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HBO makes web push to fend off Murdoch

Jeffrey Bewkes, chairman and chief executive officer of Time Warner Inc.
By Christopher Palmeri
Bloomberg News (*)
CEO Bewkes may expand a US$49-a-month trial introduced last year with Comcast

LOS ANGELES — Jeff Bewkes is looking to the Internet to accelerate growth at his prized TV network, HBO, as he seeks to demonstrate to investors that Time Warner Inc. is worth more on its own than with Rupert Murdoch.

HBO, home to Game of Thrones and Boardwalk Empire, may expand a US$49-a-month trial introduced last year with Comcast, people with knowledge of the plan said last week. The pilot, and a similar one from AT&T, offers Web access paired with HBO and limited basic TV.

HBO and its growth prospects are a big part of why New York-based Time Warner rejected a US$75 billion buyout offer from Murdoch’s 21st Century Fox Inc., saying it will be better off independent. HBO was already developing ways to reach more consumers. The plan relies on more aggressive marketing, an upgraded HBO Go app and expanded access to the network for broadband-only customers of companies like Comcast who don’t want to buy a full cable-TV package.

“We don’t like to leave any cookie unsold at our company,” Bewkes, 62, who is Time Warner’s chairman and CEO, said at an investor conference in May. “So we’ll get there.”

In the next year or so, HBO Chief Executive Officer Richard Plepler aims to offer more consumers access to the four-decade-old channel through packages similar to the Internet Plus plan offered by Philadelphia-based Comcast, the largest US cable provider, according to the people, who asked not to be named because the plans aren’t yet public.

So far the plans are only available to new customers with teaser rates for broadband, basic cable and HBO that later increase.

The structure of those deals underscores the broader risk for Time Warner and its pay-TV partners. If they make HBO available more broadly through Internet-only plans, some current pay-TV customers might drop out.

“We’re just trying to figure out how to do this in a way that enhances rather than subtracts from our business, that supports the distribution infrastructure that we need, whether it’s the TV one that goes to your house today, or whether it’s the broadband one,” Bewkes said at the May conference.

Plepler is trying to convince HBO’s major pay-TV distributors that marketing the premium network in a more affordable way would benefit cable systems as well, sources said.

HBO is typically marketed as part of a pay-TV package that costs US$100 a month or more, limiting the potential pool of customers. While it posted its best growth in 17 years in 2013, about 70 million US pay-TV homes don’t subscribe. HBO Go, the online and mobile version, is available in the US only to cable-TV customers who pay for HBO.

The US$49-a-month Internet Plus trial introduced last year with Comcast is the model for a new service, the sources said. The package is aimed at the 10 million US broadband customers, many of them younger, who don’t now buy cable TV. There are about 100 million US households that have television subscriptions. “There’s no secret we’re looking at all these distribution options,” said Quentin Schaffer, a spokesman for HBO, without commenting directly on the expansion effort.

Given its growth prospects, the network could be worth as much as US$25.8 billion by 2016, Morgan Stanley analyst Benjamin Swinburne said in a May report, at which point it would account for a quarter of Time Warner’s total asset value.

Plepler, an executive made in the Time Warner mould, has often lectured on the importance of HBO’s culture and likes to quote a line, usually attributed to management theorist Peter Drucker, that “culture eats strategy for breakfast.”

“In terms of premium content, they’re on top of the pile,” said Arnaud Levy, an investment banker with Media & Entertainment Advisors in Los Angeles.

While original programmes win awards, about 80 percent of all viewing on the network is movies. HBO has film licensing agreements with major studios including Fox, a relationship that Murdoch sees adding to the value of a deal. As HBO looks to expand internationally, the network would have to renegotiate film rights to show movies outside the US. Having Fox and HBO under one roof would make that easier.

HBO has made some moves to get its shows to new audiences. In April, the network agreed to offer The Sopranos and shows like The Wire and Six Feet Under, through Amazon.com Inc.’s Prime online service. The money from that deal will be invested in new programming and accelerating the next generation of HBO Go, previously the online outlet for those shows through a subscription service.

Murdoch’s interest in Time Warner has been stoked by a rapidly changing pay-TV landscape, driven by consolidation among phone, cable and satellite operators in deals that total more than US$134 billion this year.

Comcast’s proposed takeover of Time Warner Cable Inc. will give the combined company 30 million US TV subscribers, while AT&T Inc.’s bid for DirecTV will put about 26 million customers under a single roof. As those companies bulk up and gain leverage in negotiating for rights to programming from networks like HBO, content owners like Fox are feeling pressure to grow by acquisition as well.

HBO generated US$1.79 billion in operating income last year, with profit surging 16 percent from 2012 and making the network one of Time Warner’s fastest-growing units. Revenue advanced four percent to US$4.9 billion.

HBO and its sister channel Cinemax added two million subscribers in the US last year, bringing their domestic total to 43 million, the company has said. The two channels had about 127 million subscribers worldwide at year-end, according to Time Warner filings.

Still, HBO is adding customers and revenue more slowly than Los Gatos, California-based Netflix, the pioneer in Web-based film and TV viewing. Netflix reported a 25 percent increase in quarterly revenue last week, with its worldwide subscribers increasing by a third to 50.1 million. The company, which offers older films, reruns and original programming such as Orange Is the New Black, has been running close to break-even as it invests in growth, and has a market value of US$25.4 billion.

Time Warner has experimented outside the US by offering HBO as a standalone product, and found that it increased cable-TV subscriptions, rather than cannibalizing the main product. HBO is available in more than 60 countries.

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