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HBO Challenges Netflix's Global Ambitions

By Andrew Tonner - Jan 21, 2016 at 7:19PM

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As Netflix continues its global expansion, a crucial shift in strategy at Time Warner's HBO subsidiary will undoubtedly increase the competition for streaming subscribers.

Source: Netflix.

With its recent move into 130 additional countries, like the United Kingdom of yore, investors can now say the sun never sets on the Netflix (NFLX 2.72%) empire.

Between its surging stock price, swelling subscriber base, and growing pile of Emmy awards, Netflix can claim its place as the pre-eminent player in the streaming space.

Though Amazon.com's Prime Instant Streaming also deserves mention, Time Warner's (TWX) HBO subsidiary has emerged in recent years as one of the few media properties capable of challenging Netflix's global ambitions. And a recent move from Time Warner's HBO holds a number of key implications for Netflix and the broader streaming space.

HBO and Netflix to lock horns in Spain
According to Bloomberg, Time Warner's HBO service is preparing to launch a standalone streaming product in Spain by year's end. As part of the move, HBO has elected not to renew its content licensing agreement with Spanish cable providers, which will in effect make its HBO streaming service the only means of accessing HBO original content across the country.

HBO's shift to an online-only strategy in the populous European country (nearly 47 million people) is no accident. Spain is unique in that it features the dual dynamics of having a high proportion of its population with broadband connections but without the usual accompanying cable TV subscription, as well as high rates of media piracy. About 75% of Spain residents have high-speed Internet, according to Bloomberg, while roughly half subscribe to broadband, but not pay TV. Depending on how HBO prices the service, the media consumption patterns in Spain seem to position the service especially well to gain market share, though at least eight online streaming services currently operate in the country, including Netflix.

How real is HBO's threat to Netflix?
Even including Amazon's formidable competitive position, HBO may represent the greatest threat to Netflix's budding international dominance for two crucial reasons: content, and mobile content consumption.

Source: Netflix.

Though Netflix has developed a laudable catalog of its own original content since 2012, HBO's award-winning original content and series could at least match, if not exceed, Netflix's content value in the eyes of many consumers. What's more, HBO and Netflix both have the ability to cultivate smart original content that caters to the diverse tastes of their ever-expanding groups of users.

HBO's most popular show in Latin America isn't its blockbuster franchise Game of Thrones, but Sr. Avila, a series about a Mexican insurance man who's a hit man by night. If the recent history of streaming has taught us anything, it's that quality original content is the only true means of differentiation among streaming providers. And it's this kind of knack for savvy content development that, though hard to quantify in a dollars-and-cents way, positions HBO to steal customers from Netflix over the long term.

Turning to mobile, HBO enjoys an impressive global distribution, with 138 million total subscribers spread across 150 countries. However, even though two-thirds of its subscribers lie outside the U.S., only a paltry 20% of HBO's revenues are generated abroad because of lower average revenue per users in developing countries such as Vietnam. However, the emergence of mobile devices as content-consumption powerhouses has created a new distribution channel for HBO to grow users in places such as Spain, where latent demand might lie dormant simply because of a lack of cable subscriptions. In many ways, favoring a TV-first distribution model puts HBO at a disadvantage versus the likes of Netflix. By changing course on its strategy, HBO has evened the playing field between itself and Netflix by this critical measure.

The evidence supports the notion that HBO and Netflix can co-exist successfully, as both have enjoyed ample growth in recent years. With Netflix recently surpassing 75 million users and expecting to eclipse 80 million in its current quarter, it doesn't expect its growth momentum to slow any time soon.

So while only time will tell to what degree these two media heavyweights can play nice, HBO's increased emphasis in streaming should send ripple effects though the streaming space.

Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com and Netflix. The Motley Fool recommends Time Warner. 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.

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