HBO Go Is Becoming More Like Netflix

Time Warner is adding new content to HBO Go, making it more like Netflix in the process.

Aug 17, 2014 at 10:00AM

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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Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple and Netflix. The Motley Fool owns shares of Apple and Netflix. 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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