It's been four and a half years since HBO launched HBO GO, its streaming video website that gives subscribers of its cable channels unlimited access to its back catalog. In that time, sharing passwords has become commonplace. HBO CEO Richard Plepler remarked earlier this year that he doesn't care that people are sharing passwords, saying it's excellent marketing. Time Warner (NYSE:TWX.DL) CEO Jeff Bewkes said during a conference call a year ago that having the most pirated show (Game of Thrones) was "better than an Emmy."
But speaking at the Goldman Sachs Communicopia conference last week, Bewkes mentioned that the "broadband opportunity is getting bigger," and taking HBO GO direct to consumers "is more viable and more interesting." The move would put the premium cable channel in more direct competition with Netflix (NASDAQ:NFLX).
Separately, CBS (NYSE:CBS) CEO Les Moonves mentioned that moving over the top with Showtime Anytime is certainly a possibility as well. Showtime's service is less than 18 months old, however, so consumers are still getting used to it.
Moving to a stand-alone service would allow HBO and Showtime to capture revenue the two companies have been missing out on -- the market of password sharers. HBO has been very hesitant to leave the cable bundle, but the opportunity may be too big to ignore any longer.
HBO's and Showtime's relationships with cable operators
The fact that you still need a cable subscription in order to get HBO or Showtime isn't because these companies are behind the times. The relationship between the networks and cable operators is very symbiotic. HBO and Showtime produce excellent content, and the cable operators handle marketing and customer service. They typically split the fee about 50/50.
It's a business model that has worked for over 40 years, and it still works today. In the first half of the year, HBO has added more than twice as many domestic subscribers as it did in the same period a year ago. Internationally, the subscriber base grew almost 15% over the past year.
But it's a double-edged sword. Many new customers are non-revenue-generating for HBO, meaning the cable operator keeps the entire carriage fee. This is part of HBO's marketing plan, but it can inflate numbers and drag down revenue.
Showtime has seen an increase in viewership over the last few years as well. This is mostly on the strength of its original content, which still has a way to go in order to catch up to HBO. Still, the company now has six original shows with at least 5 million weekly viewers, up from just one in 2010.
So, why ditch the cable companies now?
Over-the-top services are growing extremely popular. Netflix zoomed past HBO in terms of domestic subscribers, going from 27.15 million domestic streaming subscribers at the end of 2012 to 36.24 million at the end of the second quarter this year.
HBO has about 28 million domestic subscribers, but about 130 million subscribers globally. With Netflix still in the early stages of its international expansion, it might only be another five years or so before Netflix catches up.
The success of Netflix encouraged HBO to launch a stand-alone HBO GO service in Scandinavia about two years ago, and the company has seen a fair amount of success. Additionally, HBO partnered with Comcast to offer a $50-per-month package of broadband Internet, very basic cable, and HBO. Bewkes said that offer is "showing a very good demand for HBO."
HBO has also seen very strong adoption of its HBO GO service recently. Last quarter, active users increased 35% year over year.
Everything is in place for HBO to go over the top if it wants. It has the rights, the platform, and the demand.
What about Showtime?
Showtime is not HBO. It doesn't have the subscriber base or the critical acclaim HBO gets. To be fair, nobody does.
As mentioned, Showtime has only been offering its Showtime Anytime for 18 months, so the demand and awareness of the product isn't as great as HBO's. If HBO does go over the top, Showtime could actually benefit from sticking with the cable bundle and getting extra marketing from operators... until it, too, ditches them.
Adam Levy has no position in any stocks mentioned. The Motley Fool recommends 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.