Time Warner’s HBO To Offer A Standalone Service From 2015

October 29th, 2014 by Trefis Team
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Time Warner

Time Warner‘s (NYSE:TWX) HBO network has announced that it will offer a standalone service starting 2015. [1] The company will try to reach 80 million homes, which haven’t subscribed to the network. HBO is a very popular network and offers recently released movies and original TV programming. HBO’s U.S. operations account for more than 25% of Time Warner’s value, according to our estimates. The network derives its revenue primarily from subscription fees, which have grown steadily over the past few years. While the company has not given any guidance on pricing for the standalone service, it could be anywhere around $18, according to some speculation. [2] However, if the company does decide on this pricing, it will be very expensive and much higher than the $8.99 per month Netflix (NASDAQ:NFLX) charges for its wide content base. On the other hand, it cannot afford to sell the standalone service at a lower price to what it charges for pay-TV, as it would trim the existing subscriber base. It will be interesting to see how HBO works on the pricing and if it can gain a solid subscriber base for its standalone service in 2015.

HBO currently has 43 million subscribers in the U.S. and charges an estimated $7 monthly subscription fee, translating into revenues of over $3 billion. The estimated EBITDA margin of 39% for HBO translates into EBITDA of over $1.3 billion, representing 16% of Time Warner’s overall EBITDA for 2013.

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Why Did HBO Go For Standalone Service?

Currently, HBO Go offers streaming services for the customers who have subscribed to the network on television. However, the company will remove that barrier in 2015 and the subscription will be open to all. The pay-TV operators are facing some headwinds from the rise of alternative video platforms such as Netflix and Amazon Prime. Moreover, rising pay-TV bills are making some customers either drop the service or switch to lower cost packages. In either case, this is not good for media companies, as it would reduce penetration in TV households. Some of the popular networks such as ESPN and TNT has seen more than 4% drop in penetration over the past four years. [3]

HBO is a premium channel and is immensely popular due to its original programming. It has backed several original drama and comedy series, many of which have won awards and received critical acclaim, including Game of Thrones and True Blood. However, the majority of HBO’s programming includes recently released, uncut and uncensored movies. The company typically acquires exclusive rights to these recently released movies, creating a unique appeal among movie and video entertainment enthusiasts.

Given the demand for its content, it makes sense for HBO to offer a standalone service and target the 80 million TV households, which are not subscribed to the network. Moreover, there are more than 10 million households, which have a broadband connection but are not subscribed to pay-TV. [2] Given the demand for its content, a standalone service may look attractive to such customers. However, its success will largely depend on the pricing of the service. If the company does manage to gain an overall streaming subscriber base of 10 million at $18 price tag, it would translate into annual revenues of over $2 billion, which is more than its current income from international operations and content licensing.

HBO is not alone deciding to offer standalone service, CBS Corporation (NYSE:CBS) recently announced the launch of its streaming service CBS All Access for $5.99 a month. [4] A similar service like HBO plans to roll out next year, will offer thousands of episodes of various shows such as The Good Wife and Survivor. It will also include current season primetime shows, a day after they air on television. Disney’s (NYSE:DIS) ESPN also said it will offer a package of NBA games online. It must be noted that going standalone is a bold move and is feasible only for few networks, which are very popular for their content. For instance, HBO’s shows are extremely popular across the globe while CBS is the most watched network in the U.S. and ESPN has majority of the popular sports coverage. For smaller networks it may not make much of sense to offer standalone services as it would make difficult for customers to shop for each network separately. Given the recent developments, it will be interesting to see how this industry shapes up in the near term. For now we will be looking for any updates on the pricing of HBO during the company’s earning release in November.

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Notes:
  1. HBO Chairman and CEO Richard Plepler Announces HBO to Offer a Stand-Alone HBO Streaming Service in 2015, Time Warner’s Press Release, Oct 15, 2014 [↩]
  2. HBO standalone product risks alienating cable, satellite cos, Reuters, Oct 16, 2014 [↩] [↩]
  3. Pay TV’s New Worry: ‘Shaving’ the Cord, The Wall Street Journal, Oct 9, 2014 [↩]
  4. CBS Brings Programming Direct To Consumers With New Multi-Platform Digital Subscription Service, CBS Corporation’s Press Release, Oct 16, 2014 [↩]