AT&T Counters T-Mobile and Netflix With Free HBO

AT&T (NYSE: T) recently announced that it would give free HBO subscriptions to its Unlimited Choice customers, who currently pay $60 per month for unlimited data, talk, and text capabilities. Customers who already subscribe to AT&T's DirecTV or U-verse plans will simply get HBO added to their channels, while non-pay TV subscribers will receive access through the DirecTV Now and HBO Go apps.

AT&T previously only bundled free HBO subscriptions with its Unlimited Plus plans, which bundled unlimited data, talk, text, and tethering capabilities with either DirecTV Now ($100 per month) or DirecTV ($115 per month) subscriptions.

AT&T is also taking aim at T-Mobile (NASDAQ: TMUS), which recently added free Netflix (NASDAQ: NFLX) subscriptions to its T-Mobile ONE family plan. That plan, which includes two unlimited data lines, costs $120 per month. Therefore, AT&T's $60 per month plan might lure new subscribers away from T-Mobile, especially if they only need a single line and prefer HBO over Netflix.

Why this is good for AT&T

AT&T is giving investors a glimpse at the potential synergies of its acquisition of HBO parent Time Warner (NYSE: TWX), which it expects to close by the end of the year. By adding HBO, Warner Bros., and Time Warner's other cable properties (including CNN, TNT, TBS, and the Cartoon Network) to its media portfolio, AT&T gains the building blocks of a massive streaming video ecosystem that could challenge Netflix.

Since AT&T is also an internet service provider (ISP), it won't need to worry about another ISP throttling the speed of its streaming videos -- a problem that repeatedly forced Netflix to negotiate "paid peering" deals with service providers for faster connections. AT&T is already offering its wireless customers "sponsored" streaming videos that don't count toward their data caps -- which locks them in with bundled plans that merge wireless and pay TV subscriptions.

This strategy could counter Netflix in two ways. First, repackaging DirecTV Now as a Netflix alternative could offset cord-cutting losses at its older U-verse business. Second, bundling its own streaming media properties with wireless and pay-TV plans could make stand-alone Netflix plans, which cost $10 per month, less appealing.

But it's not a perfect plan...

However, evolving from a telco into a diversified streaming media company remains an uphill battle for AT&T. AT&T's total video subscribers fell 0.5% annually to 25.2 million last quarter, as its growth in DirecTV Now (491,000 subscribers) and a slight uptick in satellite connections were offset by a 21% drop in U-verse subscribers.

HBO Now, Time Warner's streaming answer to Netflix, only recently reached 3.5 million subscribers. Those are tiny figures compared to Netflix, which reached 99 million paid subscribers (50 million in the U.S., and 49 million overseas) last quarter.

The longevity of HBO's programming lineup is also questionable. Game of Thrones is the network's crown jewel, but the series only has a single season left. HBO's plans for a Game of Thrones spin-off might miss the target if it lacks the appeal of the original show.

Westworld is a worthy successor, but the show is expensive (with a reported budget of $100 million for the first 10-episode season) and it's unclear how many more seasons it will last.

The road ahead

AT&T, T-Mobile, and other carriers are all trying to expand their ecosystems with unlimited data plans, streaming media, and other perks -- and that battle won't end anytime soon. This ongoing battle benefits consumers, but it's not great for investors.

As this battle heats up, these carriers' margins will likely contract as they cut prices to gain new customers. This could make it much tougher for companies like AT&T to keep growing their revenue and earnings over the next few years.

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Leo Sun owns shares of AT&T. The Motley Fool owns shares of and recommends Netflix. The Motley Fool recommends Time Warner and T-Mobile US. The Motley Fool has a disclosure policy.