On Wednesday, September 10, 2014, CNet reported that Jeff Bewkes, CEO of HBO's parent company Time Warner (NYSE:TWX), turned heads at a Goldman Sachs investor conference in regards to access of its website, HBO Go. On the surface, there was no change in regards to policy or strategy. However, the minor acknowledgement only confirms what was unthinkable a decade ago but now seems entirely possible: cable is going way.
Bewkes appeared to tip his hat to an Internet-only subscription for HBO Go. He stated [emphasis added]:
Up until now, it looked like the best opportunity was to focus on HBO through the existing affiliate system... The broadband-only opportunity up until now wasn't ... at the point where it would be smart to move the focus from one to the other. Now the broadband opportunity is quite a bit bigger.
And that's important; right now, HBO Go is essentially a companion site for HBO subscribers. In addition to receiving the premium channel via its cable provider -- what Bewkes refers to as its "existing affiliate system" -- consumers are provided with HBO Go as an additional viewing format with an HBO subscription. The new statement appears to be looking at a broadband-only opportunity, one that cuts cable providers out of the picture.
And that's a clear shift from Bewkes past thinking. Last year at the same conference he identified HBO's main opportunity as the 70 million pay-TV (a term meaning both cable and satellite) subscribers without HBO rather than the estimated 5 million-10 million cord cutters -- those without pay-TV.
On a raw-numbers basis, this seems rather odd considering there are seven times more pay-TV customers than the most optimistic estimate of cord cutters. In addition, pay-TV customers already pay cable providers for content, so it appears the only barrier to growth is presenting the value of HBO.
Here's why that could be wrong
A raw-numbers basis doesn't tell the whole story. First, it isn't as if other households aren't consuming content, it's just they are looking in other formats. Streaming-based content-delivery services like Netflix (NASDAQ:NFLX) have done well recently. The company has grown from a business plan to 50 million members in less than two decades. Initially started as a DVD delivery service, the company transitioned to its current core business -- streaming -- in recent years.
Many households are both pay-TV members and Netflix subscribers, and that's what Bewkes could be looking toward. That expands HBO's broadband opportunity from a mere 10 million subscribers to virtually every household without it.
And by cutting the cable providers out of the process, it is entirely possible the company could price the service lower than its premium channel pricing that averages $15-$20 a month depending on provider and package. If they'd like to compete with Netflix's $9 fee for streaming, that would have to be lowered.
Could this be bluster?
The current television model is big business with billions in cable bills and ad-based revenue up for grabs. With all that money sloshing about, it is natural for providers of content (think: Time Warner's HBO) to differ with cable providers (think: Time Warner Cable). While HBO doesn't have commercials, the fees its gets from cable operators -- which they get from HBO subscribers -- comes in at 85% of its annual earnings.
As such, HBO is highly dependent on these affiliate fees. So mentioning there is demand outside of the cable-provider relationship could potentially strengthen HBO's negotiation hand when dealing with providers. However, building out an untested streaming network business model may be easier said than accomplished in the immediate future and, for the time being, it may be best for HBO to not disrupt its current business model.
However, this is yet another indication that the current business model of cable is unsustainable in the long term, investors should prepare accordingly.
Jamal Carnette has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs 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.