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HBO’s Streaming Plans Have Pay TV Perplexed

10 December 2014 in Trading Ideas

A couple of months ago, Time Warner’s ubiquitous HBO division seemed to signal that the end was near for the exclusive coupling of its programming with cable and satellite TV providers.

HBO said it planned to offer next year a standalone online streaming version of its service, targeting the 10 million people in the US who have an Internet connection but no pay-television service.

As the Wall Street Journal pointed out at the time, consumers have been pushing for HBO to free itself from having its premium service packaged with large bundles of channels, many of which are never watched by subscribers.1

Of course, not everyone is necessarily content to watch HBO carry out its plans. As the Journal reported last week, the company’s move could run up against the interests of its pay-TV partner DirecTV.2

Specifically, according to the Journal, HBO could encounter problems if it signs up more than 450,000 subscribers nationally for “over-the-top” online service, or 300,000 in any given local market.

DirecTV, the nation’s second-largest pay-TV distributor, would have the contractual right to scale back its marketing of HBO, highlighting it in consumer offers for only five months of the year instead of 11 months. The contract also says DirecTV would immediately get the right to offer HBO’s streaming product as well, the Journal reported.

It isn’t clear whether DirecTV, which has 20 million subscribers, would be able to cut the price it pays for carrying HBO, the Journal said.

HBO’s move is just one of many that Time Warner plans to show investors that portends future growth as a standalone company. As the Journal explained, although HBO is growing in the US, it isn’t getting revenue for many of those subscribers because of the way its deals with big distributors are structured.

HBO is attempting to address those contract terms, the Journal said.

Competition with Netflix is fierce, as a burgeoning roster of companies explores original online programming, while content providers also attempt to test their increased leverage with higher fees charged to pay-TV partners.

The Content is King motif has gained 5.4% in the past month. Over that same period, the S&P 500 has risen 1.3%.

In the past six months, the motif has increased 2.4%; the S&P 500 is up 6.7%.

Last year, Netflix surpassed HBO in its number of subscribers in the US, although HBO is far more profitable, the Journal said.

HBO will still need partners, however. The Journal said that the company is exploring several ways to offer a standalone Web service, including as an add-on to broadband packages with cable operators or through technology partners like Apple, Microsoft and Amazon.com.

According to the Journal, it has positioned the Web service to cable operators as a product that will encourage their broadband customers to sign up to more-expensive tiers of Internet service.

But that doesn’t do much for the fortunes of satellite providers like DirecTV and Dish, which don’t offer broadband service that competes with cable and phone companies.

All of which figures to make HBO’s attempts at building its streaming service a valuable litmus test for investors considering the stocks of film and television content companies.

1Joe Flint and Shalini Ramachandran, “HBO to Launch Stand-Alone Streaming,” wsj.com, Oct. 15, 2014.

2Shalini Ramachandran and Keach Hagey, “DirecTV Could Ding HBO on Streaming Service,” wsj.com, Dec. 3, 2014.