How Does HBO Compare With Other Premium Networks?

Time Warner’s (NYSE:TWX) HBO network has seen phenomenal growth in the past few years, led by the success of its original programming. The premium network generates revenues primarily from subscription fees collected from pay-TV service providers. The network’s subscription fees have been increasing given the demand for some of its popular series such as Game of Thrones. HBO competes with other premium networks such as Starz and Showtime. In this note, we compare HBO with Showtime and Starz. Overall, we expect that HBO’s unparalleled content will continue to aid its subscription growth in the coming years despite the growth of digital video platforms. In fact, HBO’s own over-the-top streaming service will likely widen its subscriber reach and aid Time Warner’s overall growth.

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HBO Is The Leader Among The Premium Networks

While other premium networks such as Showtime and Starz are doing well, HBO remains a standout. Looking at subscriber bases, HBO is the clear leader, while Starz and Showtime have exchanged the second spot several times. The chart below compares the subscriber bases for these three premium networks in 2010 and 2015. It must be noted that these are standalone figures and do not include Cinemax or The Movie Channel. HBO subscription revenues in our model take into account HBO and Cinemax combined.

All of these three networks have some outstanding content, which has led to subscriber growth for all three. Starz saw massive success with Spartacus back in 2010, and for Showtime it was Homeland, which continues to do well for the network. Looking at HBO, Game of Thrones has seen stellar demand across the globe. While these are just few shows, the quality of HBO’s is evidenced by the Emmy nominations that the network receives every year. HBO won a record 43 Emmy awards in 2015.

Given the quality of HBO’s programming and its demand, the network charges relatively high monthly subscription fees. We estimate that HBO (HBO and Cinemax) charges approximately $7 per subscriber monthly fees to cable distributors. Both networks combined reach about 43% of U.S. pay-TV households, translating into revenues of close to $4 billion. We expect the penetration levels to grow to 55% by the end of our forecast period (towards 2022), translating into revenues of over $7 billion. This can primarily be attributed to HBO’s programming, which has also helped it secure an exceptionally active international fan base. Continued investment in programming will ensure high demand for its content, which in turn should aid subscription fee growth in the coming years.

Streaming Services Will Aid Overall Revenue Growth 

Apart from subscription, these premium networks also generate revenues from content licensing and international markets and now from their streaming services. HBO was the first one to launch its over-the-top streaming service in April this year, and primarily targets broadband-only subscribers. Later in July this year, Showtime launched a similar streaming service. There has been a shift in viewership from traditional to digital platforms, and this has impacted television networks. Viewers now prefer to watch content on multiple devices, including smartphones and tablets.

Streaming Services Can Generate Over $1 Billion In Annual Revenues

Currently, there are 10 million households with broadband-only subscribers. and more than 80 million households who are not subscribed to HBO or Showtime. ^[1] These networks rightly see an immense opportunity to reach out to these homes. We currently estimate around 5 million streaming subscribers for HBO and 3.5 million subscribers for Showtime towards the end of our forecast period (towards 2022). However, there could be a potential upside of over 10% for both stocks if their streaming subscriber bases hit the 15 million mark for HBO and around 8 million for Showtime. In that scenario, both the networks would generate revenues north of $1 billion.

While both the networks have a huge market to cater to, HBO appears to be leading the race in streaming as well. The network’s new service reportedly crossed the one million mark on the iOS platform alone by Q2 2015. ^[2] It should be noted that neither of the networks have reported official subscriber numbers yet.

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1. Nearly 60% of U.S. Broadband Homes Use OTT Video Services, Home Media Magazine, Apr 12, 2015 [↩]
2. Analysts: HBO Now already has about a million subscribers, Quartz [↩]