Instead of typical syndication to basic cable channels, Time Warner (NYSE:TWX) has elected to go digital with its recent slate of award winning television series. The most-recent market receiving HBO's originals is the Google Play Store. HBO shows are also available on Amazon.com's Instant Video and Apple's iTunes.
This strategy is brilliant for Time Warner. It exposes its great content to the widest audience possible and could be more profitable than syndication.
People already download Game of Thrones
Game of Thrones was the most pirated show in 2012 and 2013 with an average of 5.2 million people downloading each episode illegally between March and June of this year. That's nearly as many downloads as live viewers.
There is a clear demand for the show from people without an HBO subscription, but that's not to say all of these illegal downloaders will pony up $30 for a season. Yet, even if just 10% of illegal downloaders are compelled to buy a legitimate copy of their favorite show, Time Warner is banking an extra $1 million per episode (based on a traditional 70/30 revenue split). At 25% penetration, the company reaches par with the $2.6 million it received per episode of the Sopranos from A&E.
Even though I expect at least 10% of illegal downloaders will face their guilty conscience and pay for Game of Thrones and other popular HBO shows, that's by no means a guarantee. So why would Time Warner take the risk of missing out on guaranteed revenue?
The Netflix effect
Instead of syndicating to just one (albeit popular) channel like A&E, digital downloads allow HBO to take its content to as many stores as it wants. More importantly, digital downloads offer viewers on-demand viewing, which isn't achieved by traditional syndication. Giving viewers the option to watch what they want, when they want it, on whatever device they want it, is the standard set by video streaming leader Netflix (NASDAQ:NFLX).
Perhaps HBO is going after the same effect Netflix streaming has had on shows like Breaking Bad and The Walking Dead. AMC Networks (NASDAQ:AMCX) Breaking Bad finale had 10.3 million live viewers. Its first season didn't even average 1 million viewers.
AMC can thank Netflix for the show's outlandish rise in popularity.
Serial dramas like Breaking Bad and Game of Thrones practically require viewers to start from the beginning. On-demand services like Netflix or Google Play allow users to do that much more easily than traditional syndication. As a result, each subsequent season of Breaking Bad after its Netflix premier saw a ratings bump, with the most-recent season seeing viewership more than double.
Since Breaking Bad's premier, AMC has been able to increase its affiliate fee 50% on the back of the popularity of the show and its other hits. Moreover, it's able to charge huge amounts for advertising during its most popular shows. The network charged $250,000 for a 30-second spot during the Breaking Bad finale.
Game of Thrones is already a well-known show, but offering it and five other shows that are currently airing new episodes every year on HBO may attract more subscribers to the premium network, just as AMC did through Netflix.
In short, the potential residual effect of allowing users to binge on previous seasons of its most popular shows is worth the risk of non-guaranteed income.
It's not either/or
Another thing to keep in mind is that HBO can still license its content for syndication to any network willing to pay its asking price. I believe the digital route will be much more effective for the network and creates the potential for the company to increase its subscribers while making money from the huge number of downloaders pirating its content.
Adam Levy has no position in any stocks mentioned. The Motley Fool recommends AMC Networks and Netflix. The Motley Fool owns shares of 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.