October 16, 2014

The Center Cannot Hold

A monumental announcement on Wednesday: HBO will launch a standalone HBO Go service in the US in 2015. After more than four decades of partnership with pay-TV operators, HBO has decided to break free and go after the 80 million US households that do not subscribe to HBO today.

This new service will be delivered as an OTT broadband service. Pricing has yet to be announced, but it is safe to say the economics will be in line with HBO’s existing offerings. While this is certainly a watershed moment for the TV industry, it should not come entirely as a surprise. TDG first discussed this inevitability as far back as 2008, noting that HBO’s real competitor was Netflix, and vice versa. In 2012, TDG published a report on HBO’s experiments with standalone OTT offerings in Scandinavia. Clearly, HBO is now ready to apply those lessons in the US.

It is important to view this announcement within a larger context: for two years, I’ve been discussing the future of ‘TV as an App.’ It appears that, for HBO, this future is now.

So what does this announcement mean for the industry? Two thoughts…

1. The Pay-TV Bundle is in Trouble
If there is one overarching difference between TV-as-channel and TV-as-app, it is the role of bundling. Channels naturally want to bundle. It is inherent in the viewing experience of linear television. With linear television, if you don’t want to watch what is on right now, there is one natural response: change the channel. In other words, choice comes (and only comes) from having multiple linear channels on offer. And users want choice, and they choose to buy TV services in the form of a bundle of channels. This has been the underlying assumption of all pay-TV marketing for the past 40 years and applied just as much to HBO as to any other channel. Who would want a linear TV service that only provided HBO? It makes no sense, which is why it was never offered.

Apps do not naturally want to bundle, a quality inherent in the viewing experience of a TV app. HBO Go is the exemplar, although the same logic applies equally well to other online SVOD services such as Netflix, Amazon, or Hulu Plus.

HBO Go offers all original shows produced by HBO, as well as a selection of television shows and movies licensed from the major studios. All shows are offered in an on-demand format. New episodes are posted at the same time as they are broadcast on HBO’s linear channel. Viewers can either ‘binge view’ the past seasons of both current and former shows, or they can watch new episodes each week in a style more similar to traditional TV viewing. In either case, HBO Go provides an enormous amount of viewing choices within the HBO Go experience itself. There is no default show I am required to watch, and therefore no need to ‘change the channel’ to another provider. As Netflix has so ably proven, TV apps stand alone as a unique user experience, which is why HBO Go can function as a standalone offer, even if the market opportunity for such a service is fairly small at the outset. This is bad news for folks in the traditional pay-TV bundle business. As more TV brands move to an app-centric model, content will increasingly break free of the bundle.

More consumers are going to decide that the traditional pay-TV bundle is no longer necessary. Once this snowball begins rolling downhill, it will not stop. No, the bundle will not vanish tomorrow. This is a big industry and consumer inertia tends to act as a damper to short-term change. This is why TDG predicts an incremental decline in pay-TV households; a death by a thousand cuts, if you will. But make no mistake: the “super-size” television channel bundle is in trouble and the pay-TV industry will be required to adjust.

2. But New Broadband Bundles Will Thrive
The glass is still half full, folks. Time Warner made it clear in its announcement that it expects to work with existing partners to offer the new service. The meaning of this is simple. Time Warner will let operators like Comcast and Time Warner Cable bundle (and bill for) HBO Go with broadband Internet service. This is a very smart move, and potentially gives HBO Go a unique go-to-market advantage. HBO has existing wholesale pay-TV relationships with the providers of the vast majority of the wireline broadband connections in the country. By shifting these wholesale customers over to the ‘broadband side of the house’ (rather than moving out of the house entirely), HBO maintains these relationships, even as it redefines them. HBO continues to leverage the massive marketing efforts of its partners, even as it develops much closer relationships with end users. The broadband operator continues to make a monthly margin on every HBO Go subscriber and thus gains a powerful new way to market its broadband service to would-be subscribers (Millennials, in particular). Consumers, for their part, gain a new level of choice and control over their video spending. Millions of households who subscribe to broadband but are not currently eligible for HBO (whether they get “basic cable” or not), will now see HBO Go as a true alternative (i.e., competitor) to Netflix.

Game on.

Conclusion
Netflix said long ago that it wanted to become HBO before HBO became Netflix. Come 2015, it appears time is up. Netflix has dominated the US OTT market to date, largely because its strongest competitor (HBO) has been fighting with one hand tied behind its back in an effort to protect its legacy pay-TV partners. No more. Legacy operators should brace for increasingly rough seas.

For broadband operators, as well as those of us who simply enjoy fierce competitive fireworks, this is going to be good.

Stick with TDG, and stay ahead of the curve.

Joel Espelien is a Senior Advisor for TDG and serves as an advisor and Board Member to the video ecosystem and technology companies. He lives near Seattle, WA.

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