HBO Go Is Becoming More Like Netflix

Since its debut in 2010, Time Warner's (NYSE: TWX  ) HBO Go has served as a digital gateway to HBO content -- and only HBO content. Unlike Netflix (NASDAQ: NFLX  ) , which hosts a wide variety of original and licensed programming, HBO Go has remained strictly the digital alternative to its namesake cable network.

That is, until now.

Last week, Time Warner added the first episode of The Knick to HBO Go. This is significant, because unlike Game of Thrones or True Blood, The Knick isn't an HBO original show -- it's broadcast on Time Warner's other premium network, Cinemax. The change, in addition to recent comments from Time Warner management, suggests a new direction for the digital service -- one that could align it much more closely with Netflix.

HBO Go could become something more
During Time Warner's recent earnings call, CEO Jeffrey Bewkes hinted that additional content could be coming to HBO Go:

At HBO, we're investing in top talent, including a large team of software developers. ... [HBO Go] is a very good product. It's a very good consumer experience ... what we're doing there is we're trying to be best in class to have a platform that could not only deliver HBO networks, but also Turner networks and frankly, other networks. It doesn't have to be ... just [the] ones that we own.

Although HBO Go may have better content than Netflix, including its Emmy-winning original series and recently released Hollywood movies, its scope is limited to a few dozen series and roughly 250 films at any one time. Netflix, meanwhile, streams literally thousands of shows and movies. If it wanted to close the gap, Time Warner has several other networks -- such as TNT, TBS, and the Cartoon Network -- that it could draw from, as well as the Warner Bros. film studio.

Still shackled to the cable giants
Of course, to truly compete with Netflix, Time Warner would have to consider altering the way in which it distributes HBO. While some cable providers have begun to offer HBO with basic cable and Internet packages, Time Warner's premium network largely remains chained to traditional pay-TV providers.

Given its reliance on the pay-TV industry to monetize its less-popular networks, it seems unlikely that Time Warner will make major adjustments in the near term. But the steps it is taking -- bolstering HBO Go's library, working to build what it calls the "next-generation" of HBO Go -- suggest Time Warner is preparing for the day when it could sell its digital service to consumers directly.

As Netflix's customer base continues to grow, Time Warner's business model looks increasingly antiquated. Netflix surpassed HBO in number of U.S. subscribers more than a year ago, and earlier this month it overtook Time Warner's premium network in subscriber revenue.

Netflix is still less profitable, but its upside appears higher. HBO has seen great international growth -- up 15% in the past 12 months -- but its domestic subscriber base has, for several years, remained stuck around 30 million. Netflix has more than 36 million domestic subscribers and believes it could eventually have as many as 90 million.

HBO Go adds value to Time Warner's business
Until such time as HBO Go becomes a true Netflix competitor, Time Warner appears to be leveraging its digital distribution investment to bolster its existing pay-TV business.

HBO subscribers can catch the first episode of The Knick on HBO Go, but if they wish to watch the rest of the series, they'll have to subscribe to Cinemax. Pay-TV providers often bundle HBO with Cinemax, but not always. Given the high and growing rate of HBO Go engagement (active users rose 35% on an annual basis last quarter), debuting shows on HBO Go could give its other networks a boost.

At any rate, Time Warner's investment in digital distribution gives it a clear advantage over its peers. The closer HBO Go becomes to Netflix, the better for Time Warner's business.

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Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 17, 2014, at 10:26 AM, duuude1 wrote:

    Hey Sam,

    So here are a couple characteristics of NFLX that I think make them a unique and powerful competitor... and a compelling investment:

    Focus - NFLX does nothing else. In order to survive, they must excell at what they do - deliver compelling video at outstanding value.

    Leadership - Hastings, Sarandos, Wells (and before him McCarthy)... are people who have delivered without excuses, made mistakes and fixed them, experimented continuously with their product, their organization, their strategy, and continuously improved.

    Product - both non-exclusive and exclusing content as many others have profiled

    Technical excellence - whether developing the DVD warehouse and delivery network, or moving their entire systems to AMZN's AWS and optimizing AWS performance using their SimianArmy apps, to optimizing streaming speeds with their Open Connect CDN - NFLX has demonstrated consistent standard-setting technical excellence from day 1.

    Track record - they have battled the top competitors through the years including: Blockbuster, Walmart, Amazon, Apple, Hulu, Redbox...

    OK.

    So HBO Go has... what?

    Reed himself has said that his goal is to become HBO before HBO becomes NFLX. But I think that was being generous. As of today, I believe HBO is in no position to become NFLX.

    Duuude1

  • Report this Comment On August 18, 2014, at 6:29 AM, runarounddennis wrote:

    This article is grossly in accurate.

    1.) The article goes says HBO GO is the gateway to HBO and ONLY HBO content. Then later says has about 250 movies. HBO (and Cinexmax) have licensing agree agrees with WB Entertainment, 21st Century, Universal to name a few. And these are first run deals!

    2.) The article says it is limited to a few dozen series. What?! What exactly is a few dozen exactly? Let's say it's just 36 series. That's 36 original programming series to Netflix how many?

    Sounds like Sam has some serious bias against HBO.

  • Report this Comment On August 18, 2014, at 3:54 PM, TMFMattera wrote:

    @runarounddennis

    Those ~250 movies are "HBO movies" in the sense that HBO has entered agreements with movie studios to show their films on its network. In other words, the movies on HBO Go are the movies that HBO runs on its cable channels. In contrast, The Knick is a show from another network, Cinemax.

    Yes, HBO Go has many more series than Netflix, stretching back to Oz. But in terms of raw content, Netflix has much more.

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