

HBO Ignores Internet Geniuses, Sells More HBO - cremnob
http://allthingsd.com/20120801/hbo-ignores-internet-geniuses-sells-more-hbo/

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SwellJoe
Classic _Innovator's Dilemma_.

By the time the numbers are right for HBO to move forward, it will be too
late. They're right to make this choice for profits _this year_ , and maybe
next, and maybe even the year after that. But, if they want to be relevant in
ten years, the changes need to be happening now. Otherwise, other players will
come in under them and simply eat their lunch. They'll have no idea what hit
them. I don't know who those players will be (Netflix seems a likely
candidate, which is why some of the cable and movie companies have targeted
them for retributive licensing deals or simply refuse to license), but they
will come...because there's billions of dollars at stake, and there's always
someone willing to work really hard on a billion dollar problem.

They're feeling pretty infallible right now, due to a slate of popular shows
and a strong subscriber base. But, things change. And, with the Internet,
things change faster than ever before.

~~~
majormajor
The cable companies should be worried about new distribution models... I'm not
sure HBO should. The internet, and online-focused content producers, have so
far not had a noticable impact on the demand for their own shows. Rather, this
is in many ways a golden age of quality television programming, and demand for
HBO certainly appears to be on the rise.

So if the traditional cable model gets displaced, then HBO will be able to
move _then_ to make deals with the new distributors, or start distribution on
their own, as long as they still have a product that millions of people want
to pay a dozen bucks a month for.

(I'm not fully convinced the current cable model will get replaced... there
are an awful lot of people who want nothing more than to be able to pay just
one monthly fee to get an enormous amount of video content delivered. I
believe the way it's delivered will continue to move towards a pure IP-based
system for practical reasons, and I believe alternate services will
increasingly provide options for people who really don't need a full cable
package, but once you start talking about the amount of programming the
average person or family watches, the flat-rate-watch-all-you-want model is
extremely attractive for consumers and the cable companies already have the
content.)

~~~
SwellJoe
This is potentially valid, but I would present a counter-argument based on the
events surrounding the Netflix vs. Starz negotiations and subsequent pulling
of Starz content from Netflix.

Around the same time, Netflix announced new episodes of Arrested Development
would be appearing exclusively on Netflix. Other expansions into exclusive
content seem to indicate that Netflix is going the direction of competing with
both the cable companies (distribution) and the content providers, by
necessity. In order to continue growing, Netflix is having to make content,
too. I would argue that's going to continue. Netflix will find shows in the
still-fat middle of the long tail, and pick them up when they get canceled,
and they'll probably go into new production, too.

Was it HBO's intention to make a potential future distribution partner into a
direct content competitor? Probably not, but that's what happened. Other
"distribution" plays will probably end up being force to do the same.

Netflix seems to be thinking ten years out. HBO seems to be thinking next
quarter. HBO may be poised to make all the right moves when the time is right;
I can't say what's going on behind the scenes, and I am definitely not an
expert in the entertainment industry (I worked in broadcast TV for five years
about 15 years ago, but that knowledge does not scale). But, the Internet is
without a doubt the future of entertainment.

"once you start talking about the amount of programming the average person or
family watches, the flat-rate-watch-all-you-want model is extremely attractive
for consumers"

There are other values. Watching what you want, when you want, is extremely
valuable to many people.

~~~
jonnathanson
_"Netflix will find shows in the still-fat middle of the long tail, and pick
them up when they get canceled, and they'll probably go into new production,
too."_

In theory, yes. In praxis, the problem is that the production costs of picking
up canceled shows don't make sense relative to the Netflix revenue model. TV
productions are _extraordinarily_ expensive. Talent deals are astronomical.
Producers' fees, writers' salaries, even technicians' salaries, are dazzling.
Union scales aren't cheap, either. The whole thing is very, very costly to
produce. The reason a TV network can afford that cost is because a) it doesn't
pay all the costs on its own, and b) it doesn't sell the content directly to
its consumers. It sells massive amounts of advertising to a handful of deep-
pocketed advertisers, and also makes money licensing the shows to cable
networks and other distribution outlets.

Netflix, in the original content production business, faces the problem of
having disintermediated a costly supply chain, and then having condensed that
supply chain into itself. It eliminates the production company, the TV studio,
and the TV network, replacing them all with Netflix, but bearing all of those
costs as if they went up a three-part value chain (because it inherits all the
costs that were already in place when the show was being produced for TV).

This is why I have to believe that Netflix will increasingly depend on for-
Netflix originals, and not on picking up canceled TV shows. It may pick up a
canceled show here or there, all of which will make great headlines and
probably generate a lot of new users (or existing user loyalty). But these
aquisitions will be loss leaders, serving primarily to grow the subscriber
base at a considerable loss per show. They can't be the basis of a business
model, in and of themselves.

TLDR: Netflix will need to build a first-rate originals business, perhaps
aquiring canceled shows along the way to season the steak. The bulk of its
future originals will be from production companies pitching content directly
to Netflix, and not from Netflix's licensing existing content from other
sources. Cost models don't translate very well from medium to medium.

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crazygringo
> _"But the whole idea that there’s a lot of people out there that want to
> drop multichannel TV, and just have a Netflix or an HBO — that’s not right.
> Look for the data, you won’t find them."_

Well, what is the data then? Don't say it doesn't exist, tell me what the
actual numbers are.

I know I don't have "multichannel TV" but would pay for HBO+Netflix. Now I'm
actually kind of curious what percentage of Americans feel the same way.

