Think of the company in terms of its biggest hit, “Game of Thrones”: From afar, the Wall looks secure. In 2015, the pay cable network made $2 billion in profit; unveiled its long-awaited standalone streaming service, HBO Now; signed a slew of international licensing deals; and sauntered home with 43 Emmys, the most in its history.
But peer closely, and you can see that the sheen of profits and awards are masking a slow erosion of HBO’s once unassailable competitive advantages. The Wildlings are closing in.
HBO’s reign over premium television was fortified on the back of key competitive advantages that were once ironclad but are now dwindling.
For over two decades, scripted original programming defined and differentiated HBO’s brand. Amidst an ocean of commodity programming, HBO was an island of originality and complex emotion.
Today, however, the sea is littered with competition. AMC, FX, Showtime, Starz, Amazon Prime Video and Netflix have breached HBO’s moat around edgy, cinematic scripted fare. HBO’s monopoly on provocative, scripted storytelling has been busted.
HBO’s seemingly unending awards bounty has underwritten a perception of quality that has served to rationalize HBO’s premium price in comparison to competing subscription services.
But the quality gap is closing. Last year, Netflix received eight Golden Globe nominations vs. HBO’s seven, and 10 Screen Actor’s Guild nominations to HBO’s six. It’s a remarkable achievement given that Netflix only began making its own shows in 2011.
The pace at which the quality of Netflix’s programming is improving should concern the HBO brass. It is going to get increasingly difficult for HBO to ask subscribers to pay $15 per month if Netflix offers just as much quality programming for a much lower price. To date, HBO’s 120 million global subscribers have supplied a giant source of stable financing that has nourished television’s highest production values and allowed HBO to outbid competitors for the best projects.
But Netflix will spend $6 billion on content in 2016, compared to $2 billion for HBO. This growing disparity sets in motion a nasty feedback loop; less money to spend on new content results in fewer new subscribers, which results in even less money to spend on new content. In content, scale supports innovation.
It is unsurprising then that all of the meaningful advancements in the creation and distribution of content — the full-season binge, the slow upending of the traditional theatrical window, and 4K streaming — are happening at Netflix. In order for HBO to pioneer the next wave of content innovations, it must get bigger.
|“Last year, Netflix received eight Golden Globe nominations vs. HBO’s seven, and 10 Screen Actor’s Guild nominations to HBO’s six.””|
The challenges facing HBO will only intensify. But an HBO/Apple marriage would address these problems and create lasting financial and strategic benefits. With over $40 billion per year in free cash flow (versus Time Warner’s $3.6 billion for 2015), Apple could invest a small percentage of its cash to double HBO’s content budget to $4 billion. This incremental content investment would fund the expansion of a global library of original programming across every vertical, including kids, news, film and sports, enriching the value of the HBO subscription. The return on Apple’s investment would compound as HBO’s content library grows.
Apple’s digital ecosystem, installed device base and retail stores create an unparalleled global distribution network that provides the infrastructure necessary to sign up the next 50 million HBO subscribers. By marrying its distribution with HBO’s premium content, Apple could create a magical union of technology and storytelling.
Buying HBO would give Apple a productive use for the $200 billion in cash currently sitting in its bank, and provide a platform to expand further into premium video. HBO’s $2 billion in stable, recurring subscription cash flow would help Apple’s languishing earnings multiple re-rate higher, pleasing its frustrated investor base.
Last but not least, HBO CEO Richard Plepler; Apple’s iTunes chief, Eddy Cue; and Apple Music chief Jimmy Iovine are all friends. Apple was the launch partner for HBO Now. Apple has a profound respect for artists. The cultures would harmonize and invigorate each other. Perched atop its Drogon, HBO would rise again.
Ben Weiss is manager of New York-based investment fund 8th & Jackson, which focuses on media.