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When will HBO stop futzing around and start selling subscriptions to Web subscribers, just like Netflix?

Maybe, one day, says HBO and its parent company, Time Warner. But probably not anytime soon: The pay channel makes oodles of money the way things are now, when it is tied directly to pay TV providers like Comcast.*

But let’s say one day shows up. What would it look like if HBO did sell subscriptions on the Web?

Here are two interesting ways it could play out, courtesy of Barclays analyst Kannan Venkateshwar. Note that in both of these scenarios, Venkateshwar figures HBO will still make the bulk of its money via traditional pay TV subscriptions, and will try hard not to anger the cable guys too much. So these are having cake/eating cake proposals:

  • HBO “windows” all of its new programming for digital-only subscribers. That is, you could stream “Game of Thrones” or “True Detective” on your iPad, but you’d have to wait for six months or a year to get the new seasons. Venkateshwar figures HBO could sell these wait-a-while subscriptions for $11 a month, a discount from the $15 a month the average cable TV subscriber pays for HBO.
  • Sell the real-deal version of HBO over the Web, but charge a premium for it, like $18 a month. The theory here is that there are several million people with broadband who don’t pay for TV right now, and it seems unlikely they ever will. So why not turn some of them into paying customers?

Here’s what that might mean financially for HBO. Note that Venkateshwar assumes that up to 20 percent of HBO’s current subscribers may cut the cord and sign up for its theoretical lower-priced option. But he doesn’t consider that possibility when it comes to the more expensive version.

$11/month digital HBO:

$18/month digital HBO:

If HBO tried both of these options at the same time, it could generate up to $600 million in new earnings, Venkateshwar estimates. Given that HBO generated $1.7 billion in operating earnings last year, that’s real money, and Wall Street might give Time Warner $5 a share or more for that kind of upside.

A couple of months ago, all of this would have seemed like an entertaining exercise and not much more. But now, Time Warner CEO Jeff Bewkes has to convince Wall Street that he has a plan to make his company more valuable than the offer he wouldn’t take from Rupert Murdoch. So maybe the future will show up faster than we thought.

* Comcast owns NBCUniversal, which is an investor in Re/code’s parent company, Revere Digital.



8 comments
Alan Wolk
Alan Wolk

In addition to the MVPDs aggressively selling HBO, there's also the halo effect: HBO benefits every time someone wants to watch "Homeland" because HBO and SHO are usually bundled together in the Titanium package. Consumers might not be so keen on unbundling them (plus Cinemax if shows like "The Knick" are its future) as their overall cost for premium cable would go up.


And don't discount the hassles involved in creating a billing system and collecting every month, not to mention the potential ill will bad customer service creates: Netflix is able to push streaming problems off on the MPVDs. Not sure if HBO will have the same luck.


I'd also posit that Venkateshwar vastly overestimates the potential audience for 6 month old programming-- saving $4/month is not going to convince large numbers of people to stay 6 months behind the water cooler buzz.


Finally, I wonder what's to prevent the MVPDs from rolling out aggressive counterproposals in response. If you recall, many of them had experimented with low-price HBO + basic cable packages about a year ago. Were HBO to try and Go it alone, those packages could quickly reappear.

James Bell
James Bell

Ummm, Netflix and Prime have set the expected price point in the consumer's mind at $9.  I've played around with HBOGo and there's just no way I'd pay $200+ per year for that content.  I like several of their original content shows, let's say I watch 40 episodes of them during a year, that's paying $5 an episode.

ds1234
ds1234

I used to work for HBO on the earlier versions of the product (called "myHBO") around 2005-2007, which were led at the time by a former Yahoo exec.


The original plan was indeed to go direct to consumer. We even went so far as to set up call centers for tech support.


I wasn't privy to the strategic-level conversations, but there were broad concerns at all levels about cannibalizing the existing cash cow revenue stream and undermining the relationships with Comcast et al.


I personally now suspect -- this is a personal opinion here -- the direct-to-consumer play may be a negotiating tactic that HBO might periodically dangle if Comcast's renewal terms were to become unfavorable for HBO.


Another strategic point is that it's important to remember that HBO's strength is in content curation and branding (and it is very good at these). However they don't have any other skills in house.


All content production is outsourced to creative agencies & production studios. All marketing is outsourced to ad agencies.  Subscriber acquisition and retention is outsourced to the cable providers. So basically most people at the company do nothing but manage the equivalent of vendors (though they clearly do a good job of it) and don't have any data about their customers/users - in particular the relationship between content consumption and subscriber retention.


So HBO would need to bring many of these skills in house to compete with Netflix head-to-head, particularly engineering (and I doubt there are any software engineers on the management team, which is scary to anyone who is the slightest bit technical), and figure out how to integrate them with their existing bureaucracy & decision-making culture, which would be no walk in the park.

aaaronsimpson
aaaronsimpson

Wouldn't this type of offering enrage the pay tv providers who use their exclusive exhibition of HBO as a subscriber lure? And subsequently, at renegotiation time, HBO would presumably lose out on some of their share of the subscriber's bill. Might be a zero sum game at that point, or worse. Perhaps they try this at a time when pay tv is less in demand and the negotiations wouldn't be as contentious, but until then my guess is the pay tv gravy train is just too delicious. 

hugomcpinto
hugomcpinto

Would be even cooler if they figured out once and for all the content market is global - followers and fans worldwide are also connected to the internet :) Maybe they'd double that number and finally start impacting piracy...

Pkafka
Pkafka

@ds1234 I do think you're right about the strategic value for HBO in being able to raise this issue - it certainly has gotten the attention of the cable guys. Then again, I do think HBO wants to have the ability to do this in the real world as well. And yes, the marketing infrastructure -- and ability to execute well in general -- are a major  challenge. But a company with HBO's resources should be able to tackle that challenge, at the very least.

Pkafka
Pkafka

@aaaronsimpson It certainly upsets pay TV providers to hear HBO talking out loud about this, which I believe is one of the reasons HBO is talking about it -- but not actually doing it. I do think that if HBO went to a Web option while still keeping its cable deals, a major issue would be the way the providers reacted. Would they attempt to punish HBO, and turn down their marketing efforts? Or would they be happy to keep selling a high-margin product to their best customers?

aaaronsimpson
aaaronsimpson

@Pkafka HBO subscribers are dropping (along with Showtime, Starz and others), but with revenue still moving north, it's probably not time for anyone to panic. But with Netflix surging, the threat of cord cutters, I suspect pay tv operators will take drastic actions to prolong the inevitability of HBO's distribution independence, while HBO leaning towards the digital riches. Nasty channel blackout threats with both sides pointing fingers might be the result of this seemingly inevitable "HBO don'tGO" battle.

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