Should HBO Leave Cable Behind?

Tomorrow is a big day for millions of Americans. Game of Thrones Season Two will premier on HBO at 9 PM EST to millions of viewers and much fanfare. Season One boasted 13 Emmy nominations and 2 wins and has attracted a dedicated following, myself included.

However, the biggest story surrounding Game of Thrones isn’t who will be watching tomorrow — it’s who won’t be watching. Here is a blog post by MG Siegler (a Michigan grad) venting his frustration about HBO’s business model. Here’s a PandoDaily article by MG about the same thing. Here’s another blog post responding to the PandoDaily article.

HBO is only available by way of an additional fee on top of traditional cable packages. Cable television is expensive, and there are millions of people unwilling or unable to subscribe. In this current landscape, this means that the aforementioned people are automatically precluded from subscribing to HBO. No cable? No HBO.

HBO is the biggest name in premium cable television. It boasts the best shows with the best actors, and now with the advent of HBO Go, you can watch all of the network’s shows anywhere. There are a lot of people who want access to HBO’s content, but do not want to pay for (or have) a cable subscription. Further, HBO doesn’t make its content readily available for non-subscribers. For example, HBO could sell its shows on iTunes a day or a week after episodes air. While many consumers would be frustrated waiting a week to watch the Game of Thrones premier, a week is a reasonable amount of time to wait for great content. But HBO doesn’t do this, presumably due to restricting contracts with cable companies. To me, it seems impossible for HBO to satisfy cable companies and meet all of the consumer demand for its content.

I’m sure HBO would love to charge a monthly rate for its services a la Netflix so everyone who wants HBO subscribe. However, the company is unwilling to leave its lucrative contracts with cable companies behind. Time Warner, HBO’s parent company, described the rising revenues of its "Filmed Entertainment" business segment in their latest 10-K filing. Operating income for this business segment (of which HBO is a part of) increased by 14% to over $1.2 billion from 2010 to 2011. HBO is obviously very successful, and they’re growing. While I can’t say for certain, I’m sure the consensus between HBO’s management is — if our business model ain’t broke why fix it?

The short answer — digital cable market saturation.

As of 2011 there were 46 million digital cable subscribers (link). While this is an increase from 2010, digital cable subscriptions have been increasing by a rate of about 10% or greater since 1998, and the number of subscriptions only increased by 3% from 2010 to 2011. These numbers appear to say that the digital cable market is nearly saturated, thus HBO’s prospective pool of subscribers is also nearly saturated.

HBO is a pioneer in digital television content with HBO Go. HBO Go is a fantastic service that works well and is easy-to-use. However, HBO is in the same position as Kodak was with digital photography - yeah they both do digital television content and digital photography, respectively, but will they put forth the effort to make these products/services their main revenue generator?

This is the second time I’ve brought up a Kodak comparison in a blog post, but I feel that it is a great analogy for companies that struggle to adapt. HBO needs to adapt its business model somehow to capture the millions of potential subscribers who don’t want or need cable. This could be as easy as making HBO Go available to everyone for $20 a month and offering the service on multiple platforms (HBO Go is going to be available on Xbox 360 in the near future, and should expand to other products like Apple TV and the PS3). Or the business model could be as complicated as running a hybrid business model that maintains the cable money. With digital cable subscription growth waning, HBO needs to see the writing on the wall and prepare to adjust its business model accordingly.