Why HBO Max Needs to ‘Blink First’ in Standoff With Roku

Putting aside its impact on the theater business for a moment, WarnerMedia’s decision to release 18 films on HBO Max over the next year has suddenly upped the stakes in its ongoing negotiations with Roku. Since launching in late May, HBO Max has been conspicuously absent from the nation’s largest streaming platform, as the two sides haggle over a distribution deal. Now, it’s worth asking, who holds the upper hand?

The answer, according to a analysts, still appears to be Roku — whose stock closed on Friday at all-time high of $296.38 per share. “In this game of high stakes poker, it’s HBO that blinks first with the pressure on around distribution and subscriber growth,” Wedbush analyst Dan Ives said. “With the streaming wars heating up more, and especially given their price points and content pressures, we see HBO needs to ink a deal. It’s important to Roku as well, but it’s a key ingredient for success in our opinion around HBO Max into 2021 and beyond.”

HBO Max may have just become the best deal in streaming, with major movies like “Dune,” Godzilla v. Kong” and “Matrix 4” now set to hit the service at the same time they hit theaters next year. Add in the upcoming Christmas release of “Wonder Woman 1984,” and it’s clear that WarnerMedia parent AT&T is serious about elevating HBO Max to the level of Netflix and Disney+. Still, to get there, the service needs to boost its subscriber numbers — and that’s tough to do without a Roku deal.

As TheWrap reported on Thursday, HBO Max technically has 28.7 million subscribers, though the heavy majority of those, 25.1 million, are customers who already pay for HBO and get Max for free as part of their subscription. Of those, around 12.7 million have actually signed up (in what AT&T calls “activations”) for Max specifically. An additional 3.6 million have bought HBO Max on its own through WarnerMedia. HBO Max’s numbers can be hard to parse, but it’s easy to see it still trails well behind Netflix, the streaming king, with its 73.1 million domestic subscribers, as well as the 73.7 million people who have Disney+, most of whom come from the U.S.

Also Read: Is HBO Max Now the Biggest Threat to Netflix?

Striking a deal with Roku would instantly amplify HBO Max’s reach. Roku now has 46 million active accounts, and, according to a recent note from Needham analyst Laura Martin, that translates to 100 million monthly viewers — or about half of all Americans streaming via connected devices.

“By implication,” Martin wrote, “if any new OTT service wants to launch in the U.S., it must be distributed by Roku to be successful. If not, it isn’t viewable by a large segment of [connected TV] viewers because the next largest platforms (Amazon Fire TV and Game Consoles) each reach 30% fewer viewers than Roku.”

Both sides know this, but it’s now become a staring contest. Roku typically asks for a 20% cut of subscription dues plus 30% of ad inventory from its partners, although it has struck more generous deals with some companies, like NBCU’s Peacock. Like Peacock, HBO Max plans to eventually roll out live TV programming; Roku, of course, would take a slice of those accompanying ads. And considering how important ads are to Roku — fully 70% of the company’s $452 million revenue in Q3 stemmed from on-platform advertising — you can see why it’s not rushing to give up too much of that revenue.

While terms of Roku’s deal with Peacock are not known, they still seem to be too steep for AT&T and WarnerMedia.

And Warner gained some leverage with the HBO Max move, which “strengthens HBO’s hand” in negotiations with Roku, according to Tony Maroulis, principal analyst with Ampere Analysis. For one, having a major service like HBO Max helps keep viewers streaming and drives discovery of other channels as well, including The Roku Channel, which funnels ad dollars back to Roku. At the same time, the absence of HBO Max could drive some shoppers to lean toward Roku rivals like Apple TV or Amazon Fire TV that already offer the service. For a company that’s seen its share price surge 113% this year, any threat to growth is worth taking seriously.

Also Read: Movie Theaters vs Streaming? Warner Bros' HBO Max Plan Is a Complete Paradigm Shift

Ultimately, though, Roku’s reach appears to be the trump card here. Without Roku, HBO Max would miss out on too many potential subscribers, hamstringing its push into the streaming world’s upper echelon. (Investors seem to agree, with Roku’s market valuation climbing to $37.7 billion this week.)

“Roku and Amazon’s Fire TV devices are by far the most popular OTT boxes in the U.S.,” Maroulis said. “Because of this, the lack of support [and] on-boarding on both of these services would be a significant loss for any online video platform… HBO needed to break the deadlock and find a compromise.”

That compromise could include Roku getting a smaller slice from billed HBO Max subscribers, Maroulis said.

When asked on Thursday if there was an update to the HBO Max-Roku negotiations, WarnerMedia streaming boss Andy Forssell said: “I’m sorry, the answer is no. They’re a good company [and] they were a good partner for a long time. I’m sure they’ll be a good partner for many years ahead. We will work through our issues, but I don’t have any prognostication for you.”

For HBO Max to fully benefit from its influx of movies, it’ll need to work through those issues sooner rather than later.

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