How HBO gets into 50 percent of US homes

According to HBO CEO Richard Plepler, the company has an opportunity to reach 50% penetration of homes in the US. Reaching that goal requires a lot more growth because HBO is in around a third of homes today.

HBO grew subscribers an impressive 5 million in 2017. Moreover, Mr. Plepler says the 35% of the company’s growth has come in the last five years. Performance such as this is likely the reason Mr. Plepler believes he can ultimately drive the service into half of US homes:

“We think there’s a lot of growth left. We’re going to attack it.”

However, where is all that growth coming from today, and where is it likely to come from in the future?

HBO Now growing strongly

HBO launched its direct-to-consumer online service HBO Now in April 2015, after several years of relatively little subscriber growth for the premium channel. It took the company almost two years to reach 2 million subscribers. However, 2017 was a watershed year for the service. The company saw subscribers climb from 2 million in February to 5 million by the end of the year.

The increase of 3 million subscribers in HBO Now helped propel the channel to its best year of subscriber growth ever, increasing by 5 million. So, where did the other 2 million subscribers come from, and how will it get to 50% penetration?

Traditional pay TV unlikely to help

If HBO saw any subscriber growth from traditional pay TV operators at all last year, it was minimal. Cable, satellite, and telcoTV operators are shedding subscribers at a steady clip. They lost around 3.5 million in 2017. However, their customers are also dropping premium tiers like HBO to save money. Mr. Plepler says that his best pay TV operator partners have HBO in 50% of customer homes. However, deepening penetration of a shrinking market may not result any growth at all.

vMVPDs an important part of HBO’s growth

Virtual MVPDs like Sling TV and DirecTV Now allow customers to subscribe to HBO through their services. For example, a DirecTV Now customer can add HBO for just $5 a month. Sling TV and PlayStation charge the standard $15 a month.

In 2017, vMVPDs grew strongly. Sling TV finished the year with 2.2 million subscribers, up 40% from one year earlier. DirecTV Now ended the with 1.46 million subscribers, up from 200,000 one year earlier. Assuming the same penetration level of vMVPDs as regular pay TV, HBO could have more than a million subscribers coming from Sling TV and DirecTV Now. Penetration at DirecTV Now could be even higher, with HBO through DirecTV Now costing a third of HBO Now.

The number of HBO subscribers from vMVPDs is likely higher still. PlayStation Vue and Hulu Live both allow customers to subscribe to HBO. However, neither Sony nor Hulu have announced how many subscribers they have to their vMVPD services.

Around half of traditional pay TV cord-cutters sign up for a vMVPD. As cord-cutting accelerates, expect vMVPDs to continue strong growth for some time to come.

YouTube TV could deliver a big bump in subs

There is one major vMVPD that currently doesn’t have a reseller arrangement with HBO: YouTube TV.

Google does not report how many subscribers it has for YouTube TV. However, in the Q4 2017 Video Trends report from TiVo 8.5% of survey participants said they were using the service. 3.8% said they used DirecTV Now and 2.3% used Sling TV.

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HBO and Showtime are Being Revitalized using OTT

Netflix has become the poster child of how over-the-top delivery of premium content can create a hugely valuable business. But in Netflix’s shadow, traditional premium TV networks including HBO and Showtime are being revitalized by OTT delivery which is changing the dynamics of subscription TV.

Both HBO and Showtime recently reported record subscriber levels for 2017, mainly attributable to online growth. HBO and Cinemax gained over 5 million subscribers in the U.S., driving its domestic base to 49 million. Half of the online subs came from HBO Now, its standalone streaming service, with the other half coming from distributors like Amazon Channels and skinny bundles like DirecTV Now.

While HBO made a big splash with its HBO Now launch back in early 2015, the company has been extremely careful not to discount its monthly price below $15 (though distributors routinely offer it on promotion), continuing to pursue a market skimming strategy that inherently limits its upside. Yet, even at the relatively pricey $15 per month, HBO Now more than doubled in size in 2017.

