During Time Warner's (NYSE:TWX.DL) fourth-quarter conference call on Wednesday, the company gave investors a key update on its 2015-launched cable-free streaming service, HBO Now. The service now boasts 800,000 subscribers, HBO CEO Richard Plepler noted. With the service's subscribers already at 800,000, does this spell trouble for Netflix (NASDAQ:NFLX)?
Putting HBO's 800,000 subscribers into context
While Netflix investors definitely shouldn't categorize HBO Now's 800,000 subscribers as a fluke, there's no reason to worry yet. Not only was the subscriber count a smaller number than analysts were expecting, but also the service's failure to launch with a bang suggests it won't be easy for HBO to build a formidable competing streaming product to Netflix.
To see why 800,000 subscribers for the new service isn't really very impressive, consider these facts for context.
- A few hours after January 1st, Netflix's streaming members surpassed 75 million members.
- During 2015, Netflix added 75 million members -- more net additions than in any year prior.
- In Netflix's fourth quarter alone, the company added 5.6 million subscribers -- Netflix's most quarterly net additions yet.
- During Q4, Netflix added about 1.6 million members in the U.S. and 4 million internationally.
With these numbers in mind, it's easy to see why some analysts may have been expecting HBO Now, which was launched on April 12 last year, to have garnered more than 800,000 subscribers. One analyst at FBR Capital Markets & Co. was estimating HBO Now's subscriber count would have reached 1.4 million subscribers by now, according to Bloomberg.
Indeed, if HBO's content was as premium to Netflix's content as its $14.99 monthly price tag suggests, it would seem plausible that pent-up demand from cord-cutters could have helped the new service easily surpass 1 million members by now -- unless, of course, the price itself is simply too high for cord-cutters to justify. Comparatively, Netflix streaming service is priced well below HBO Now, at $9.99 a month.
The next steps for Time Warner
During the call, Plepler defended the service's progress to date, and noted some of the content that would do particularly well on a streaming service -- such as an upcoming Jon Stewart program, and the launch of Vice Daily on the platform. As the company outfits the new service with more appropriate content, boosts the platform's amount of original content, and launches the platform on more devices, the service would gain steam, Plepler argued.
But it appears that growth may also bring along with it some heavy spending. The company said in its fourth-quarter press release that operating income was flat despite a 6% revenue increase, citing expenses associated with HBO Now as the reason for the offset.
"The increase in expenses was mainly due to higher programming costs as well as higher marketing and technology costs related to HBO NOW," the press release stated.
Going into 2016, expenses related with HBO Now are likely to continue rising, as management noted during the earnings call that the company planned to more aggressively market the streaming service in 2016.
HBO's difficulty in gaining meaningful traction with its streaming service in relation to Netflix's 75 million subscribers is good news for Netflix investors. But at the same time, Time Warner's plan to more aggressively market HBO Now could heighten the costs of customer acquisition for Netflix.
Daniel Sparks has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.