HBO Max subscribers will be treated to a host of big-budget films over the next year, starting with Wonder Woman 1984 on Christmas Day. AT&T (NYSE:T) is betting big on streaming by releasing its entire 2021 slate on HBO Max the same day the films premiere in theaters.

To some degree, it's already producing results. AT&T struck a deal with Roku (NASDAQ:ROKU) to distribute HBO Max ahead of the Wonder Woman debut. But it remains to be seen how the move will affect box office receipts and how many subscribers it'll drive to HBO Max. Those are the real metrics to watch for investors.

IMAGE SOURCE: WARNERMEDIA.

What could have been

Before AT&T announced its plans to roll out its films on HBO Max for the next year, the slate was expected to generate over $1 billion in box office revenue, including Wonder Woman 1984, according to Wedbush analysts. That said, the opening weekend for WW84 in international markets disappointed even depressed expectations. It brought in just $18 million in China and $38 million in total overseas. So the potential damage may be less than expected.

Still, there's hope movie fans will be less hesitant to head to the theaters in the second half of 2021 thanks to the distribution of COVID-19 vaccines. But AT&T's commitment to release its entire 2021 slate of films on HBO Max could keep its box office receipts at a minimum. Big theater owners are none too happy with the decision and could refuse to screen the films. That will leave just a handful of smaller independent theaters to distribute the movies, knocking out a significant percentage of would-be box-office revenue.

AT&T keeps about 60% of box office receipts in traditional distribution agreements with exhibitors. That translates to between $600 million and $700 million in potentially foregone revenue based on estimates.

AT&T may also have to provide additional compensation to actors and directors where contracts provide participation in box-office revenue. If revenue is significantly diminished, it could tarnish the media company's relationship with creatives for future projects. The shift to streaming premieres has already ruffled a few industry feathers.

Making up for lost revenue

AT&T needs its films to generate a significant number of incremental HBO Max subscribers to make up for its foregone revenue. AT&T CEO John Stankey has full faith in the strategy to do so.

Earlier this month, he shared there are now 12.6 million active HBO Max accounts, up 4 million from the end of the third quarter. "Putting the slate out there is only going to accelerate that further," he said at the UBS Global TMT Conference.

Four million additional subscribers in just over two months may sound impressive, but that number requires context. AT&T ended the quarter with 3.6 million retail HBO Max subscribers. About 30.7 million wholesale HBO subscribers were eligible to activate HBO Max, but only 30% of them have tried HBO Max based on Stankey's update. That number may climb higher now that it's cemented deals with Roku and all the other major streaming platforms.

But to see a real return on investment, AT&T needs to see incremental HBO subscriber growth above and beyond initial expectations. That means building on the base of 38 million total HBO subscribers it counted as of the end of the third quarter.

At $15 per month, the addition of the film slate would need to bring in an average of an additional 4 million monthly subscribers to offset the potential lost revenue from the domestic box office in one year. That number could be lower if AT&T expects subscribers who otherwise would've never subscribed to stay subscribed in 2022 and beyond. On the other hand, if more people sign up through its distribution partners, it may collect a smaller percentage of revenue and need more total subscribers.

It's impossible to know what HBO Max's subscriber growth would be without the 2021 film slate, but it should show at least some base level of growth. It added 650,000 retail HBO Max subscribers in the second quarter without any real catalysts. That may serve as a baseline for quarterly subscriber growth expectations in 2021. Therefore, investors will want to see 5 million or 6 million net subscriber additions for the year to make up for its lost box office revenue, and most of that should be front-loaded. AT&T will provide a glimpse at its early results when it shares its fourth-quarter earnings at the end of January.

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