Billion dollar baby

Cable fees, DVDs drive HBO's profits

NEW YORK — Time Warner is generating lots of buzz and good reviews for Clint Eastwood’s “Million Dollar Baby” from its Warner Bros. division, but when 2004 comes to a close next week, another TW division, HBO, will become the first billion-dollar baby in TV history.

That’s $1 billion in pure profits, and HBO will be able to pound its chest big time: No other network — broadcast or cable — has ever crashed through the billion-dollar mark in profits for a calendar year. Even NBC at its peak a few years ago managed to hit only $500 million in profits.

Word filtered out of TW headquarters last week that its HBO unit had bested its 2003 tally of $960 million in profits and would pass the billion-dollar mark for the current year.

TW doesn’t break out the HBO figures separately, but Dennis McAlpine, a media analyst for McAlpine & Associates, said he’s not surprised at the unit’s fiscal watershed.

McAlpine said HBO extracts more money from cable operators — a monthly fee of as much as $6 a subscriber — than any other network, cable or pay. On top of those fees, he adds, HBO sells millions of copies of DVDs generated by such hit original programs as “The Sopranos,” Sex and the City,” “Six Feet Under” and “Band of Brothers.”

And this year HBO slugged its first homerun in the sale of rerun programming to basic cable and TV syndication when it sold repeats of “Sex and the City” in a window shared by TBS and TV stations, chiefly Tribune Broadcasting. License fees from these joint deals funneled well over $100 million into HBO’s coffers.

HBO will harvest about $2.2 billion from cable-operator license fees alone in 2004, said Tom Eagan, media analyst for Oppenheimer & Co.

The paybox will have spent about $1.4 billion this year clinching theatrical-movie output deals with Warner Bros., Fox, Universal, DreamWorks and New Line and producing original series like “Six Feet Under,” “Carnivale,” “Deadwood” and “Curb Your Enthusiasm.”

As with “Sopranos” and “Sex and the City,” HBO owns these original series and will be able to exploit their backend.

ESPN sports big bucks

Tom Wolzien, senior analyst with Sanford Bernstein, said the only network that may be close to the billion-dollar benchmark is ESPN, which pockets more dollars from cable systems and satellite distributors — $2.42 billion — than any other nationally distributed basic-cable net, according to Kagan Research.

What’s more, ESPN and its various siblings (ESPN2, ESPN Classic and ESPN News) will jointly sell more than $1.25 billion in ad spots in 2004, a revenue stream that’s denied to HBO, which doesn’t carry advertising.

ESPN will chalk up $770 million in 2004 cash flow, Kagan said, and sister ESPN2 will drive another $105 million.

But HBO is king right now, and the network can trace its success to one main ingredient, according to Richard Greenfield, media analyst with Fulcrum Global Partners: “It comes up with uniquely creative programming that you can’t get elsewhere,” he said.

HBO shows pump fees

That programming, said Wolzien, “allows HBO to charge cable operators significantly more money, per subscriber, than any other network.”

Original series also drive HBO’s on-demand service, which McAlpine said is more popular by far than that of any other cable network, basic or pay.

On demand is not yet generating significant revenues, but as more HBO subscribers become aware of it, they’ll be less inclined to cancel their subscriptions. The canceling of pay TV, called the churn rate, is one of the biggest problems faced by HBO and its two main competitors, Showtime and Starz!.

McAlpine added that HBO viewers can expect lots more sexually titillating series like “Real Sex” and “Sex Bytes” as those are the most requested programs by viewers to HBO’s on-demand service.

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