Deep inside HBO’s New York offices is a memo that was originally created 5 years ago. Each year it gets updated with new numbers and projections. This document is controlled by its corporate strategy group and it lays out the pros and cons of HBO continuing to sell its programming through the large American MSOs (the Comcasts and Time Warner Cables of the world).
Within the pages of this document there is active debate about whether HBO Go should be tethered to the MSOs for sales and promotion or whether HBO Go should become a consumer facing product that is sold directly by HBO to its customers. As each year passes the debate framed by this document becomes more intense.
1. Each year, the cost of creating and delivering HBO Go to its customers (all of whom must have a linear HBO TV subscription though they may or may not use it) continues to decline.
2. Each year, the MSOs, as HBO’s reseller, continue to take a large share of the $15 monthly subscription fee that HBO charges for its service. (Let’s assume 1/3 to 1/2.)
3. Each year, it becomes clearer to the corporate strategy folks who run the numbers that HBO is leaving ever larger sums of money on the table because it is unable to sell HBO Go directly to consumers online. (Assume they lose $5 to $7.50 per month per subscriber to Comcast, etc.) This money would contribute greatly to their bottom line. (It is has grown from tens of millions to hundreds of millions in the past 5 years.) This is not chump change.
Every year the corporate strategy folks lay out these numbers to their bosses at HBO and to their bosses at Time Warner. And every year the debate rages within HBO. They ask themselves: Do we cut HBO Go loose from the requirement that one has to buy a linear HBO subscription from Comcast? Do we grab that larger profit per customer that is waiting for us if we eliminate the middleman?
This is but one instance of the general dilemma that all mass media companies face today. In our larger media world we are moving from distribution networks that are centrally controlled, ie, cable systems and broadcast networks to a distribution network that is based on a distributed architecture-i.e. the Internet.
As this shift to the Internet occurs, mass media companies have the opportunity to deal directly with their customers as they never have. Large creators and publishers of content, like HBO, can now interact with their customers and understand their wants and desires in a completely new manner. And they can do so at a much lower cost than going over legacy mass media networks. This cost will only continue to go down as the price of all things digital continues to fall.
Not to mention that HBO has a lower priced competitor that already deals directly with its customers on the Internet. It is called Netflix. It is starting to do exactly what HBO does. It licenses Hollywood content and creates original content that will shortly be on par with HBO. (House of Cards comes in 2013 and more to follow.)
So HBO, on the one side, is squeezed by competition from the Internet and on the other, held back by legacy middleman agreements through its arrangements with the large cable companies. These debates within HBO would be fascinating drama in themselves.
Ironically, HBO has to ask the very same question that is asked by many of us who subscribe to cable.
When do I cut the cord?