"Up until now." Three little words uttered by Jeff Bewkes, the CEO of HBO's parent company Time Warner, at a Goldman Sachs conference yesterday that could represent a seismic shift in the way cable TV is sold. Bewkes was talking about moving from selling HBO through cable and satellite companies to a direct-to-consumer model: "The broadband-only opportunity up until now wasn't ... at the point where it would be smart to move the focus from one to the other. Now the broadband opportunity is quite a bit bigger," he said, as reported on Cnet. Bewkes didn't make any announcements, but he certainly sounded more sanguine about the possibility than he has before. Cord cutters have reason for hope; cable operators have much to fret about.
Turn and face the strange?
Less than a year ago in this space, I weighed the arguments for HBO going direct:
On balance, there comes a time when not only HBO, but other cable channels, might well find they need to bypass the middleman. And if there was a chance for HBO to blunt the continued growth of Netflix by making now that time, the argument would be much more compelling. The good news for HBO is that the Go app is already built and fantastic.
What's perhaps most noteworthy is that the motivation for that analysis was Netflix CEO Reed Hastings' comments that he saw only HBO on his competitive radar. Netflix has tacked on 10 million subscribers since then, bringing its total to 50 million, and expects close to 4 million more in the upcoming quarter. It also passed HBO in total subscription revenue last month. But for all the talk about HBO coming from Hastings, the two companies still rarely compete directly. The reason, of course, is that Netflix sells directly to consumers and HBO sells through cable companies (with the exception of the Nordic countries, where it has experimented with a direct model).
The net effect is that HBO's much larger customer base -- more than 114 million worldwide -- brings in less revenue, because the booty is shared with distributors. If HBO cuts out the middleman, it will incur all sorts of costs it doesn't have today, but it will have a different set of problems. Billing, marketing, customer service and content delivery are barely on HBO's plate. They would all be front and center for an HBO Go you can buy without a cable subscription. As a trial balloon, the company has been selling HBO with a "skinny basic" cable plan, including broadband internet and local channels. That service on Comcast runs about $50 a month and Bewkes has been pleased with the uptake.
But it also reminds that HBO without internet is nowhere and Comcast is a partner in many ways. Once HBO starts skirting cable, it runs two very distinct risks. First, it will anger those partners, who like receiving about $8 per HBO subscriber each month and also using the popular channel to encourage people to buy bigger bundles of cable TV. Second, it has a pricing problem. If HBO charged $10, for example, it would likely make more than it currently does per customer. But that would surely infuriate Comcast, DirecTV and others who would not be undercut. Still, if HBO opens the door, the potential exists for others to follow. And even if only a few key channels do that, the cable bundle as we know it begins to unravel and, at minimum, consumers gain new choices in how to acquire programming.
Netflix doesn't have these problems, selling for as little as $8 per month with no worries about anyone else charging a different price. HBO has always known the day was coming when it would have to emulate its upstart rival, and it would surely gain more customers at Netflix-like prices, but the transition will be painful. This is why it hasn't made any moves so far.
The tide is high?
In the meantime, the shift in thinking isn't limited to HBO. Les Moonves, the head of CBS, was asked about taking Showtime direct and Deadline reported him saying this: "Everybody in the media business is thinking about what is the most appropriate way to market your product ... Is there some time in the future when that could happen? Absolutely. I don’t know when that is ... Over the next three to five years, the business will change dramatically."
Perhaps sooner. Sony finally inked a deal to carry Viacom channels like Comedy Central and MTV on its proposed cable-like service that would run over an existing broadband link. That service also first hit this space last year and is one of several slimmed-down cable offerings a number of companies are trying to make real. Getting programming rights has been the hard part, though Dish Network is also believed to be making progress for its own variant. As with HBO going direct, these new cable offerings have implications for the traditional cable operators and their mostly one-size-fits-all bundles. That's why you're seeing experiments like the Comcast-HBO-broadband offer. Expect many more new models to emerge soon.
Last year, I wondered if for HBO's direct efforts: "Perhaps the time has come." It hadn't yet, but it's drawing ever closer.
