Game of phones

HBO will lead AT&T’s challenge to Netflix

Time Warner’s crown jewel must scale up while maintaining quality

IN LATE 2012, just before the release of “House of Cards”, Ted Sarandos, chief content officer of Netflix, declared: “The goal is to become HBO faster than HBO can become us”. Few took him seriously. HBO had a globally recognised brand with some of the best programmes in television, including “Game of Thrones”. Yet Netflix would go on to surpass HBO in subscribers, money spent on programming and, this year, Emmy-award nominations.

Meanwhile HBO did not try to become Netflix. It prioritised profits over growth as Jeff Bewkes, then chief of Time Warner, HBO’s parent, looked to sell the company. HBO achieved enviable operating-profit margins of 30-40% ($2.2bn on $6.3bn of revenue in 2017), and was comparatively restrained in its pursuit of high-profile shows (Netflix committed $100m in outbidding HBO for “House of Cards”, and was ridiculed for it). The network also lagged behind in the technologies of personalisation and streaming that made Netflix a killer app. At one point Reed Hastings, boss of Netflix, puckishly joked that the password used by Richard Plepler, his HBO counterpart, for online access was “Netflix bitch”.

Now HBO is preparing to launch its counter-attack, backed by a phone giant. In June AT&T finalised its $109bn purchase of Time Warner. The wireless firm, which is also America’s largest distributor of pay-TV, views itself as locked in an existential battle with Netflix, Amazon, Facebook and Google for people’s attention. Facebook and YouTube each command screen time from about 2bn users a month, while Netflix wins about two hours of viewing a day per subscription. With its newly-acquired media assets, AT&T wants to match that kind of engagement.

Ma Bell rides out

AT&T is pinning its hopes in part on a new subscription streaming service to be rolled out in 2019 under Time Warner’s new banner of WarnerMedia. A bigger HBO will be the “cornerstone” of that strategy, says John Stankey, boss of WarnerMedia. The phone firm hopes video customers will become wireless customers, and vice versa, driving down both churn and the cost of acquiring subscribers. It will join a crowded field: Disney and Apple are launching streaming-video services next year.

HBO is not far behind Netflix in subscribers, with more than 100m worldwide (142m when counting subscribers to Cinemax, HBO’s other premium service), including about 40m subscribers in America. Netflix has nearly 60m subscribers in America and 137m globally. But most of HBO’s customers are acquired through a third-party distributor, depriving it of direct customer relationships and data.

Under AT&T, HBO will have a better crack at both. AT&T already offers HBO-over-the-internet in America in high-end wireless plans and in packages with DirecTV Now, a streaming pay-TV service (and will do the same with its new streaming product). Eventually AT&T will allow HBO to sell more directly to consumers around the world. With accompanying investments in technology HBO should get a lot more data about what those subscribers are watching.

And the new HBO will have a lot more shows to watch. Its budget for programming had grown at a snail’s pace under Time Warner, to $2.3bn in 2017; Netflix increases its spending on programming by an entire HBO or more each year, to $12bn-13bn in 2018. Under AT&T, HBO will spend several hundred millions more on original programming next year, and more than that thereafter. Mr Plepler, who has fretted in the past that he could not say “yes” to everything he wanted, has already started saying “yes” to a lot more. HBO’s slate of big-budget shows in the coming years now includes adaptations of “The Time Traveller’s Wife”, “His Dark Materials” and “Watchmen”. HBO is also developing a prequel to its biggest hit, “Game of Thrones”. Mr Stankey says he wants “a more muscular HBO” that engages customers so regularly that they consider it important enough to keep year round.

But HBO will not try to muscle its way into becoming another Netflix, which releases hundreds of original feature films, documentaries and series a year. Netflix sells its product on volume, personalisation and ease of user experience. HBO by contrast wins subscribers through a few hit shows and a reputation for quality television, which could be wrecked by an over-rapid expansion. As the network’s margins may be eroded in the near term, AT&T will need to be cautious. WarnerMedia will already take a hit to revenues as it pulls its content from Netflix to beef up its offer.

Yet HBO will still face a challenge to maintain its reputation as it expands. One Hollywood executive reckons that its schedule of original shows is about to double in size in the next few years. Among TV networks, he says, “I don’t think anybody has ever tried to scale it at the level that HBO is attempting to scale it.”

AT&T’s bosses show signs of understanding this. Randall Stephenson, its chief executive, has referred to HBO as Tiffany’s to Netflix’s Walmart. Still, making the transition under AT&T will not be easy. In June Mr Stankey told a gathering of HBO employees that the year ahead would be such hard work at times that “it feels like childbirth”. AT&T is expected to surround HBO’S programmes with a variety of assets from WarnerMedia, from Warner Bros studio’s films (such as “The Dark Knight”) and TV shows (like “Friends”) to Turner’s library of classic films. Under Time Warner those assets were farmed out to a wide array of outlets including Netflix, HBO, Cinemax, Turner’s cable networks and niche streaming services like FilmStruck (which will shut this month). If they are consolidated in one streaming product, to be sold alongside HBO, subscribers would in theory have something else to watch between servings of “True Detective” and “Westworld”. “There are nights you want to go to a four- or five-star restaurant,” Mr Stankey says. “But we also know there are nights where you want to get a cheeseburger.”

This article appeared in the Business section of the print edition under the headline "Game of phones" (Nov 1st 2018)