Reed Hastings has positioned Netflix as an “Internet TV network,” with HBO among its chief competitors.
And now Netflix is almost as big as HBO — at least in terms of topline revenue. In the fourth quarter of 2013, Netflix’s revenue climbed 24% to $1.2 billion, within shouting distance of HBO’s $1.3 billion in revenue, which was up 6% year over year.
Netflix is on a faster growth trajectory than HBO and other premium cable TV networks. However, the 41-year-old HBO remains significantly more profitable than Netflix, which is investing in new market launches in Europe this year and is in the early stages of building up its original content portfolio. As a more mature business, HBO has a beefier bottom line — it generated operating income of $413 million for Q4 (33% margin), compared with Netflix’s operating income of $82.3 million (7% margin).
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Time Warner broke out HBO’s financial results for the first time in reporting Q4 earnings, which a company rep said is aimed at providing more “transparency” to investors with the spinoff of Time Inc., set to occur in the second quarter of 2014. But the change may also reflect a desire by the media conglom to show how HBO stacks up against rapidly rising challenger Netflix.
“HBO remains in a league of its own,” Time Warner topper Jeff Bewkes said on the company’s earnings call Wednesday. “We don’t see any discernible effect” on HBO’s subscriber numbers or pricing because of Netflix or other Internet video subscription services.”
In 2013, HBO and Cinemax added almost 2 million subscribers in the U.S., which was the highest increase in 17 years, he said. That gave HBO and Cinemax a combined 43 million total subscribers in the U.S., with two-thirds of that represented by HBO, according to Bewkes. In total, HBO has 130 million subscribers worldwide.
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But according to Time Warner, most of those subscriber gains for HBO and Cinemax in the U.S. were not “revenue-producing,” meaning the pay-TV affiliates kept 100% of the fees from subscribers for those services. As of the third quarter, HBO had 29.2 million U.S subs and Cinemax had 13.6 million, according to SNL Kagan.
Meanwhile, Netflix added 2.3 million U.S. subs in the fourth quarter alone, to reach 33.4 million. Hastings had said he believes the addressable market for Netflix is between 60 million and 90 million in the U.S.
HBO also generates licensing revenue for its original programming, unlike Netflix. In the fourth quarter, HBO’s subscription revenue grew 8% while content revenue declined 9% ($16 million). The increase in subscription revenues resulted mainly from higher U.S. rates and the consolidation of HBO Asia and HBO Nordic, according to Time Warner.
Bewkes was asked on the earnings call about how many HBO subscribers have come out of Comcast’s marketing of a package with broadband, basic TV and HBO, which the operator introduced last fall. Bewkes responded that it was a relatively new offer, but such a “broadband-only” approach could be an effective way to reach the 8 million to 10 million U.S. households that have broadband but not pay-TV.