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HBO and Time Warner Take On Netflix, But Is It a Mistake?

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It's finally happening: Time Warner plans to offer an over-the-top version of its premium network, HBO. Though details remain scarce, HBO's chief executive, Richard Plepler, announced that an Internet-based HBO service, free from the bonds of traditional cable, would be made available to U.S. consumers sometime next year.

Netflix's chief content officer, Ted Sarandos, announced last year that his company's goal was "to become HBO faster than HBO can become us."Now it appears HBO may win that battle, though Netflix's recent earnings report suggests it may not be a fight worth waging.

HBO has the parts in place
Time Warner has remained relatively mum on the details surrounding this new, cable-free version of HBO. Some analysts have speculated that it could prove a lackluster offering -- it may include all of HBO's shows, for example, but days, weeks or even months after traditional cable subscribers receive them.


That's certainly possible, but seems unlikely. HBO's chief executive, Richard Plepler, remarked that it was "time to remove all barriers to those who want HBO" -- offering a stripped-down version would hardly qualify.

It might also be more complex. HBO's digital app, HBO Go, offers a wide variety of HBO content to subscribers -- from the latest shows minutes after they air, to titles more than ten years old. HBO Go is available on nearly every browser, mobile device, and set-top box on the market, but currently requires a cable subscription to access. Going direct to consumer -- selling access to HBO Go to anyone with a credit card -- would create a widely accessible over-the-top offering virtually overnight.

Netflix overtakes HBO
Some have seen Time Warner's stubborn refusal to go over the top as mistake -- I myself argued that it could be limiting Time Warner's share price, as an independent HBO could command the same (or similar) high multiple as a fast-growing Netflix.

Although HBO is tremendously profitable, its domestic subscriber base has hovered near the 30 million mark for years, a barrier that it seemingly cannot break no matter how many Emmys its hit shows win. Netflix, even with lesser quality content, was able to surpass HBO in U.S. subscribers late last year, and now has more than 37 million U.S. members.

Netflix's management has long argued that it has only scratched the surface -- that it could, one day, have as many as 90 million domestic subscribers. If so, that would be shot across the bow of HBO, and nearly definitive proof that it had backed the wrong distribution model.

But Netflix's most recent earnings report challenges that narrative, calling into question the long-term viability of a la carte, over-the-top distribution. In the third quarter, Netflix added streaming subscribers, but fewer than one million -- less than it had forecast, and less than analysts were expecting. Netflix is still growing, but not as rapidly as many had hoped. Shares plunged more than 20% following the report. On the earnings call, Netflix management reiterated their long-term forecast, but the sluggish growth raises the obvious question: Is Netflix nearing saturation?

What an independent HBO might mean for Time Warner
If so, Time Warner's decision to finally offer up HBO a la carte could be a mistake. Though it may add some subscribers on the margin, it may not be enough to justify the potential costs.

Time Warner has long relied on its paid-TV partners to handle customer acquisition and service, for example; going over-the-top will force Time Warner to absorb these costs itself. At the same time, an independent HBO could entice some subscribers to ditch traditional paid-TV altogether, creating ill-will with Time Warner's paid-TV partners and leading to worse results for its other, less popular networks, including CNN, TBS, and TNT.

Or Netflix's recent results could just be a bump in the road -- a temporary set back to an inevitable, a la carte future. In that case, both HBO fans and Time Warner shareholders alike should cheer on its latest move.

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The article HBO and Time Warner Take On Netflix, But Is It a Mistake? originally appeared on Fool.com.

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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