Unraveling HBO’s Standalone Streaming Announcement

Posted By on Oct 15, 2014 | 2 comments


On Wednesday came news from Time Warner that HBO would begin offering some form of HBO Go as a standalone online service in 2015, making HBO available to non-pay-TV subscribers for the first time.

Or perhaps not quite the first time.  HBO has previously acknowledged quite openly the high level of piracy associated with the current HBO Go service.

A number of prognosticators quickly declared HBO’s move to be a harbinger of the unraveling of the cable bundle, and many explicitly looked to ESPN for the next move.

In fact, HBO’s move probably does mark the beginning of the end of the cable bundle, but at the same time, the move was one of the most predictable, and predicted, moves.  And though it likely marks the beginning of a process of unraveling, it’s not likely a move that actually drives that process, and certainly not a likely harbinger of a quick implosion.

Here’s why.

HBO is the lowest hanging fruit of the pay TV universe.  As a premium channel, HBO is not a beneficiary of the cable bundle.  HBO is almost never part of low tiers, and there are very, very few subscribers who receive HBO despite not wanting it, only because it is part of their bundle, or part of a required buy-through package to receive other channels.

HBO can be available elsewhere, and it will still make economic sense for pay TV distributors (cable/satellite/telco) to continue offering it, as a premium channel.

What has held HBO back to this point really has nothing to do with HBO, but with other networks, owned by parent Time Warner, that do benefit from the bundle.  So what’s actually interesting here is that Time Warner gave approval for HBO to proceed.  That they did suggests that Time Warner actually believes the assurances they’ve been offering that the move won’t substantially undermine HBO’s traditional service—and in essence, that they don’t believe this move by HBO is likely to make dissolution of the cable bundle occur substantially faster than it otherwise would.

And there’s some good reason to think they are correct.  First, it’s hard to imagine that there are many people who have kept their traditional pay TV subscription solely because of HBO.  If we think about a typical cable offering, to get HBO a customer would have to spend ~$50 for extended basic cable service, plus an average of $15 for HBO as a standalone premium.  Then also, they would have to pay ~$7 for at least one cable box to receive it.  That $72 might compare to $20 for a typical basic cable offering of just over-the-air channels.  So a subscriber staying just for HBO would probably be paying at least $50 for that benefit.

It doesn’t seem terribly likely that many subscribers value HBO at $50/month, and are truly staying just for HBO.

Making that even more true is how easy HBO Go has made it for non-subscribers to access HBO programs.  A cord-cutter who really wants HBO can probably find an HBO subscriber—often a parent—who will share an HBO Go login with them, to allow them access.

That means there aren’t likely to be many, perhaps any, pay TV subscribers who are still pay TV subscribers just because of HBO.  Any that did exist, have already left.

HBO and parent Time Warner are likely betting that they can convert some of those pirates into legitimate paying customers, with a standalone service, as well as attracting some cord-cutters who haven’t been pirating, without having much impact at all on traditional pay TV distribution.  And there’s a decent chance that they are correct.

So while this move by HBO likely does mark the beginning of the end, it likely does so in a ceremonial sense, marking an inevitable (but probably slow) march to dissolution of the cable bundle.  That march is driven by the unsustainable economics of the current bundle, rather than by HBO’s move.

Those looking for a similar move from ESPN, on the other hand, will be waiting a very long time.  ESPN is effectively HBO’s opposite.  They are the biggest beneficiary of the bundle.  There are many subscribers (in fact, the majority of subscribers) who receive ESPN despite not being otherwise willing to pay for it, because it is always part of a low tier that customers must buy if they want to get virtually any channels other than over-the-air networks.

If ESPN were to follow in HBO’s footsteps and create a standalone online offering for their main content, then no distributor would continue to carry them in a low tier.  (With ESPN available independently, distributors would no longer have to worry about losing customers over ESPN, and suddenly the tables would be turned, with distributors wielding all the leverage in carriage negotiations.)  So ESPN would lose tremendously from such a move.  What’s more, ESPN parent Disney would lose even more, because ESPN is used as leverage to gain favorable carriage terms for other Disney networks.

So ESPN will go over-the-top only when the bundle has entirely dissolved.

As a practical matter, today’s announcement doesn’t seem likely to usher in a rapid change in traditional pay TV distribution.  In the near-term, the most likely change we might expect would be HBO offered a la carte, on top of just basic service (which is required to be a buy-through package, under current FCC regs), rather than only on top of extended basic service.  That would seem a natural path for traditional distributors looking to serve cord cutters who are only willing to pay for over-the-air channels plus HBO, and who could now get such with an online HBO subscription. It remains to be seen, however, whether pay TV providers can make such an offering work within the confines of the many restrictive carriage agreements they have for other networks in the traditional bundle.  At the end of the day, pay TV is a game that remains entirely under the control of the programmers.

  • Keith Habberfield

    Good one here Jonathan. Do you think CBS falls somewhere in between these programmers? They do over more diverse programming than either HBO or ESPN.

    • The CBS move had been telegraphed for the last 9 months or so, in CBS’s war of words with Aereo. The announced package looks like a combination of CBS’s anti-Aereo offering, and a CBS-only Hulu plus offering. (CBS is, of course, the one OTA network that didn’t take a stake in Hulu.)

      In any case, I think CBS is closer to ESPN than HBO…however, as an OTA network, CBS affiliates are (presently) much lower cost than ESPN, and have much broader appeal. So while they benefit from the bundle, they are not drawing anywhere near the level of benefit from the bundle that ESPN does.

      At the same time, however, like ESPN, major OTA network affiliates are must-have programming for a cable (or satellite or telco) operator to survive, and they are used as leverage to gain favorable carriage for other networks. So OTA networks can’t afford to make themselves dispensible from cable line-ups.

      The exclusion of some of CBS’s most valuable content–NFL games–looks to be a critical aspect of the, otherwise, “All Access” package. While ostensibly due to rights issues, I would think it likely that CBS would have withheld that content even if there were no rights issues, and I wouldn’t expect them to be trying meaningfully to resolve those issues in the future. They will need to use something to try to retain leverage for carriage disputes, and presumably the NFL will be it. You can bet that they have crafted their various carriage agreements to expire in conjunction with the start of the NFL season.

      And even then, if there should be an extended dispute resulting in a blackout, I’d guess that we’re liable to see some kind of attempt by CBS to refuse new subscriptions from customers of the affected operator, in order to maximize the pressure. For even without all content, the offering should certainly serve to weaken CBS’s hand in negotiations: it creates an easy way for the most unhappy customers (those who would quickly switch providers over the blackout) to get access to most of the content, (I doubt, however, that such blocking actions can continue much longer without generating a regulatory or legislative backlash.)