When HBOGo launched in 2010, it completely modernized the way viewers accessed the premium network’s programming. For the first time, HBO’s entire catalog was available to stream via the web, tablets, mobile devices, and other TV-based platforms. Not only could viewers watch every episode of every HBO Original Series ever made, additional content, such as interactive features and new movie releases, made the new service a smash hit. However, the ability to access HBOGo has remained incredibly exclusive. HBO doesn’t allow its content to be used by the major internet streaming distributors; Hulu, Netflix, Amazon, and Apple. So, the only way to enjoy the amazing programming that the service provides is to become an HBO subscriber, and the only way to do that is to sign a contract with a major cable company.
A massive outcry from fans of the hit series Game of Thrones has sparked a fiery debate over whether the network should offer HBOGo as a stand-alone service. Even though the issue isn’t anything new, controversy started to arise when Forbes.com published an article stating that ‘Thrones was on pace to become the most pirated show of 2012. Additionally, another Forbes writer, Eric Kain, decided to personally attack the network by saying “HBO only has itself to blame” for the millions of illegal downloads the show received each episode. To his credit, Kain wrote a follow-up piece on how he agrees with HBO’s current position, but believes that stand-alone service would one day be inevitable. However, the backlash these articles created caused numerous fans to criticize the network for limiting access to their shows.
The grassroots movement “Take My Money HBO” has a website that allows users to tweet the amount they would be willing to pay for monthly HBOGo service. While the site maintains that they would be happy to pay for HBO, they refuse to go through a cable provider. More and more people today are deciding to “cord-cut” and use broadband internet as their source for entertainment. This means streaming content providers, such as Netflix, Hulu, and Amazon, are becoming a model for what television will ultimately be like in the future.
On average, the price that people seem willing to pay is around $12 per month. Currently, HBO receives around $8 for every subscription. So, it would seem that they can make an additional $4 of revenue per sub, as well as possibly adding millions of new viewers. However, what cord-cutters and critics of HBO’s policy don’t seem to understand is that it’s impossible for the network to make that jump with their current business model. While I believe that offering HBOGo to the masses will be a necessity sometime in the future, HBO is currently making the right decision by only allowing access to cable subscribers.
Last December, HBO’s co-president Eric Kessler was interviewed by William Richmond of Video Nuze and gave some enlightening insight into the company’s infrastructure and their thoughts behind HBOGo. Here is a quick rundown of the main points that were discussed during the interview:
HBO is highly transactional – HBO has around 10 million transactions per year, which is the number of people who add/drop the service.
HBO uses a statistic called the “customer life cycle” – This stat is basically how long a subscriber stays with the network once a transaction is made. The ultimate goal of the company is to limit the amount of transactions by extending this life-cycle.
There are two ways to extend the life cycle – The first, and most difficult, is to offer quality programming. The second, once you have a great series, is to make access to the show easier. This is the primary reason HBOGo was developed in the first place.
80% of HBO’s revenue comes from its linear service – Linear service refers to the 30 million viewers that subscribe to HBO through a major cable provider. Since this is what drives revenue, the company is constantly trying to increase their number of subscribers.
HBO feels there is value in exclusivity – HBO views aggregates, such as Netflix, Hulu, and Amazon, as competition. While most of these streaming services focus on quantity of programming, HBO is more concerned with quality.
There are two main reasons why HBO’s current business model doesn’t allow them to venture into the streaming service market. First, HBO would lose money from their linear service due to being dropped from affiliate cable providers. Second, the mass distribution of HBO’s content would negate their competitive strategy.
The major distributors of streaming internet content use an e-commerce business model, buying and selling products and services over the internet. These companies rely on B2C (business-to-customer) sales and the use of Web storefronts to make money. HBO, however, uses a completely different model. The main difference is that HBO is a merchant company; they actually own and take title to the content they provide. Therefore, cable providers, such as Comcast, DirecTV, and AT&T, sign licensing contracts with HBO so they can include the network in their channel lineup. Of course, they could receive 100% of the revenue by selling directly to customers through e-commerce; but it’s not a very wise decision for the company to make. Not only would they have to compete with companies that have already established themselves in that market, but issues would arise with cable affiliates that would ultimately doom the network.
