Netflix vs. HBO

netflix-vs-hboJanko Roettgers published an article “Netflix exec: HBO would have many more customers if it sold online-only subscriptions” earlier this week on GigaOM in response to David Wells’ (CFO of Netflix) statement at a Goldman Sachs conference that HBO should be more like Netflix (read: direct to consumer) to grow. Frankly, it’s not that simple and, coming on the heels of Netflix’s recent original programming award wins, this smells a little like a PR play for Netflix to draw a comparison with HBO, especially as Well’s made another comment (unmentioned in the GigaOM article, but reported by Cynopsis) at the same conference that “We [Netflix] would love… to be available via the existing device in the home, which is the set-top box.”

Netflix doesn’t have the legacy business model (or related nuances) to consider in making such a broad statement, whereas HBO has an established and profitable revenue model, one which offering subscriptions over the Internet would, at a minimum, disrupt. Not something to do lightly.

HBO’s stance of having “no plans to sell subscriptions directly over the Internet,” it’s at least partially posturing due to the MSOs having anticipated content owner’s potential desire to go direct to consumers in their carriage agreements. Most current agreements have “most favored nation” clauses that, in short, mean MSOs don’t have to pay the network more per subscriber than any other outlet they offer their service on.

Considering Netflix subscriptions hover at around $8 a month, that would be considerable lost revenue for any premium cable network. For a network like HBO, this means that they would have to immediately exceed their current subscriber base just to match their current revenue. Unless HBO were taking on significant water in their current model, there’s little immediate incentive for HBO to take the risk.

MSO deals also allow the stronger network brands to negotiate carriage for sister and child networks, something that may very well get lost in an online / direct model. And for networks with advertising, it’s even more complicated because, if they don’t hit their subscription numbers, they negatively impact both of their primary revenue streams, subscription and advertising.

HBO is already on the forefront of TVE with HBOGo and MAXGo, both as apps / services and via their on deck positions on products like Apple TV. From a consumer standpoint, a direct offering give that an online subscriber online access, but they now have to stream to their television (Apple TV, Roku, etc.) because if MSOs aren’t making any revenue on the subscription, they certainly aren’t delivering it via cable or satellite.

Meanwhile, HBO is no doubt learning a ton about the consumption habits of HBOGo and MAXGo users without having put all their proverbial eggs in that basket. Trend data they have at this point in time however is short-term (e.g the binge-viewing and non-linear programming options that Netflix thrives on), and they may not have a large enough sample set across generational demographics to make an informed decision on David Wells’ suggestion.

We will see the day in the not too distant future where networks become unbundled offerings, whether it’s an evolution of MSO offerings, networks taking the Internet plunge and going direct or some TBD hybrid. For now, HBO seems to be striking the right balance.

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