Analysis: The hidden problem with HBO Max's service plan

For consumers it felt like a sweet stream: pay the same $15 you're already paying for HBO, get all the additional content of HBO Max.

As the AT&T-owned WarnerMedia unveiled Tuesday, this is how the cord-cutting service will work. When it launches in May, HBO Max's monthly price will entitle HBO subscribers not only to watch the network of "Succession" and "Sesame Street" but also originals like a "Grease" spinoff, a Gina Rodriguez movie and a Ridley Scott science-fiction series, not to mention hits such as "South Park" and "The Big Bang Theory." All for the same fifteen bucks they're already paying.

But there's a catch - for HBO.

In order to offer such a service to its subscribers, HBO doesn't actually have the clear field the presentation suggested. It has an obstacle-strewn one.

Outside of AT&T's providers and the HBO Now service, HBO relies heavily on outside companies to deliver its programming to some 30 million subscribers. Those companies, such as Comcast, Charter and Dish, all take a chunk of revenue for providing - and often promoting - HBO.

And that's where the problem comes in.

These are companies AT&T does not own. And they're companies that decidedly have a vested interest in not shifting their consumers over to HBO Max. Why would they? They don't stand to take in any of the dollars once it happens.

A Comcast representative and a Charter representative, the company's two biggest cable providers, would not comment.

Analysts, however, were plenty verbose.

"The existing [traditional] subscribers - do you need to go back and reopen their current ... agreements?" John Hodulik of UBS asked executives after the presentation.

"So I sign up for HBO Max on Comcast or Charter's Spectrum ... how does that sausage all work?" queried Rich Greenfield of LightShed Partners.

The theme they're hitting on: Sure, all these conversions are not a problem when it comes to the subscribers of DirectTV, which AT&T owns, or HBO Now. HBO will let them switch right away; the money's going into the same corporate coffer.

But what about everyone else? How does HBO move them over, and why would those companies help them do it? An executive at one provider laughed when the question of such assistance was posed. If anything, they would have motive to stop subscribers from shifting to HBO Max - such a switch is money directly out of their pockets. And that puts HBO, which needs these companies to get aboard or at least out of the way, in a tough spot.

HBO sought to downplay these concerns.

"We are in active discussions with our distributors. The intent is indeed to get these existing 30-plus million consumers access to HBO Max as quickly as we possibly can," said Tony Goncalves of Warner subsidiary Otter Media, who has been tasked with the effort.

An FAQ on HBO Max's site played things equally close to the vest.

"If you subscribe to HBO through a cable or TV provider, stay tuned for more details as we get closer to our launch date," it offered to the question of what happens if you subscribe through a non-AT&T provider.

So how would this seemingly irresolvable stalemate play out?

In one scenario HBO would have to pay a high sum for these providers to facilitate an HBO Max transition - something WarnerMedia would almost certainly not want to do for a service whose contents costs are already well over $1 billion with no timeline for profitability. The whole point of streaming is to reduce the payout to distributors and shift the dollars in-house.

In another scenario, HBO actually would go to war with its own distributors - that is, target people currently paying Comcast or Spectrum for HBO and woo them away. Not exactly ideal either, since for the foreseeable future it's still getting tens of millions of subscribers through these companies.

In yet another scenario, HBO could raise the price of Max for non-AT&T customers so there's enough money to go around to the Charters and Comcasts of the world too. That's pretty unpalatable too, given that HBO Max is already priced higher than every other large streaming service.

"WarnerMedia is caught between a rock and a hard place," veteran Los Angeles-based investor Lloyd Greif said. "It's a highly competitive space and it's not called the streaming wars for nothing."

In other words, there's no easy answer.

All of this highlights a key problem in the streaming wars and the legacy companies that want to do battle in them. A firm like WarnerMedia wants to reach consumers directly - there are numerous financial and marketing advantages, and Wall Street loves it.

But the problem is it still does business with traditional distributors - tens of millions of subscribers-worth of business. Essentially a company is trying to get into distribution at the same time it needs distributors.

"We're optimistic and hopeful we'll open up the deals and be able to do something proactively," WarnerMedia chief executive John Stankey said Tuesday of the distributor relationships. Then he cautioned, "Obviously it takes two parties to [make a change]."

And one of those parties may be wondering why it should.