Why doesn't HBO allow non-cable subscribers to subscribe to HBO Go à la Hulu?

• It's a really amazing service with great content (nice contrast to Netflix streaming!), and I would certainly be willing to pay $12/month for it, which is what HBO tends to cost on top of cable, and HBO wouldn't have to split anything with the cable providers. ...but I don't want to pay the ~$50+ "cover charge" for an overpriced cable subscription just to be able to get HBO. My potential theories: Time Warner owns HBO and doesn't want to cannibalize its cable business HBO/TW is hedging against uncertain OpEx (esp. w/ bandwidth & Net Neutrality) and doesn't want to go all in w/ Internet distribution in the case that its distribution costs particular spike.

• Answer:

  Having spent a few years working on second-screen initiatives at Comcast, this is often the first question people would ask me upon finding out what I did for a living, so I figured I'd answer it here. The short version is this: HBO, more than any other network, benefits from the pay TV ecosystem currently in place, so it has little incentive to try to go around it. If it were to sell directly to consumers, it would have figure it was leaving more money on the table by not currently doing so than it would cost  (and risk losing) by doing so. Here's why: Unlike most networks, HBO doesn't make any money on advertising, so it's reliant on cable/satellite operators for the bulk of its revenue. Most programmers make money from two main revenue streams: 1) advertising, and 2) affiliate fees they charge to the pay TV operators to carry their channel. Because HBO doesn't run ads, the bulk of its revenues are generated through the per-subscriber-per-month fees that cable/satellite operators (herein referred to as MSOs) pay. HBO currently has around 30 million subscribers. Affiliate fees are estimated to account for around 85% of revenues (the rest are largely DVD sales). At an estimated $8/subscriber/month affiliate fee [1], that puts HBO's annual take from MSOs at almost $2.9 billion. Also, unlike most other networks, HBO produces its TV shows itself. Most of the content on TV is produced by television studios (like 20th Century Fox), which then license the shows to networks. A network like NBC will buy a season or half-season of a show, and if it performs well (that is, amasses an audience that ads can be sold against), it will re-up with the studio for subsequent seasons. HBO, by contrast, produces television shows itself. This arrangement gives HBO the flexibility and latitude to allow its showrunners incredible artistic freedom, but it also means that HBO has to absorb all of the risk of producing shows itself. As a point of reference, a high-quality scripted drama like Game of Thrones costs around $75,000/minute, sometimes more. The first season of Game of Thrones cost between $50-60 million to produce. And all of this capital expenditure is front-loaded--you can't air an episode, wait to see if it's popular, and then decide to make another one for the next week. You need to make an entire season or half-season of a show in advance. One thing that allows HBO to offset this cost is that most of its programming, on an hourly basis, is movies (remember that HBO stands for Home Box Office), the rights to which are relatively less expensive than producing original content, as much of the production cost of these films has been absorbed by box office sales. The second thing is the predictability of incoming revenues from MSOs. This is where the current pay TV ecosystem comes back in. HBO gets not merely revenue from its MSO partners, but two other key benefits: stability and subsidized distribution. Let's start with the first. One key metric any subscription business has to pay attention to is customer churn. In any given month, how many of your current customers will abandon? Suppose you could subscribe to HBO, but you really only cared about Game of Thrones. Would you cancel your subscription when the show was out of season? This volatility can be killer, as it makes it more difficult to predict future revenues. MSOs offer other bundled services with your pay TV package (internet, phone) which reduce subscriber churn (it's a pain to switch to a new service, with technician appointments and new hardware to install), meaning that month-to-month revenues are more predictable--allowing large, upfront investments in content. Arguably even more important is the marketing and distribution support HBO gets from its MSO partners. You know those deals where you get free HBO for 3/6/12 months when you sign up for Comcast/DirecTV/AT&T U-Verse? The cable companies, which legally can't expand beyond a geographically-regulated footprint, are fighting tooth-and-nail for subscribers against the satellite operators, who aren't regulated the same way and can provide service anywhere. These giveaways are essentially free marketing and promotion for HBO, which the operators subsidize (what's $3/month to them, over the course of a two-year, $100/month contract?). Beyond this, there is sales support--HBO needs to only sell to a few cable/satellite operators rather than 30 million subscribers individually--and last, but not least, distribution support. HBO pays nothing to deliver high-definition video feeds to each of their 30 million subscribers, as this is all handled by the cable and satellite systems' infrastructure. All of this is extremely expensive: just ask Netflix, who expects to lose money as its builds its international business [2], a close analog of what HBO would face going over the top. So that's an overview of why the current setup is working