~~~
pgrote
Unsure. I know we haven't had cable/sat for six years now and haven't looked
back. Sure, I miss the history channel from time to time, but the only time we
watch TV is for superbowl, etc. The rest of the time we stream through netflix
or amazon, so we went from $150 or so a month to 7.00 for amazon prime and
8.00 netflix.

I don't think we're alone, which gets to your point about how many people are
out there. How would you even begin to measure that number?

~~~
Splines
If you miss the history channel of six years ago, trust me, you're not missing
anything now.

~~~
illuminate
Right. It doesn't exist, so I don't see the point in mourning.

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kevinh
So because HBO is selling more subscriptions to HBO (due to having one of the
most popular shows available), they're doing as well as they possibly can?
That seems like it's ignoring all of the customers they _could_ pick up and
are sweeping aside as irrelevant.

Everything that Bewkes says indicates that he has preconceived notions of what
he wants his business model to be. I would be very surprised if he wasn't
cherry-picking data to meet his hypothesis. It's not very surprising that the
CEO of a television conglomerate is sticking with forcing people to get cable
subscriptions - that's probably better for _Time Warner's_ bottom line, not
_HBO's_.

~~~
mtgx
When you get disrupted _never_ wait until your financials start looking _bad_
because of the disruption. At that point you're already too late to turn the
company around, because it takes a few more years to do it, and you're quickly
running out of time.

Look at RIM. They were breaking sales record after sales record up until 2010,
because of brand inertia in the international markets. So they thought things
are just fine because the financials look good. But that's not what they
should look for when they get disrupted. They find out if their
products/services actually make sense in the new "era". If they don't, then
it's just a matter of time before the financials start looking bad, too, as
the world moves on.

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aidenn0
I seem to say this a lot, but don't forget that HBO doesn't pay for most of
its advertising right now. Go into the lobby of any Cable store, or watch any
add for cable in the US and at least one HBO show (or HBO by name) will be
mentioned.

This is all free advertising for them.

~~~
AjithAntony
Probably far more complicated than that. If HBO receives $8 of a $20
subscription, and the cable company got $12, is the marketing that the cable
company does free?

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dknutsen
This isn't necessarily the whole story though. HBO also had the most pirated
show of the first half of the year (Game of Thrones), possibly the whole year.
Imagine how much greater their subscription numbers might be if they did offer
some sort of HBO Go only plan. I would certainly be interested (and I have no
intention of ever subscribing to the current cable service).

~~~
danielweber
HBO is in the position to know. And what they are doing seems to be working
out the best for them.

It's possible they are wrong, but if they are wrong they will be the ones
suffering the consequences. If someone on the Internet saying "let me pay $10
and I'll buy it (maybe) and so will a bunch of other people" are wrong, they
won't suffer the bad side effects.

It's like people complaining that NBC is hosting the "buggy-whip" Olympics
when NBC is getting record high ratings. Maybe the people actually running the
business actually know what they are doing.

~~~
MartinCron
_Maybe the people actually running the business actually know what they are
doing._

A lot of people are having trouble with the idea of what's best for HBO not
aligning with their own self-interest.

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nitrogen
There's no shame in trying to change the world to look the way you want it to
look, so long as it doesn't come at the expense of other individuals. If
people want the world of video entertainment to move entirely online, why
shouldn't they try to make that happen?

~~~
MartinCron
I think they should try to make it happen, absolutely. I just think the "those
people are fools refusing the money that I'm trying to give them (as long as
it is on my terms)" argument is pretty shallow.

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gamble
Reminds me of a few years ago, when many pundits were still poo-poo'ing
criticisms of RIM and Nokia, because - hey, they're still selling tons of
product to existing markets! Who cares if they're not considered cool by those
weirdo iPhone/Android early adopters?

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thornofmight
Why does everyone want to pay for HBO Go so much? Has anyone actually used it?
I have, and it's absolutely horrible on both Mac and PC in any browser. It
skips often, horrible picture quality, weird colors, not to mention a bad
interface for finding and watching.

I just recently got the iPhone HBO Go app and it's awesome, never skips,
crystal clear quality, easy to use. Why the enormous difference? Am I the only
person experiencing this?

~~~
efsavage
I watched most of game of thrones on PC (in a VM no less) and it was flawless.

My only peeve with the UI is that there isn't a "next episode" button when
watching a series.

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xbryanx
Reminds me of a favorite aphorism.

Data is not the plural of anecdote.

