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Wonder Woman's Riskiest Mission Yet

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WarnerMedia’s strategy gets a preview on Christmas Day when ‘Wonder Woman 1984’ is released.

WarnerMedia’s strategy gets a preview on Christmas Day when ‘Wonder Woman 1984’ is released.

Photo: Clay Enos/Associated Press

Can the economics of a megabudget movie work for streaming? The answer is complicated.

WarnerMedia, the entertainment giant now owned by AT&T, is betting big on smaller screens. The company has committed to putting its entire film slate for 2021 onto its HBO Max service on the same day those films are set to debut in theaters. At least four of those films are likely to have production budgets well north of $100 million. The strategy gets a big preview on Christmas Day with the release of “Wonder Woman 1984” in the same manner. That movie—with a reported budget over $200 million—qualifies as the most expensive ever to make its initial debut on a subscriber-based streaming service.

Can it work? Investors enthusiastic about streaming will point to
Netflix,
which has been producing more expensive movies recently for its own service. Two of the most notable were the Martin Scorsese-helmed gangster flick “The Irishman” and a Michael Bay action title called “6 Underground.” Both cost more than $150 million each to make and both launched late last year.

Netflix famously keeps a tight lid on precise performance data, but the company said about 26.4 million global accounts watched at least 70% of “The Irishman” during its first week of release last year. The company also said during its fourth-quarter earnings report in January that more than 83 million viewed “6 Underground” during its first month—though it noted in the same report a change in its methodology that now counts a viewer after only two minutes into the program.

Netflix added a little under 8.8 million subscribers in the fourth quarter of last year when those movies made their debut. That was ahead of its own projections, but also slightly under the 8.9 million added in the same period the previous year. Average revenue per paying subscriber, though, rose about 9% year over year.

Still, Netflix is a streaming company, with a business model designed around that purpose. Established Hollywood studios such as Warner Bros. and
Disney
that have long based their businesses around theatrical exhibition and downstream revenue from there have to thread a different needle.

And Warner’s aggressive pivot to streaming was born out of necessity, with the pandemic having closed most of the nation’s theater capacity. Only 38% of North American movie theaters were open the weekend of Dec. 11, down from 57% over Labor Day weekend, according to Comscore.

Even if many of those reopen in time for next summer’s movie season, WarnerMedia’s decision will prove costly. U.S. theater chains haven’t said yet if they will even play the company’s movies next year since all will be available to stream on HBO Max for subscribers.

That places the company’s entire domestic box office for 2021 at risk. Warner Bros. movies have averaged a domestic box office gross of $1.8 billion annually over the last five years, estimates

Michael Nathanson
of MoffettNathanson. So even a sharp drop due to limited theater capacity in 2021 could still leave the company missing out on around $1 billion in box-office revenue.

That could prove worth it if it helps the company to substantially grow its HBO Max subscriber base that currently numbers 12.6 million, according to AT&T Chief Executive

John Stankey
at a Dec. 8 investment conference sponsored by
UBS.

Doug Mitchelson of
Credit Suisse
estimates that if HBO Max adds 5 million new subscribers due to the new strategy, the additional $700 million in annualized revenue creates “the potential for a one year or less pay back.” But theatrical movies also generate revenue from other release windows such as home video, which also could disappear if a movie simply goes to HBO Max.

“For a company for which free cash flow is precious as they struggle to balance their dividend and their bond ratings, this is a high price to pay,” Mr. Nathanson wrote to clients of parent company AT&T’s plight.

There is also a potential cost to WarnerMedia’s reputation. The move has generated considerable ire in Hollywood, as filmmakers whose movies got shifted to streaming stand to miss out on box-office participation. The company says it has a plan to compensate for the shift, but it still might have to write some big checks around Hollywood to put out those fires. Otherwise, its effort to light a fire under HBO Max could leave scorch marks.

The coronavirus pandemic shuttered every single AMC theater for months. But the pandemic isn’t the only thing pushing the company onto financially shaky ground. Photo Illustration: Jacob Reynolds/WSJ[object Object]

Write to Dan Gallagher at dan.gallagher@wsj.com