HBO is a premium product that people love, delivered to them by companies they hate. In the cable-TV network’s four-decade history, it has rarely had direct dealings with its customers. Now, that could all change. With the announcement last week that Time Warner (TWX) will sell an HBO streaming-video service next year apart from the cable-TV bundle, the network faces the prospect of getting to know—and soothe—its audience in ways it has rarely done before.
Those viewers can get very cranky when the video stutters during the season premiere of True Detective. “That is the absolute biggest risk of going out on their own,” says BTIG analyst Rich Greenfield. “If it doesn’t work, you have a big problem.”
There are few details known so far about HBO’s streaming product, and the company declined to answer questions. Most analysts expect a streaming price similar to or higher than the $15 monthly charge now assessed to its cable-TV subscribers. It’s possible HBO could split the fee with Internet service providers that would handle marketing, billing, and customer service, re-creating HBO’s current relationship with cable-TV providers (many of the same companies that sell broadband service).
But it also remains possible that HBO will connect to its streaming consumers on its own, keeping most or all of the subscription revenue for itself and carrying all the burdens of dealing with customers. It would be the first time that HBO would have names and credit card information for a large portion of its more than 30 million subscribers.
At $15, HBO would cost almost twice its main over-the-top streaming competitors: Netflix (NFLX), Hulu Plus, and Amazon’s (AMZN) Prime Instant Video service. Many analysts say HBO would be wise to provide a premium customer service experience, one that matches the perceived quality of its original dramas and the functional elegance of its HBO Go app for current cable subscribers.
Going alone would mean developing new skills. “There are operational issues that shouldn’t be underestimated,” says Aaron Shapiro, chief executive of the design and marketing firm Huge. Shapiro and his team helped build HBO Go, an online video portal available to HBO’s cable-TV subscribers. “Netflix has a whole infrastructure for direct-response sales. HBO doesn’t have any of that.”
HBO would need to spend heavily to build that part of the operation from scratch. Albert Lai, chief technology officer for media at Brightcove (BCOV), a video distribution platform, calls Netflix and HBO the industry leaders in building a simple, quality online viewing experience. He predicts HBO won’t merely repurpose its HBO Go app for its standalone streaming service, seeking instead to create a new product that offers enough to appeal to cable-free households without luring away cable subscribers.
The new streaming platform will also need to scale for larger audiences. HBO Go has already stumbled several times during episodes of Game of Thrones, raising questions about the service’s ability to handle large viewing events. “If I were them,” Lai says, “it would be a question of, how do I compete against myself in order to build for the future?”
Dan Rayburn, an analyst at market researcher Frost & Sullivan, says the technical challenge is well within HBO’s ability because the subscriber level for its standalone product will likely fall far below Netflix’s more than 36 million streaming customers. But he notes there’s a much greater risk to getting it wrong once streaming isn’t just an add-on available to people paying for a cable channel.
HBO already has a small direct-to-consumer streaming service called HBO Nordic, available in Sweden, Denmark, Finland, and Norway. But it’s hard to see it as much of a precedent for a rollout in America. HBO Nordic has attracted less than 10 percent of the user base of Netflix’s local service, according to Swedish market-research firm MMS.
Attracting users will be only part of the challenge for HBO’s marketing department. Retaining them is equally important. Companies offering over-the-top streaming services have a harder job than cable-TV companies once the customers have been signed up, in part because it’s easier to cancel the service with a click of the mouse. Binge viewers have little problem signing up for Netflix, watching both seasons of Orange Is the New Black, and dropping out until the next hot show comes along—a phenomenon that could plague HBO in between seasons of a huge hit like Game of Thrones.
Streaming subscribers also appear to be much more price-sensitive than cable-TV customers. When Netflix reported disappointing subscriber numbers last week, it blamed a $1 price hike, with the stock losing one-fifth of its value in two days.
Whatever shape HBO’s new service takes will be informed by the company’s need to maintain a difficult balance. By definition, over-the-top streaming is a way around HBO’s traditional partners. But the network clearly wants to develop this new business model in a way that doesn’t undermine an existing one that works well for Time Warner. “We will work with our current partners,” HBO Chief Executive Richard Plepler said last week when announcing the streaming service. “And we will explore models with new partners.”
The company is spurred by some numbers that suggest an opportunity online: Plepler cited 10 million U.S. homes with broadband and no cable-TV subscriptions. The penetration rate for HBO among cable subscribers has not hit 50 percent, even through cable operators that market the service aggressively. HBO has become a potent lure for landing and keeping cable subscribers in recent years, and both HBO and its cable partners see that continuing.
Among HBO’s current customers, there’s also an enormous split in how they approach the content: 75 percent who use the traditional “linear” HBO watch mainly new movies, which is still the company’s dominant offering, despite all the media buzz its shows attract. Yet that statistic flips for HBO Go’s primary users, with about three-quarters viewing the original series, according to data HBO released at its recent investors conference.
It’s clear that current subscribers are already segmenting themselves in what they watch and how they watch it, with a pronounced split between the streamers and the traditional cable-TV watchers. The challenge for HBO will be how to achieve that same outcome as it builds its new standalone streaming service. Live sports and big, first-run Hollywood movies are almost certainly out of the mix. The HBO streaming platform is likely to skew heavily toward original programs and the back catalog Time Warner controls. It remains unclear whether HBO could, or even wants to, include the older original series, miniseries, and comedy shows it licensed to Amazon this past spring.
“I think they would like to make it an unattractive product to someone who is already buying the cable bundle,” says Neil Macker, a Morningstar (MORN) analyst. “They’re going to have to figure out what’s that right balance for the cord cutter.”
In cable TV these days, that may be the biggest, trickiest question of all.
