Showtime Anytime's Expansion Could Net CBS More Subscribers

There are now dozens of different streaming video apps available on the many Internet-connected set-top boxes, smart TVs, video game consoles, and Blu-ray players on the market. Netflix (NASDAQ: NFLX  ) and Hulu Plus stand out as the two most ubiquitous -- accessible on virtually every platform -- followed by many other less popular services, including Crackle, WatchESPN, and MLB.tv.

Time Warner's (NYSE: TWX  ) HBO GO is somewhere among that second group, although it's probably near the top in terms of importance. It's hard to qualify it objectively, but read any review of the recently unveiled FireTV and you'll find the lack of HBO GO cited as a major drawback.

But while FireTV lacks HBO GO, it has access to CBS' (NYSE: CBS  ) Showtime Anytime, the digital gateway to CBS' premium cable network. While CBS has lagged Time Warner in terms of its digital content strategy (FireTV is only the second such set-top box to get Showtime Anytime), a more aggressive rollout could help the premium cable channel bolster its visibility, grow its subscriber base, and bring value to CBS shareholders.

HBO vs. Showtime vs. Netflix by the numbers
In terms of subscribers, CBS' Showtime isn't as popular as Time Warner's HBO, but the gap isn't overwhelming: In the U.S., CBS has about 23 million Showtime subscribers, while about 28 million households pay for Time Warner's HBO. Netflix leads both, with just over 33.4 million U.S. subscribers.

Netflix has a larger content catalog than both Time Warner and CBS' premium networks, but its subscriber dominance is likely due to the price: Anyone with an Internet connection, a credit card, and $8 can sign up for Netflix -- Showtime and HBO are more expensive surcharges on top of an already costly cable bill.

Don't hold your breath for an independent HBO
Time Warner's critics (and HBO's fans) have long been clamoring for an independent HBO, one that could be sold directly over the Internet rather than through a paid-TV provider. Such a move could, in theory, allow HBO to grow its subscriber base dramatically, as it would cut out the cable requirement -- a major stumbling block. With Netflix surpassing HBO in subscribers and aiming to add 60 million more in the coming years, this argument has only become more valid.

But Time Warner's management has resisted such notions, and has rarely broken out HBO's financial results. Although an independent HBO could be more successful, splitting HBO from the rest of Time Warner would likely weigh on its other networks: Without a monopoly on HBO subscriptions, paid-TV providers may be less likely to pay for Time Warner's other channels (CNN, Cartoon Network, TNT, among many others).

CBS doesn't have the conflicts of interest
CBS, on the other hand, isn't encumbered by the need to prop up a dozen other networks. Besides Showtime and its namesake broadcast channel, CBS owns only two other networks -- CBS Sports and the Smithsonian channel (it also owns half of the CW, but that's another broadcaster).

Would CBS be willing to offer up Showtime a la carte? Management hasn't made any overtures toward such a possibility, and in fact actively resisted the idea of a la carte channels when it was negotiating with a major cable provider last year -- making such an outcome unlikely, at least in the near future. Still, expanding Showtime Anytime's presence on set-top boxes could allow for the company to pivot, selling directly to consumers, assuming the slow decline in paid-TV subscriptions continues.

Right now, Netflix is worth about $20 billion -- CBS, in comparison, is more valuable, with a market cap of roughly $36 billion. However, CBS' entire cable segment (of which Showtime is the largest part) generates just 14% (about $2 billion last year) of CBS's revenue  and 27% ($877 million in 2013) of its operating income  . In comparison, Netflix as a whole generated just $166 million in operating income and $945 million in revenue last year -- and that includes its high-margin DVD-by-mail business, something CBS' cable division lacks.

Of course, comparing Netflix's financial metric to CBS' Showtime could lead to a more obvious conclusion: Netflix could simply be overvalued. Indeed, with a price-to-earnings ratio north of 220, Netflix is far from a value stock. But investors are likely giving Netflix a premium valuation based on its potential for growth -- while Netflix aims for 90 million domestic subscribers, Showtime isn't anywhere near as ambitious.

Showtime Anytime's expansion will help CBS grow the brand
On Sunday, angry Game of Thrones fans took to social media to express their outrage -- Time Warner's HBO Go servers had failed, leaving hundreds of thousands, perhaps millions of viewers, unable to watch season 4's premiere.While technical failure is an obvious embarrassment, the fact that Time Warner's service was pushed to its limits is a positive sign -- if Game of Thrones wasn't so popular, HBO Go may not have crashed.

The not so obvious secret of HBO Go, of course, is that many of the people using it are not actually subscribers, but simply borrowing a friend or relative's password. Time Warner's management is unfazed by this phenomenon, choosing to view it as a net positive. "[It's a] terrific marketing vehicle for the next generation of viewers," Time Warner's Richard Plepler told BuzzFeed earlier this year.

That sort of marketing vehicle is something CBS' rival, Showtime, has lacked -- that is, until now. With its more aggressive set-top box push, highlighted by its availability on the FireTV, CBS' premium network should enjoy a greater degree of brand awareness. If Showtime Anytime can join the tier of "must-have" set-top box apps (alongside Netflix and HBO Go) it could help CBS close the gap with its larger rivals.

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