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HBO Pushes Web Expansion as Bewkes Battles Murdoch Bid

July 28, 2014

HBO Pushes Web Expansion as Bewkes Battles Murdoch Takeover Bid

HBO, home to “Game of Thrones” and “Boardwalk Empire,” may expand a $49-a-month trial introduced last year with Comcast Corp., people with knowledge of the plan said last week. Source: HBO/Everett Collection

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. (TWX:US) is worth more on its own than with Rupert Murdoch.

HBO, home to “Game of Thrones” and “Boardwalk Empire,” may expand a $49-a-month trial introduced last year with Comcast Corp., people with knowledge of the plan said last week. The pilot, and a similar one from AT&T Inc., 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 $75 billion buyout offer from Murdoch’s 21st Century Fox Inc. (FOXA:US), 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, the largest U.S. cable provider, according to the people, who asked not to be named because the plans aren’t yet public.

Managing Risk

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, said the people, who asked not to be named because they weren’t authorized to speak publicly.

Slimmer Plan

HBO is typically marketed as part of a pay-TV package that costs $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 U.S. pay-TV homes don’t subscribe. HBO Go, the online and mobile version, is available in the U.S. only to cable-TV customers who pay for HBO.

The $49-a-month Internet Plus trial introduced last year with Comcast is the model for a new service, said the people. The package is aimed at the 10 million U.S. broadband customers, many of them younger, who don’t now buy cable TV. There are about 100 million U.S. 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.

Bewkes, whose Time Warner career began at HBO in the 1970s, is resisting an $85-a-share cash and stock offer by Murdoch’s Fox, which also owns cable networks such as FX and Fox News, and produces competing films and TV shows.

Time Warner’s board has decided the company can do better staying independent, even if Murdoch were to bid as much as $95 a share, according to people familiar with the thinking.

Standout Programs

Fox valued HBO at $20 billion in its bid, people familiar with the matter have said. Given its growth prospects, the network could be worth as much as $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 mold, 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.”

HBO’s standout original programming makes it a must-buy in many homes. “Game of Thrones” pulled in 19 Emmy Award nominations last month, leading the annual contest for TV’s top honors.

“Game of Thrones and HBO’s ‘‘True Detective’’ will compete for best drama against Netflix Inc. (NFLX:US)’s ‘‘House of Cards.’’ HBO also scored best-comedy nominations for ‘‘Veep’’ and ‘‘Silicon Valley.’’

‘‘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.

Film Rights

While original programs 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 U.S. 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.

New Programs

A new show, ‘‘The Leftovers,’’ has been increasing its audience, making a second season more likely. Plepler said in March he’s working on an upgrade to HBO Go.

‘‘HBO Go is a beautiful product,’’ Plepler said then at an investor conference. ‘‘The metaphor I like to use is, it’s a beautiful BMW 3 Series. We’re building a 750 Series.”

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 $134 billion this year.

Comcast’s proposed takeover of Time Warner Cable Inc. (TWC:US) will give the combined company 30 million U.S. 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.

Netflix Comps

HBO generated $1.79 billion (TWX:US) 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 4 percent to $4.9 billion.

HBO and its sister channel Cinemax added 2 million subscribers in the U.S. 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 breakeven as it invests in growth, and has a market value of $25.4 billion.

Time Warner has experimented outside the U.S. 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.

Nordic Plans

A standalone HBO service in Sweden, Norway, Finland and Denmark, which can be bought separately from cable-TV or Internet service, has generated 380,000 subscriptions, according to the people. Subscriptions to HBO through traditional pay TV providers in those countries have also increased, they said.

“There’s a big interest in premium channels right now, just look at the attention around NFL Sunday Ticket and original content like you see on Showtime,” said Amy Yong, an analyst with Macquarie Securities USA Inc., in New York. “We are moving to a landscape where cable and pay TV providers are trying to segment the market.”

To contact the reporter on this story: Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net; Sarah Rabil at srabil@bloomberg.net Rob Golum


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Companies Mentioned

  • TWX
    (Time Warner Inc)
    • $75.17 USD
    • -0.50
    • -0.67%
  • FOXA
    (Twenty-First Century Fox Inc)
    • $34.34 USD
    • -0.18
    • -0.52%
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