HBO A la Carte Decision Could be the Tipping Point

Any future decision by HBO to sell HBO by itself, over the top and online, could well be the tipping point for a massive wave of online video disruption in the U.S. market, as it would signal the first major break from current industry business models and distribution practices.  But that decision is not yet imminent. 

The reason any such decision could be a tipping point is that it would signal a clear belief at Time Warner that the gains from doing so, namely selling more over the top subscriptions and making more money, are greater than the inevitable friction with HBO's major distributors, namely cable, satellite and telco video subscription services.

"If, in the long run, there's a clear development of enough people that need an a la carte offering of HBO, we'll look at it," Bewkes says. 

HBO executives note that there are roughly 105 million multichannel TV households in America, of which 77 million do not subscribe to HBO. So for logical reasons, current subscribers to video entertainment services would seem to be a logical prospect base. 

By way of contrast, there are only about three million U.S. households with broadband connections and reasonable amounts of money but no multichannel TV service. In other words, from one perspective, the potential upside for online versions of HBO would not seem to be as lucrative as marketing to existing video service customers. 

The best evidence for such thinking is HBO's current willingness to sell HBO online in Sweden, Norway, Finland and Denmark. In those markets, HBO believes it can reach more potential customers using both video distributors and over the top mechanisms. 

But there are other issues, as well. What might work better, an over the top subscription to the full channel, or sales of individual programs? Ignore for the moment the fact that HBO does not want to sell programs one by one. Where's the demand?

In the U.S. market, about 30 million subscribers to basic cable also buy HBO. Could HBO do better with an over the top strategy? 

Netflix has about 27 million subscribers that some would argue represent a similar market, and evidence that demand for streamed products is substantial. And Netflix uses a consumption model more akin to video on demand than a "channel."

And demand for streaming services is clear, especially when compared to traditional VOD. 

Bill Niemeyer, The Diffusion Group senior analyst, estimates in in the fourth quarter of  2011, Netflix U.S. subscribers watched 80 percent more streaming video hours than were viewed in the same period on all U.S. video on demand services. "Viewing hours" are not a direct proxy for subscriptions or revenue, but are indicative of the relative popularity of VOD and streaming. 

In fact, TDG estimates that all VOD consumption is just one percent of U.S. viewing hours. 

Disruption seems inevitable at some point. A move by HBO could be the trigger for a wider set of moves by other programmers as well. Why HBO? Simply because HBO already has gone with a dual distribution strategy in the Nordic region, and because HBO prides itself on being an innovator in the business.