Up to now, many households have decided to continue paying for cable since they value live sports on ESPN and wildly popular shows on HBO, such as “Game of Thrones”– all content they can only get through a cable box.
But HBO’s move could change that calculus.
“This is an enormous breakthrough; consumers will be able to get to pick what they want and they will finally have content companies selling directly to them,” said Gene Kimmelman, president public interest group Public Knowledge, which has fought for regulations that would force the unbundling of cable television channels for consumers. “The question is, ‘Who is next’? That’s trickier because this speaks to the power of HBO’s brand to be able to break from the cable bundle.”
HBO chief executive Richard Plepler, who announced the plan in an investor meeting held by parent company Time Warner, did not say how much the service would cost or what content it would offer exactly. He said starting next year, the service will be available to U.S. subscribers and to consumers in two other countries before expanding to its entire international footprint.
Plepler was careful to describe the service as complementary to cable, rather than something aimed at busting the industry’s business model. He said HBO is targeting the 10 million homes in the U.S. that have high-speed Internet but don’t subscribe to cable or satellite television already.
“It’s time to remove the barriers to those that want HBO,” Plepler said.
The way things works now, cable firms and HBO have enjoyed a highly profitable and close relationship. HBO charges cable firms hefty fees for the right to carry their programming; cable companies in turn charge consumers additional money–say, $10 or $20 per month–to add HBO to their selection of cable channels. The linchpin of this arrangement: HBO agreeing to offer its content exclusively to cable companies.
But in recent years, HBO has grown impatient with its cable partners, saying many have not done a good job of marketing the premium channel. Plepler said “hundreds of millions of dollars” have been left on the table through untapped distribution rights and poor marketing for new subscribers.
And studies show younger viewers — particularly millennials — are choosing online video subscription services over cable TV.
In May, Amazon and HBO announced a deal in which Amazon Prime members could watch a slew of HBO shows, films and miniseries–mostly past seasons of old shows like “The Sopranos.”
When asked by an analyst if the plan will hurt HBO’s cable business, Plepler said: “I don’t think this is either or,” adding that 85 percent of Netflix’s users also subscribe to cable or satellite television. He said the HBO online service would be offered in partnership with Internet service providers, who are also their cable partners.
The announcement Wednesday is a striking reversal for parent company Time Warner, whose chief executive Jeff Bewkes in 2010 famously dismissed the threat of Netflix, equating it to “The Albanian army” or a “200-pound chimp.”
But with an online streaming service, HBO is taking a page directly from Netflix and will soon compete head-to-head with the rival streaming service. HBO has 30 million subscribers in the United States; Netflix has about 37 million.
Netflix has modeled itself after HBO with its mix of exclusive award-winning original shows like “House of Cards” and movies. “We have to become more like HBO before they become like us,” Netflix CEO Reed Hastings said in an interview last summer, referencing a favorite saying of the company’s chief content officer, Ted Sarandos.
With HBO stripped away from the cable bundle, Netflix loses one of its advantages over its rival. The company, which reported Wednesday that it added fewer subscribers than anticipated, saw its shares tank about 25 percent in after-market trading.
As much money as HBO makes from cable companies–the company made $4.9 billion in revenues last year, mostly from fees paid by cable firms–the future of watching television is clearly online. According to a report by Comscore this week, four out of ten online users subscribe to a service like Netflix or Amazon Instant Video.
“I find it hard to believe that HBO is going to offer something that will make [cable companies] angry,” said Deana Myers, an analyst for research firm SNL Kagan. She said the key will be how much the online service is priced.
The big question is how much HBO charges for the online service. If the company sets the price too low, many consumers will drop their cable subscriptions and eat into the firm’s profits from that business. But set it too high, and viewers used to the roughly $10 per month charged by Netflix and Hulu Plus will balk.
The availability of more online content will provide more choices for consumers. But it won’t necessarily reduce costs. Cobble together HBO, Netflix, MLB.tv and a few more services and being an online-only viewer adds up.
And even though HBO’s announcement weakens the hand of the cable industry, firms like Comcast still enjoy a huge advantage: exclusive live sports.
As a result, consumers like Avi Greenberger won’t stop paying for the monthly service. The 25-year-old Brooklyn resident subscribes to HBO, sports channels and online services such as Hulu Plus.
“I hate double paying for both cable and online services,” Greenberger said. “But with the Rangers on MSG and the Yankees on Yes Network, it’s hard to give up on cable.”
Will there be football and basketball streaming online for people who don’t pay for cable or satellite? Not anytime soon.
This month, ESPN and TNT inked deals to retain rights to show NBA games through the 2024-25 season. And the National Football League and ESPN have a deal to keep “Monday Night Football” on the sports network through 2021.