In this case the anecdote of, me and my circle are getting rid of cable,
everyone must be.

~~~
notatoad
That's a nice saying, but it really doesn't have anything to do with anything.
Yes, current data says that people still buy cable subscriptions, but that
doesn't mean the trend will continue. Things change, and looking at data and
expecting any patterns you see to exist perpetually is just as bad as citing
anecdotes as though they were statistics.

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sp332
Remember one huge thing in this equation: HBO doesn't deal with subscribers!
HBO has _no_ subscriber database, hardly any customer support, no sensitive
personally identifiable data to keep track of. The cable and satellite
companies have to deal with all of that. That's why HBO isn't really
interested in selling direct to subscribers.

~~~
wmf
Of course, a deal with Hulu, Netflix, or Amazon wouldn't be selling direct
either.

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kemiller
So the issue here is that there are people who pay for cable (C), and people
who don't pay for cable (!C). There are also people who would, all things
being equal, pay for HBO (H), and people who would not (!H). It sounds like he
is saying that C ∩ H is larger and/or more profitable than !C ∩ H, at least
for now. And that catering to the latter would cannibalize more than it is
worth.

That is probably true, if short-sighted. I wonder how hard it would be to
undercut them and go for the small, but possibly growing !C market. I'm
guessing pretty hard.

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727374
Just because HBO could pick up customers by offering their service on the
internet doesn't mean they'd increase profits as their other revenue streams
could be cannibalized - DVD/iTunes/Amazon sales, cable subscriptions, etc.

My guess is that they have a team of smart finance people with a model that
shows it's not worth it to offer an internet only service.

~~~
MartinCron
And, once the smart finance people's model shows that it is worth it to offer
an internet-only service, they'll be ready. How difficult would it be to
authenticate HBO Go clients against their own service rather than the cable
company's?

I think the predictions of HBO's RIM-esque decline don't make sense, they know
what they're doing.

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abalone
Love the title, but that is a really poor argument. "There's no data that
people want HBO without multichannel TV."

Maybe that's because HBO isn't available any other way?

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rnambiar
I used to be on the side of wanting HBO to give an a-la carte. Heck, i don't
want regular cable TV, i want to watch only HBO shows. But i remember talking
to a person more experienced in the area explain the system.

HBO gets quite a cut from cable companies to have their channels on their
lineup. cable providers subsidize HBO so more people can get their cable. If
HBO cut all that money an a la carte option would probably cost more, maybe
$25. At that point would people who have been asking for this option pay for
it? One option is to have some online distributor like netflix or hulu cut
that cost but i guess HBO hasn't found that option appealing.

All i'm trying to say is I think HBO is making the most amount of money right
now without angering their cable partners. And from the looks of this article
they are growing quite a bit. I think once the cable cutting market becomes
bigger and more appealing, i don't see why HBO can't switch lanes. Their
product will still sell because their content is good (which is why HBO is
doing so well in the first place).

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pyre
Once cable subscriptions start declining HBO will be in the position of power.
The cable operators seem to feel that having the option of an HBO subscription
on their network helps them to get/retain customers. If they are having issues
with customers jumping ship, I would imagine that it would happen even faster
if they dropped the HBO option from their line-up as retribution for HBO
pushing their own streaming video offering (or teaming up with
Netflix/Hulu/etc). From the customer's point-of-view, the lack of HBO would be
another negative against the cable operator, and positive in favor of 'cutting
the cord.'

That said, I definitely think that HBO should not rest on its laurels. They
should be exploring these options, even if they aren't ready to execute on
them yet.

[Note: all of this assumes that HBO continues to produce excellent/desirable
content]

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purpl3p3rs0n
Interview at VideoSchmooze with Eric Kessler on HBO GO's business model.

[http://videonuze.com/article/video-interview-hbo-co-
presiden...](http://videonuze.com/article/video-interview-hbo-co-president-
eric-kessler-at-videoschmooze)

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naner
My brother subscribes to HBO solely for _Game of Thrones_. And then he drops
the subscription after each season is over. I wonder how common that behavior
is.

~~~
efsavage
We're pretty ruthless about adding/dropping HBO/showtime as series are on/off
the air, and usually only if there is more than one interesting series running
concurrently. There's really no value to these networks other than the series,
I could rent the few movies worth seeing on amazon or redbox for less than the
fee.

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michaelmior
The title of this made it sound like it would link to The Onion.

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dinkumthinkum
I know it seems crazy to some of you but some people like to watch cable TV.
We can shout HBO GO until we're blue in the face, there's not that many shows
on it, really. There are arguably great shows on HBO Go but it's not that many
and most of the seasons for each show are like 8 episodes long, great! Netflix
.. really? OK, I get that is fashionable and everything but I don't ever see
any data to back up that cable TV is done.

Also, as an aside, why is it so fashionable anyway? There's just all this
pride of like "I haven't had cable or satelite in 6 years" or the "last time I
had a cable was when Cheers was on but I turned it off and watched an
interpretive dance instead."

~~~
MartinCron
_Also, as an aside, why is it so fashionable anyway?_

I think it's multifaceted and varies from person to person. I gave up cable
for the same reason that a lot of people give up drinking... I couldn't handle
it responsibly. I hit bottom, thinking "I've only seen this episode of
'Friends' a few times already, I'll watch this". So in order to keep from
feeling like the TV is the default center of my life, I had to remove it.