pretty well for HBO. Let's suppose for a minute that HBO were to try to sell a la carte subscriptions directly to consumers, as it has already has made a first step in owning its relationship with customers in the form of HBOGO. There are a few distinct advantages to this setup. The largest of them is data: the more that HBO knows about what its customers are watching, when they're watching it, and so on, the better they can make future investments in content. They'll also be able to de-risk the content production process by more effectively marketing new content to the people who are likely to enjoy and promote it to their friends. And they'll be able to more efficiently market  to subscribers and potential subscribers, and they'll have more freedom in how they position and price their product, for instance, being able to create promotions of their own when the think a subscriber is about to churn. But the single biggest thing that would cause HBO to do such a thing is the belief that they're leaving money on the table. This is the argument that most people in Silicon Valley make when arguing that HBO should go direct to subscribers [3]. The question is, how much are they really leaving on the table? Based on a survey of about 1000 data points collected by http://takemymoneyhbo.com, the average most people offered was around $12/month [4]. So let's suppose HBO started selling for $12/month. Supposing everyone who currently gets HBO through their cable subscription bailed, HBO would have to sell 20 million subscriptions to recoup the affiliate fees lost. For comparison, that's 84% of the number of Netflix streaming subscribers in the US, who pay $8/month each [5]. But that's not realistically going to happen, because a lot of the people who want to watch HBO also want to watch other TV in their cable package, and most of the other networks aren't going to immediately follow suit and unbundle because, frankly, their content wouldn't merit as loyal a following as HBO's does. What would happen? First, HBO's MSO partners would be extremely unhappy. After all, HBO is a huge marketing tool for them. When the time comes to renegotiate the affiliate fees that HBO currently relies upon, you can bet that HBO will have lost a tremendous amount of leverage, and will have trouble trying to command such high prices from their MSO partners [6]. Second, and far more importantly, there likely just aren't enough people who would currently pay for this value proposition. Out of the 114 million households in the United States with a television, 103 million--over 90%--have some form of pay TV [7]. At HBO's current subscriber numbers, about 30% of people who have pay TV opt to get HBO. And this is with marketing and promotional support from the MSOs. So if HBO were able to get the same 30% penetration in the non-pay TV market, that would net 3.3 million subscribers, or $475 million per year at $12/month. Is there reason to believe that HBO pull this off? Perhaps, but at what cost? For reference, Comcast, DirecTV, and Dish each spend about $300 million per year on advertising. And we still haven't factored in churn, distribution, and support costs. On the demand side, it makes sense to look again to Netflix. If you look at Netflix's numbers, you'll find that Netflix subscribers are more likely to be cable subscribers than not. There are 23.9 million Netflix streaming subscribers in the US, and only 13 million households without pay TV packages, which means that Netflix would have to have more than 90% penetration in these homes for them to constitute even half of its subscribers. This is highly improbable. In fact, the exact opposite is the case: the vast majority--86%--of Netflix subscribers are already pay TV subscribers[8]. Beyond the probability, the reason for this is pretty intuitive: these people have already shown a willingness to pay for content. And at the end of the day, the same is likely to be true for HBO, but even more so, because--and this is the key point--most people who would be willing to pay for this value proposition already can. For instance, existing Comcast subscribers can add HBO to their current package for just $10/month [9]. So while it seems that there is money to be made by HBO trying to sell direct to consumers, it would be a far more difficult, costly, and risky proposition than most people think. My intention here is merely to lay out the factors they'd have to weigh. I'll also give the caveat that HBO has undoubtedly spent far more time thinking about this than I have. For the record, I do think HBO will make a move in this direction in the next few years, because at the end of the day, in this business content is king--and HBO has the best content on television. And I'm excited to see how it goes, because it will represent a harbinger for a change in the economics of the television business. [1] http://bits.blogs.nytimes.com/2012/06/10/disruptions-for-hbo-still-beholden-to-a-cable-company/ [2] http://www.mercurynews.com/business/ci_21147710/netflix-earnings-beat-street [3] http://parislemon.com/post/14557023368/dear-hbo [4] http://techcrunch.com/2012/06/05/hbo-go-without-hbo/ [5] http://www.engadget.com/2012/07/24/netflix-q2-2012-earnings/ [6] See how the current standoff between Dish and AMC has weakened AMC's bargaining position: http://paidcontent.org/2012/07/27/day-27-of-the-dish-vs-amc-standoff-wheres-the-subscriber-revolt/ [7] http://www.tvb.org/media/file/TV_Basics.pdf [8] http://www.cedmagazine.com/articles/2011/11/upfront-%E2%80%93-lrg-nearly-half-of-all-us-households-have-a-dvr [9]  http://www.comcast.com/Corporate/Learn/DigitalCable/premium-channels.html