First, price and channel conflicts will develop between HBO and its affiliates. Cable companies benefit enormously by offering free HBO as an incentive for promotional sign-ups. As Kessler states in the interview, people are highly unlikely to cancel HBO after receiving it through one of these promotions, which benefits the network as well. If they started selling service directly to those same customers, it would be a slap in the face to the partnership that has helped make both companies successful. Even if they weren’t competing for the same customers, the existing channels obviously don’t want a lower price known readily via the web. Needless to say, HBO’s affiliates wouldn’t be too happy about the move and would probably result in them dropping the network all together. Since 80% of HBO’s revenue is directly tied to its linear service, this is a risk that they simply can’t afford to take.
The second major factor inhibiting the move is logistics and customer-service related expenses. HBO thrives on their current business model because they engage primarily in B2B (business-to-business) sales. They never interact directly with customers when it comes to the 10 million transactions that are made every year. Therefore, their distributors take on all the various expenses related to the billing and processing of each transaction, as well as customer service activities. HBO incurs none of these costs. If they were to add a few million subscribers through online membership, HBO would have to set up a numerous different departments to maintain it. The expenses that this would create vastly outweigh the benefits of adding a few million more subs.
Although there is plenty of evidence that explains the economic downfalls of stand-alone HBOGo service, Eric Kessler touched on something else in the interview that I think has been overlooked: HBO believes there is “value in exclusivity”, and that’s what helps HBO compete in the market.
Organizations formulate a competitive strategy by analyzing the structure of their industry. They can focus on being the cost leader, or on differentiating its products from the competition. Further, organization’s can employ this strategy across an entire industry, or it can focus on a particular industry segment. In HBO’s case, they are a premium network that employs the quality over quantity strategy as they offer premium television at a higher cost. Additionally, they focus on a particular segment of the industry, cable television. This is where the whole “value in exclusivity” concept comes into play. HBO feels that their television shows are second to none, and I would have to agree with them. They offer top-quality entertainment to those that are willing to pay for it. It’s a luxury product, no different than any other on the market today, which means consumers have to pay a higher cost in order to access it.
Take Rolex for example. They make high-end, top of the line products at a premium cost just like HBO. Although they have the ability to make cheap plastic watches for the masses, why would they? HBO and Rolex have the resources and employ the talent to make outstanding products and services. Of course, not everyone is able to afford a Rolex watch, or HBO for that matter, but that’s the point. These are both luxury items. The competitive advantage here is that these companies provide superior products that their competition can’t contend with. Additionally, the allure of being able to experience the excellence that these companies provide is overwhelming to some people. Everyone wants what they can’t have, which is why there is such an outcry from cord-cutters to access HBOGo. But try asking Rolex, Mercedes-Benz, or any other luxury manufacturer to sell you their products at a price that everyone can afford. They will laugh at you.
To all of the cord-cutters and critics that say the television industry is doomed and will ultimately fail due to the high costs, I would have to say that I agree to a certain extent. I’m not naive enough to believe that HBO’s current business model will last forever, because it won’t. The entertainment industry is rapidly changing with the never-ending advancements in technology and it’s only a matter of time until they have to take a different approach. When that happens HBO will have to offer its programming through stand-alone services, but that day isn’t coming anytime soon. The big TV networks still have so much power and control right now that the piracy issue doesn’t seem to have an effect on them. At least, that’s what they’re telling us. However, the idea that the system will simply collapse one day isn’t very accurate. For right now, HBO is doing quite well and the exclusivity of the network is the right approach to take.
Personally, I subscribe to HBO and write for this blog because I feel that their programs are the best on TV. I do alright but I’m not living it up in some luxury apartment or anything. Yet, even though my reasons for subscribing are a personal opinion, I’ve found that being an HBO subscriber means more today than it ever did in the past. The exclusivity of HBO says something about me and every other person that pays extra to enjoy the service. It says that we care about quality, we will pay extra for it, and, in turn, we are rewarded with exceptional television programming and benefits that others can’t get. When I talk to people about how amazing Game of Thrones is, or how much I love watching old episodes of The Wire on HBOGo, those that don’t have the service feel as like they’re missing out on something. They want to experience these great shows too, but they’re not subscribers. If HBO decided to give away this exclusivity through stand-alone streaming services, it would deteriorate the very foundation that has made HBO so intriguing.
Here is the full interview with HBO’s co-president Eric Kessler from VideoNuze.com