Please ensure Javascript is enabled for purposes of website accessibility

HBO Streaming Service Coming in 2015: A Deathblow for Cable?

By Adam Levy – Oct 21, 2014 at 12:12PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Will a la carte HBO spur a round of cord-cutting?

Source: Time Warner.

Cord-cutters rejoiced last week when HBO CEO Richard Plepler told analysts the premium-cable channel will launch an over-the-top streaming service in the U.S. next year. It was just last month when Time Warner (TWX) CEO Jeff Bewkes said taking HBO direct to consumers was more viable and more interesting than in the past.

Plepler said there are 10 million to 15 million broadband-only households in the U.S. that currently have no way of accessing HBO legally. This has led to an increasing number of password sharers and a ridiculous amount of piracy. But will going over the top increase the number of broadband-only households, striking a deathblow for pay-TV operators like AT&T (T -2.22%) and Comcast (CMCSA -2.77%)?

HBO and cable are splitting up
In the past year, HBO has been experimenting with cable operators more and more. It launched a bundle with Comcast that gave subscribers broadband Internet and access to HBO through a very basic cable package. It cost just $40 to $50 per month. Not to be outdone, AT&T launched a new bundle last month that offered a similar deal and packaged a year of Amazon Prime for $40 per month.

HBO seemingly had a different goal than AT&T and Comcast with these bundles. Those prices are introductory offers, and subscribers can expect their rates to increase after 12 months. But Comcast and AT&T are using the bundles to attract more subscribers to video packages, potentially up-selling them in the future, and at least keeping them as broadband customers.

For HBO, those introductory prices offer excellent data as to how much people are willing to pay for a stand-alone HBO streaming service. Still, HBO must tread carefully into a stand-alone service, as the costs may be higher than they seem. Netflix (NFLX -0.27%) has seen its costs for content delivery balloon as it gains subscribers and Internet service providers (the same as the pay-TV operators) charge the company for better access to their networks.

HBO currently relies on pay-TV operators to do a lot of the legwork for it. They promote the network, handle billing, operate customer service, and deliver the content through their cable infrastructure. That all goes out the door if HBO undercuts the operators and they drop their overwhelming support of the network.

Millions will soon have access to Emmy-winning shows True Detective (left) and Veep (right). Source: Time Warner.

Cable's not in trouble... yet
The fact that HBO -- and its parent company, Time Warner -- relies on cable operators so much means it's not going to do anything it thinks could harm that relationship. The growth of Netflix over the last few years is a strong indication that most cable subscribers view over-the-top services as a supplement to cable rather than a replacement.

Plepler noted that there are about 10 million to 15 million broadband-only households in the U.S. Even if each of them had a Netflix subscription, that leaves 22 million to 27 million U.S. cable subscribers that also have a Netflix account. That's on par with HBO.

The bigger impact could be on the number of "cord-nevers," people who never subscribed to cable in the first place. Those HBO-centric bundles don't look nearly as enticing if you can get Internet access from the best provider in your area and HBO directly from Time Warner. HBO will become part of a growing number of services offered on the a la carte menu that includes Netflix, Hulu, Amazon, iTunes, and now HBO.

The problem for pay-TV operators will be if HBO is successful going over the top, it may lead other networks to try their hand at it. Last month, CBS's Les Moonves noted Showtime may be interested in going over the top, and the company just started offering a live streaming service of its broadcast network.

As the a la carte TV menu grows and the options get better, cutting the cord does start to look more attractive. The onus is on content companies, though, to make sure that doesn't happen -- especially those that make most of their money from cable operators, not their viewers. It's a huge undertaking to go a la carte, and most networks don't have the infrastructure, let alone the economic incentive, to make the jump.

The cable bundle isn't going anywhere
Both cable companies and networks love the cable bundle. Consumers love to hate it. But a la carte HBO won't completely disrupt the cable bundle. If it did, AT&T and Comcast wouldn't offer their HBO plus Internet packages. After all, HBO is already an add-on service, and isn't included in most bundles.

The upcoming HBO streaming service will make it harder for pay-TV operators to convert broadband-only households into video subscribers, though. And if it marks the beginning of more premium channels offering direct-to-consumer products, it could eventually spur a round of cord-cutting. For people who love basic cable channels -- like Time Warner's other networks -- and sports, the only way they're going to get that content, in the near future at least, is through the cable bundle.

Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. 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.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.