HBO delivered its highest domestic subscription growth ever in 2017 on the back of strong HBO Now sign-ups. Total subscribers in the U.S. climbed 5 million across HBO and Cinemax. The results propelled an 11% increase in subscription revenue for the year.

When Time Warner (NYSE:TWX) launched HBO Now -- a Web-only version of HBO -- back in 2015, it did so to reach an audience it didn't have access to at the time. Before HBO Now, getting the premium cable channel required some sort of cable subscription.

While HBO Now presented an opportunity for incremental subscriber growth from cord-cutters and cord-nevers, it wasn't expecting a huge number of sign-ups. In its first 10 months of operation, HBO Now signed up just 800,000 subscribers. Over the next year, it brought on a bit over 1 million more subscribers. But last year, HBO Now accounted for 3 million new subscribers.

While the success of the past year is great, investors need to ask whether that growth will continue through this year and into the future.

HBO Now streaming on a laptop.

Image source: HBO.

Where are HBO Now subscribers coming from?

2017 was the biggest year of cord-cutting yet. With millions of cable customers switching to streaming options, it was a ripe opportunity for HBO Now.

About half of the 3 million new HBO Now subscribers over the past year came as standalone customers. Even that 1.5 million is a stark increase from the previous two years and is indicative that sign-ups are strongly correlated with the number of people cutting the cord.

The cord-cutting trend is far from over. Over 10 million households in the United States will cut the cord over the next five years, according to an estimate from SNL Kagan. That leaves a lot of room for HBO Now to keep growing, but it also means it could be cannibalizing traditional HBO subscribers.

The other half of HBO Now subscribers came from partnerships with other streaming services, such as Amazon.com's Prime, Hulu, and AT&T's (NYSE:T) DIRECTV Now.

HBO also has a partnership with AT&T to bundle HBO with its wireless service with the option to take it as an add-on to its traditional cable service or as the standalone product.

AT&T management recently commented that the bundle is an essential part of its strategy, so investors shouldn't expect that to go away. And if AT&T's acquisition of Time Warner gains regulatory approval this year, that will only strengthen the bundling economics for AT&T. Competitors have also copied AT&T's bundling strategy, so it risks losing value-seeking customers if it ends the offer.

All of these trends continue to work in HBO Now's favor. Indeed, Time Warner expects HBO's subscription revenue to increase at a similar pace in 2018 as it did in 2017.

The risks of HBO Now are worth the reward

The growth of HBO Now is not without risks. The vast majority of HBO subscribers still come from partnerships with traditional cable distributors, and they're probably not too happy about HBO Now's success.

Fellow Fool Jamal Carnette noted that distributors may start asking for a larger share of subscription revenue after the launch of HBO Now. And that's exactly what has happened. Over the past couple of years, HBO has had to renegotiate its contracts with distributors to offer a larger share of revenue.

The upside is cable companies now have more of an incentive to push subscribers to the premium network again. After accounting for price cuts on the channel at various operators, however, the difference in how much pay-TV providers net from an HBO subscription is negligible.

HBO collects all of the revenue from direct HBO Now sign-ups, and it probably has favorable terms with its streaming service partners compared with pay-TV services. So as long as HBO is replacing traditional subscribers with HBO Now subscribers, subscription revenue will continue to increase. And the trend favors that result.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.