Jeff Bewkes hasn't held back on his thoughts about how his company, Time Warner (NYSE:TWX.DL), can combat Netflix (NASDAQ:NFLX). And Netflix has made it clear that it plans to take on one of the most successful cable networks, HBO, which Time Warner just so happens to own.
Bewkes has mentioned extending the window between a show's original run and when it shows up on streaming-video-on-demand (SVOD) services as a way to fight Netflix and the devaluing of content. He's also led the charge as HBO launched an over-the-top service to compete more directly with the leader in the space. Most recently, his company took a 10% stake in Hulu, a competing SVOD service.
In an interview with Bloomberg, Bewkes had some interesting thoughts on Netflix, HBO, and the future of cable television.
Netflix as monopoly
Not only is Bewkes on the attack against Netflix, but he also believes investors are acting somewhat irrationally with the company's stock:
The usual reason companies are funded or valued on the stock market for not having a current profit is because the investors believe there will be a future profit. That means they believe the market leadership position is going to turn into something that is unassailable enough -- in other words, that does not have enough effective competition -- that it can either cut costs or drive revenue and make a profit. There's a word for that ... monopoly.
Netflix is dominant in the market, but by no means is it a monopoly. It's bidding against Hulu and Amazon.com for content, and Hulu has 12 million paid subscribers while Amazon has tens of millions of Prime members around the world.
Importantly, Netflix has already proved capable of producing a profit. It's produced $0.23 in earnings per share over the trailing 12 months, and that comes at a time when the company is aggressively expanding abroad. One of the saving graces has been Netflix's ability to increase its pricing -- or "drive revenue," as Bewkes put it. You don't need to be a monopoly to do that.
Netflix stock may be overvalued, trading hands at at a ridiculous forward P/E ratio around 330. Last quarter's results, illustrating the effect of Netflix raising prices on a large section of users, is a good indication that Netflix's pricing power isn't unlimited, which was a bit of a wake-up call for investors. But one could just as easily make a bullish case for the stock, after investors dropped the price back into the double digits.
Can HBO reach 70 million U.S. subscribers?
HBO currently has around 32 million subscribers in the United States, trailing Netflix, which has 47 million. But Bewkes thinks there's potential for a lot more. The company's over-the-top service, HBO Now, surpassed 1 million subscribers in its first year, and Bewkes says "it's going exactly as we expected." Further, he expects to continue penetrating the 12 million broadband-only households.
The bigger opportunity, he says, is in the 100 million or so households that actually subscribe to pay-TV. In particular, he points to the penetration at certain pay-TV operators. He says penetration at some cable distributors, such as Charter Communications (NASDAQ:CHTR), "is literally twice" that of distributors such as Time Warner Cable and DISH Network:
What that indicates is more about those distributors than about the people living in those places. You're looking at 10 or 15 million natural pay-TV HBO subscribers in that group. So whether they get HBO using HBO Now, or whether they get it by signing up [through a pay-TV service], doesn't matter to us. We're looking at 45 million subscribers going up to 50, 60, 70 million.
With Charter recently taking over the operations of Time Warner Cable, HBO could see some benefit from more aggressive marketing from Charter.
Netflix also thinks it could reach "60, 70 million" U.S. households. It long-term view says "We think we can grow to 60-90 million members in the U.S., based upon our trajectory to date and the continued growth of Internet TV." However, its recent slowdown in U.S. subscriber growth indicates that number might be closer to 60 million than 90 million.
While there may still be some growth left for HBO, particularly with its newer OTT service, expecting to double subscribers from here is perhaps overly optimistic.
The future of cable TV
With a huge interest in preserving the big 100-channel cable bundle, Bewkes, unsurprisingly, doesn't see the status quo changing significantly. But he does believe that you'll also see more focused bundles based on interests or around meeting a certain price point, such as DISH Network's $20-per-month Sling TV. He also believes that the "core channels" -- Turner's TNT and TBS, for example -- will find their way into most of those skinny bundles.
He says the biggest area of improvement will be in the user interface (UI): "You're going to see full video on-demand and very good search recommendation and navigation engines, so consumers know what the programming is and where to find it."
In other words, he sees traditional television subscription packages moving more toward Netflix. That explains the company's investment in Hulu, which is capable of supporting all of the things he mentioned. Hulu plans to launch a live-streaming television service in the first half of next year.
Improved search and recommendations should increase the amount of time consumers spend watching live programming instead of Netflix or other SVOD services. It has the potential to help them discover new shows in-season, catch up with on-demand, and start tuning in to live broadcasts. The challenge for Time Warner will be finding the balance between affiliate fees and fitting into those smaller bundles. If UI improvements increase live audiences, it could sacrifice some affiliate fees and still grow revenue.