What the HBO Deal Means for Amazon Prime

Amazon and HBO recently announced a deal that will make some HBO shows available for Amazon Prime subscribers. How much value will this bring to the streaming video service?

Apr 24, 2014 at 11:19AM

I recently discussed the effects of piracy on Time Warner's (NYSE:TWX) HBO, as its "Game of Thrones" received the dubious distinction of having the most pirated single episode of all time. In that article, I mentioned that one way that HBO could combat piracy if it became a significant problem would be to beef up or spin off its streaming service to offer viewers who don't have a subscription the chance to stream the company's shows. It seems that the company does have something like that in mind, though not using its own HBO Go service.

News broke on April 23 that HBO had signed a first-of-its-kind content deal with Amazon.com (NASDAQ:AMZN) that will allow a number of its shows to be streamed on Amazon Instant Video and viewed by Amazon Prime members for free. As if that wasn't enough, an HBO Go app is coming to Amazon Fire TV and the Kindle Fire tablet (though an HBO subscription will still be required to make use of the app).

What does this mean for HBO and Amazon? More importantly, how will rivals such as Netflix (NASDAQ:NFLX) react to this news?

Prime value
Deals like this one are the best kind of business, since both companies are getting a major positive from the agreement. HBO will receive undisclosed licensing fees for its shows, though they are rumored to be at least $300 million if not more. Amazon, on the other hand, will receive popular exclusive content that Netflix has been trying unsuccessfully to gain access to for years. It's hard to decide which company is actually getting the better part of the deal here.

Despite the lucrative and relatively risk-free payday for HBO, Amazon might be coming off a bit better simply because this new content comes soon after the company raised the price of an Amazon Prime membership by $20. The price hike had left some wondering whether Prime was as good a deal at $99 per year as it was at $79, but access to a significant amount of HBO content goes a long way toward adding value to that extra $20.

Limitations
There are limitations on the content being offered by the deal, however. While Amazon is getting a significant amount of content, none of it is current -- all of the shows that are streaming every episode have been off the air for years, and more current shows aren't streaming any episodes that have aired within the last three years. Newer shows that haven't been around for three years are being excluded entirely, though they will for the most part be added later once their first seasons are over three years old.

Some HBO content is absent altogether. HBO original movies aren't part of the deal, and neither are shows such as "Curb Your Enthusiasm" or "Sex and the City" because they are subject to other licensing deals. HBO's biggest recent hits such as "Game of Thrones" and "True Detective" also aren't part of the agreement, allowing the company to maintain exclusivity for its biggest draws and prevent DVD and Bluray sales dips that might come if fans knew that they could stream the episodes eventually on Amazon without making full-season purchases.

Even competition
Amazon and Netflix have been competing for exclusives for a few years now, with both companies developing original productions and seeking out content partners willing to sign exclusive deals. Netflix has largely enjoyed a higher profile in this regard, with its original series "House of Cards" winning three Emmy awards and a Golden Globe and its long-term deal with Disney (NYSE:DIS) not only netting it a number of popular films, but also a multi-year deal for original Marvel Studios content. With the HBO deal, however, Amazon is making major strides.

While Amazon's original programming has yet to win any awards (though some shows such as "Alpha House" are surprisingly good), the HBO deal shows that the company doesn't have to simply ape Netflix to establish a strong streaming brand identity. The strength of HBO's content, combined with Amazon's other content and original productions, will create a strong value argument (especially when combined with other benefits of Amazon Prime such as free two-day shipping and a lending library for Kindle owners).

Takeaway
Netflix has long said that HBO was one of its biggest competitors for content, and that HBO has teamed up with Amazon shouldn't be taken lightly. This deal was a calculated move, with Amazon reportedly being the only company that HBO was interested in dealing with. The deal also hints that the rumors about HBO Go spinning off into a separate product were just that, rumors.

The combined might of HBO and Amazon is good for consumers, while the lack of key shows like "Game of Thrones" shows that HBO isn't willing to cannibalize its subscriber base just to reach out into the streaming market. The underlying value of the alliance is sure to grow as time passes as well, since newer seasons will hit that important three-year mark and finally debut on Amazon Instant Video.

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John Casteele has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Netflix, and Walt Disney. The Motley Fool owns shares of Amazon.com, Netflix, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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