analysis

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David Zaslav has been unafraid to reshape Warner Bros. Discovery with an eye on the bottom line since the merger closed in April, but the chief executive’s latest move to rekindle the distribution agreement between HBO Max and Amazon Prime Video could put a ceiling on the company’s growth, experts told TheWrap.

Warner Bros. Discovery and Amazon could reach a deal to reincorporate HBO Max into the latter’s Prime Video Channels offerings later this year, according to Bloomberg. Yet such a move would sacrifice long-term vision and competitive dynamics for a short-term gain.

“Warner Bros. Discovery may be making one of the worst decisions to try and answer the market’s questions,” Andrew Rosen, former Viacom digital media executive and founder of streaming newsletter PARQOR, told TheWrap. “We may have already seen the heyday of HBO Max as a result.”

Representatives for Amazon declined to comment for this story. And Warner Bros. Discovery reps didn’t respond to TheWrap’s request for comment.

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Why WBD would even consider returning to Amazon

Amazon Prime Video customers can subscribe to additional streaming services, such as Sundance Now and Starz, that have reached distribution deals with Amazon through add-ons incorporated in Prime. The former WarnerMedia, then owned by AT&T, opted to remove HBO and HBO Max from this distribution pact last September, which resulted in a loss of 5 million subscribers.

WBD is reportedly reconsidering that move in order to grow HBO Max’s subscriber base (which numbered about 77 million subscribers at the end of last quarter, making it the third-largest customer base after Netflix and Disney+) and garner revenue needed to help pay off debt. This is all occurring, of course, after Warner Bros. Discovery stock has fallen 44% since the merger closed on April 8.

“Zaslav needs easy wins out of the gate,” a media strategy exec told TheWrap. “His philosophy is to make money any way he can, whether direct or indirect, because he’s focused on results to prove himself. This gives a lot of air cover given the chaos at Netflix and it will be hard to criticize more subscribers and more revenue.”

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The baseline revenue split for Amazon Channels partnerships is 50/50, though bigger players such as HBO can command between 65% and 75%, individuals with knowledge of the terms told TheWrap.

As a publicly traded business, WBD holds a fiduciary responsibility to its shareholders to maximize value. From that perspective, one can understand the motivating factors behind this move. It’s only recently that direct-to-consumer business has become a key focus of the entertainment business, with studios surviving for nearly a century largely without it. Yet Wall Street’s recent about-face on its business model has execs running back into the warm embrace of guaranteed cash.

Why it’s a bad idea

At the time of HBO Max’s exit from Amazon last year, the streamer’s then-general manager Andy Forssell argued that the company needed to own the direct relationship with the customer. Under the distribution pact, Amazon was gathering highly valuable viewer data from HBO/HBO Max subscribers. This helped the company monetize content and present a stronger ad sales proposition moving forward based on that user data. In essence, WarnerMedia was helping a direct rival.

Sliding back into that relationship after a healthy breakup would partially cede control over growth and churn (the rate in which customers subscribe and then end their subscriptions) to Amazon, a company that isn’t shy about dictating terms when and where it has leverage, though Bloomberg notes WBD will only strike a new deal if Amazon agrees to “some additional terms.” Media and technology analyst Rich Greenfield noted in a recent analysis that “Amazon Channel subscribers churn at higher rates than other direct-to-consumer subscribers.”

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Amazon already boasts an under-reported power advantage in the streaming wars as Amazon Web Services hosts most of the major streaming services, such as Netflix. Adding another aggregated content asset to its arsenal allows it to use WBD’s library to attract more customers who will be owned by Amazon, not HBO and HBO Max.

“It never works out long-term when you don’t control the platform,” the media strategy exec said. “It’s tough to maintain pricing power.”

It’s not as if HBO Max has stopped growing without the aid of Amazon either. Since dissolving the distribution pact, HBO and HBO Max have still added 3.4 million total global subs over the last two quarters. Vulture recently ranked HBO Max as the top subscription-video on demand (SVOD) service in its 2022 streaming power rankings. And as far as quality is concerned, HBO and HBO Max just combined to lead all networks in Emmy nominations. The service isn’t in dire need of rescue.

The importance of understanding the consumer better than anyone else in the market is crucial right now and WBD appears willing to potentially compromise on that in the name of cost-cutting.

“The business realities are understandable, but the challenge is that it has led to decades of terrible decisions across digital media,” Rosen said. “A lot of the ongoing persistence of the old-school legacy media mentality continues to create problems in the service of telling a good story to shareholders.”

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