Fans of shows like Game of Thrones and Girls who haven't wanted to cough up for a cable subscription are getting ready to celebrate. Time Warner's (NYSE:TWX) HBO announced earlier this month that it would be launching a stand-alone streaming service called HBO Now, debuting exclusively on Apple (NASDAQ:AAPL) devices this April. For just $15/month, consumers will have access to all of HBO's shows and movies that have previously only been available with a pay-TV subscription.
Perhaps unsurprisingly, Netflix (NASDAQ:NFLX) shares reacted poorly to this news in conjunction with a disappointing earnings report when HBO first made the announcement in October. Shares slid another 3% when the premium network said the streaming service would launch in April.
Netflix has long seen HBO as its primary rival, and CEO Reed Hastings initially inspired raised eyebrows when he called HBO the streamer's biggest competition back in 2011. That was before Netflix produced any original shows, but over time the remark has become prescient as each one seems to be morphing into the other. Netflix's Chief Content Officer Ted Sarandos took the comparison a step further in 2013 when he said, "The goal is to become HBO faster than HBO can become us."
With HBO's launch of its own over-the-top service, it's made a determined grab for Netflix's turf, causing some doubts among investors. But despite HBO's unmatched arsenal of original programming, HBO Now could be a good thing for Netflix.
Expanding the market
Sometime in 2013, Netflix's domestic subscriber base passed that of HBO, an indication that the streaming service seems to have surpassed HBO in popularity. By the end of 2014, the gap had widened as Netflix counted 39 million domestic subscribers on its rolls, while HBO had over 30 million subscribers. Despite impressive growth in both companies' subscriber additions, their subscriber totals still pale in comparison to the Pay-TV empire. A whopping 116 million U.S. households, or 84% of U.S. homes, still subscribe to cable or satellite TV. The opportunity for Netflix and HBO then remains the gated community of traditional bundled subscription TV packages. Overcoming that obstacle and speeding up the "cord-cutting revolution" is the key to unlocking continued growth for both services.
HBO is not fighting the same battle against traditional TV as Netflix since HBO is still available through cable, but HBO Now and Netflix will both benefit from Americans choosing to cut the cord and from the growing numbers of Americans who never had cable in the first place. With the launch of HBO Now, HBO is expanding the market for Internet TV and cord cutters and could even encourage those consumers who are considering in trading in their pricey cable subscription for, say, less-expensive Netflix and HBO Now subscriptions.
15 is greater than 8
Perhaps, more importantly, HBO Now's price point of $15/month may be the biggest boon to Netflix. Though HBO offers what most consider to be the better package of original programming, Netflix is fast making strides with recent deals with Hollywood honchos such as Tina Fey and Adam Sandler.
In the past, Netflix has had somewhat of an identity crisis with its own pricing. After the company decided in 2011 to split the DVD-by-mail and streaming businesses in two while charging the same price for each, Netflix was greeted with a customer exodus and a tidal wave of bad press. More recently, Netflix quietly pushed through a $1/month price increase to $9/month on new subscribers, but grandfathered in existing members at $8/month for two years, remaining sensitive to the debacle a few years ago.
HBO's decision to charge streaming subscribers $15/month may offer some cover to Netflix as it aspires to raise prices to, say, $9/month and $10/month in order to bulk up its margins and spend more on content.
As the content licensing wars heat up, which was evidenced this week in the ongoing battle for Seinfeld streaming rights, Netflix may just have to raise its prices in order to stay ahead of the competition. If HBO is pulling in nearly double per head what Netflix, it will naturally be able to afford more and better programming, both originals and licensed. Price elasticity should be a concern for Netflix, but if consumers are willing to pay $15 a pop for HBO Now, Netflix should be able to justify raising price sooner rather than later.
Jeremy Bowman owns shares of Apple and Netflix. The Motley Fool recommends Apple and Netflix. The Motley Fool owns shares of Apple and 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.