Netflix has succeeded. Over the last three years, the streaming video giant has invested billions in original programming, launching dozens of exclusive series, documentaries, and movies. At the same time, HBO has slowly begun to mimic Netflix. Time Warner's (TWX) premium cable network has broken free of the traditional cable bundle, partnering with digital providers to sell itself to consumers directly over the Internet.
But is it time for Time Warner to take the next step? For years, analysts have wondered if HBO would be better off as a stand-alone company. While there's certainly no indication that it will happen, discussion about a possible split has intensified in recent weeks. Reports indicate that activist investors are considering taking a stab at Time Warner, and breaking up the firm could be seen as a way to increase shareholder value.
Were that to occur, it could have an affect on Netflix and its shareholders, as HBO stands as one of Netflix's biggest competitors. On Netflix's most recent earnings call, CEO Reed Hastings offered up his thoughts on the subject.
A "formidable global competitor over time"
When asked directly about the possibility of an independent HBO, here's what Hastings had to say:
HBO's been a great competitor, one we [have admired] for a very long time. You might have seen the recent news that they now are offering HBO Now [their digital offering] direct to consumer in multiple new nations. They started just in the Nordics, then some countries in Latin America -- now in Spain. They will be a formidable global competitor over time, again, independent of their ownership.
Hastings made similar comments in an interview with Re/code's Peter Kafka earlier this month:
I think HBO gains a lot from being closely connected with Warner TV and Warner Brothers generally. I'm a little cynical about sort of 'unlocking shareholder split,' financial complication, financial maneuvering. What drives HBO's incredible success is great content. If they focus on doing great content, they'll be an enormous success.
Essentially, Hastings isn't particularly concerned, and, indeed, seems to think HBO would be better off if it remained bound to the rest of Time Warner. However, Hastings' comments on HBO seem to contradict remarks he made about Hulu in 2013. At that time, there was talk that Hulu could be sold to a tech company or private equity firm. In an interview with CNBC, Hastings argued that an independent Hulu would've been a bigger threat to Netflix as it would've been hungrier and more focused:
I think if [Hulu were] independent ... then they got the most hunger ... if they got to be an independent company ... like a start-up, and hungry -- that might be the most concerning.
Could HBO be spun off?
Time Warner's management has no desire to sell HBO. On the company's last earnings call with analysts, CEO Jeff Bewkes denounced the possibility outright, saying that there was no benefit to a separation. Indeed, Bewkes argued that the firm's three units -- HBO, Turner Networks, and Warner Bros. -- worked well together, with deep synergies.
But that could change if an activist investor gets involved. Earlier this month, The New York Post wrote that several such investors, including Corvex Management, are considering taking a stake in Time Warner, and they could push for a sale of the entire company, or HBO in particular. Any activist would have to rally other investors to their side, of course, but it's possible, given Time Warner's recent performance. Media stocks in general have had a tough time in recent quarters, but Time Warner's market cap (near $56 billion) remains sharply below the $80 billion buyout offer the firm received in the summer of 2014.
A bigger threat to Netflix?
Time Warner's Turner Networks -- which include TNT, TBS, and CNN -- remain wed to the traditional cable bundle. They also generate about one-third of Time Warner's revenue and around half of its operating income. They may be the reason why HBO was so slow to adopt a Netflix style model of digital distribution, as offering HBO direct to consumers makes the prospect of cord-cutting more enticing -- placing added stress on the traditional bundle, and, by extension, Turner Networks.
But now that HBO has gone direct to consumer with HBO Now, it's unclear how much more threatening HBO could be to Netflix, even if it were independent.