Microsoft’s (NASDAQ:MSFT) XBox Live service is going to get HBO Go and Comcast’s (NASDAQ:CMCSA) on-demand services starting today.  This expected update adds another strong distribution platform to Time Warner’s (NYSE:TWX) HBO’s (Home Box Office) online add-on service. This add-on service is available to subscribers who already subscribe to HBO on their pay-TV packages.
We estimate that HBO constitutes about 20% to Time Warner’s value. Although its penetration in the U.S. pay-TV households is currently low, it charges a high fee of almost $7 per subscriber thereby creating immense financial value for the company. Expanding its online version, HBO Go, is going to defend the channel against new emerging competitors and encourage avid internet users to subscribe.
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Due to its high subscription fee, HBO’s reach has been limited in the U.S. The online expansion by leveraging several different devices such as tablets and game consoles presents an opportunity for HBO to gain additional subscribers.
As viewers migrate to the Internet to download and stream videos, the ability to watch HBO on new devices such as Xbox Live could lure this audience. The fact that Xbox 360 has an installed base of over 25 million in the U.S. makes it a significant platform of distribution. Overall, the potential for HBO to expand in the U.S. is significant.
By our current estimates, if 80% of the U.S. pay-TV households subscribed to HBO over the course of next 6 years, there could at least 25% upside to our estimated value for Time Warner.
Our price estimate for Time Warner stands at $40.20, implying a premium of little under 10% to the market price.Notes:
- Microsoft Xbox Live to add Comcast, HBO Go tomorrow, GigaOm, Mar 26 2012 [↩]