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HBO to Launch Standalone Over-the-Top Service in U.S. Next Year

In a bold surprise, HBO plans to launch a stand-alone over-the-top service in the U.S. next year, CEO Richard Plepler confirmed Wednesday.

“This will be transformative for our company,” Plepler said during his presentation at Time Warner’s Investor Day confab. Noting that there are now about 10 million households in the U.S. that are broadband-only, he declared: “It is time to remove all barriers to those who want HBO.”

Plepler didn’t offer many details and warned the crowd of Wall Street analysts that they wouldn’t be able to answer too many questions because of proprietary concerns. He said the plan was to “work with current partners and explore models with new partners.”

Plepler emphasized that the company’s experience with the HBO Go authenticated service and its fast uptake among millennial viewers has encouraged them to take the groundbreaking step of offering the HBO/Cinemax cluster as a stand-alone service.

“We will go beyond the wall and launch a stand-alone over-the-top service with the potential to produce hundreds of millions of dollars in revenue,” Plepler said. “The international revenue possibilities could be just as large if not larger (with OTT). We have a huge opportunity in front of us. We will use all means at our disposal to go after it.”

HBO’s news immediately raises the question about whether other programmers will follow suit, particularly HBO’s chief pay TV rival, Showtime. CBS Corp. execs have acknowledged the money-making potential of an OTT play in recent remarks to Wall Streeters. After Plepler made headlines on Wednesday, Showtime reinforced that view in a statement.

“We are always looking at ways of expanding our audience and it is certainly something that we have been examining for some time. The subscription model is ideally positioned to take advantage of developing technologies in the consumer marketplace,” Showtime said.

In a Q&A after his presentation, Plepler emphasized that HBO aims to work with MVPD partners to market an OTT service, noting that cable operators are the country’s dominant broadband service providers. Plepler said he believes an unbundled HBO is something MVPDs will “lean into — it’s their broadband. They’re going to make money,” he said. “I think this is a great inflection point for all of our businesses.”

Plepler’s bombshell comes on the same day that Netflix reports its third-quarter earnings. There’s no doubt that the SVOD giant’s subscriber gains in the U.S. and key international territories are spurring HBO to break with the tradition of offering its service only as part of MVPD channel packages.

HBO’s move also comes at a time when there are numerous startup ventures aimed at offering cable-like channel packages via the Internet. Sony Corp. is in talks with major programmers for such a service — it already has cut a deal with Viacom for a clutch of channels. Satcaster Dish Network is assembling an OTT offering, as is Verizon.

Moreover, the HBO declaration is clearly part of Time Warner’s corporate strategy to convince investors that it was right to rebuff 21st Century Fox’s $80 billion takeover offer this past summer.

Time Warner chairman-CEO Jeff Bewkes stressed at the start of Wednesday’s investor presentation that the conglom is better off in its streamlined state focusing on three core businesses — HBO, Turner Broadcasting and Warner Bros. — with strong growth potential. Taking the plunge into OTT distribution with HBO is the kind of daring move designed to prove that Time Warner is looking for any and all avenues to grow its earnings. HBO Go, Plepler noted, has seen a 40% increase so far this year in viewership in comparison with 2013.

For sure, the HBO news also goes a long way toward reinforcing Bewkes’ assertion at the start of the investor confab that Time Warner’s earnings will more than double in the next few years. Time Warner chief financial offer Howard Averill asserted that the conglom sees the OTT move as having the potential to drive “hundreds of millions of dollars in additional profit” for HBO, which generated $1.7 billion in earnings in 2013.

HBO’s move will undoubtedly be looked on with scorn by existing MVPDs, particularly the biggest cable operators and DirecTV. But HBO is one of a handful of cable brands that is likely to be impervious to blowback from traditional distribs as it’s hard to imagine any cable or satellite service pitching itself to subscribers without HBO in the mix.

The prospect of HBO, Showtime and other blue-chip channels going OTT has been much discussed at Wall Street and media-biz confabs in the past few years, particularly as Netflix gained steam. But HBO’s unambiguous announcement of its intention to embrace the opportunity still caught the biz by surprise. Reps for many major players affected by HBO’s decision had no immediate comment on Wednesday morning.

(In a sign of the significance that Netflix’s business has had on the traditional TV market, Plepler’s OTT announcement was followed at the investor presentation by Warner Bros. chairman-CEO Kevin Tsujihara, who told the crowd that the studio will see a licensing windfall from Netflix in a deal to carry all 236 episodes of Warner Bros. TV’s “Friends” as of Jan. 1.)

Plepler made other points during his presentation, although they were overshadowed by the OTT news. Among them:

  • “Westworld,” the J.J. Abrams-produced remake of the cult-fave 1973 movie, will be ordered to series for next year. Jonathan Nolan and Lisa Joy penned the script for the Warner Bros. TV production. Plepler stressed the new importance placed on HBO in terms of working with sibling WBTV division on programming.
  • Plepler also talked up the prospects for the new Dwayne Johnson comedy “Ballers,” about aging football players, and “The Brink,” which he described as “‘MASH’ meets ‘Dr. Strangelove.'”
  • Some 40% of HBO’s nearly 30 million subscribers only watch movies on the service. Some 75% of linear viewing of HBO is devoted to movies. That reinforces HBO’s determination to keep its movie output deals with Fox, Universal, Summit and, of course, Warner Bros.

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