Meanwhile, Showtime passed the 25 million subscriber mark for the first time in 2017, notching its best revenue growth in history. CBS said the nearly 5 million online subscribers it now has from All Access and Showtime are equally split between the two. That would mean approximately 10% of Showtime’s subscribers now come from direct-to-consumer, skinny bundles or online distributors like Amazon Channels and Hulu.

HBO’s and Showtime’s revitalization underscores how OTT’s ability to improve consumer choice can change business fundamentals. In the pre-OTT era, HBO and Showtime were entirely dependent on striking carriage and bundling deals with pay-TV operators. While both networks have created driven strong promotions, they were high-priced options for increasingly value-oriented consumers.

The heart of the issue was that for the most part pay-TV operators would not give their subscribers the option to subscribe to HBO or Showtime unless they first subscribed to an expensive tier of ad-supported TV networks. This “buy-through” meant the decision to add HBO and Showtime would only happen once a subscriber was already spending $50 or more per month. Talk about a hard place for HBO and Showtime to be positioned when Netflix is available for $10 per month with no contract.

Fast-forward to today’s OTT era and not only are HBO and Showtime available online as standalone services, but they can also be accessed on top of inexpensive skinny bundles. And perhaps more importantly, they can be accessed with a couple of clicks by tens of millions of Amazon Prime subscribers in the Channels program, with billing straight to the credit card on file.

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We’re Living in the Golden Age of TV Hype

Back in March, HBO made fans watch ice melt for 69 minutes on Facebook Live to find out when Season 7 of Game of Thrones would premiere. A few weeks later, TBS trolled the premium cable channel by “freezing” the title character of one of its own series, slapstick comedy Angie Tribeca, in a life-size block of ice and livestreaming the event.

After enduring her co-stars’ hazardous (and lame) attempts to free her, which involved everything from blowtorches to firearms, actress Rashida Jones emerged to hype the show’s third season debut. She had nary a bullet wound, no hypothermia and pretty decent hair. Imagine that.

These stunts are just two recent examples of the lengths to which television networks will go to grab viewers’ attention, creating original short stories, parody videos and pieces of quirky content and distributing them across linear and digital channels to pique interest and drive tune-in.

It’s not just the golden age of TV we’re living in; it’s the golden age of TV promotion.

In fact, there’s probably more pressure on marketing than ever before, given splintered audiences and fierce competition. Networks and their promo shops, often drawing in advertiser partners, are going far beyond the traditional 30-second spot to create inventive, compelling, Easter egg-filled content that’s meant to share with friends and spark conversations.

“It’s a seismic change because we’re moving away from a time-honored format. That one hero spot is a much lower priority these days,” said Brad Roth, principal at Stun, which created the Angie Tribeca gag. “Campaigns need a range of content to run across various platforms.”

That’s why AMC launched faux ads for Los Pollos Hermanos, a fictional fast-food chain in Better Call Saul run by series arch-villain Gus Fring. The cable net also opened pop-up restaurants in several markets and worked with Acura on animated “training videos,” webisodes and interactive games tied to the prestige Breaking Bad prequel.

Meanwhile, Netflix teased its new superhero mash-up, The Defenders, with “surveillance footage” of four Marvel characters stuck in an elevator, while E! made mock offers of marriage for money to Bachelor contestants via social media videos to promote its new scripted hit, The Arrangement.

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Sky-Discovery carriage dispute a sign of things to come

The eleventh-hour settlement of the high-profile carriage dispute between Sky and Discovery is not likely to be the end of the discussion as to what those channels are really worth.

The deal means that Sky subscribers will continue to enjoy Discovery’s bouquet of 12 thematic genre channels, yet it must be noted that according to Futuresource Consulting analysis, comparing data for the last seven months of 2016 with the same period for 2014 shows that Discovery’s ratings (excluding Eurosport) have declined, while Sky’s share of eyeballs has remained the same. That backs up Sky’s original beef with the programmer.

“The disagreement was simple – Sky said Discovery’s viewing on its platforms had fallen and it did not want to pay what was being asked to renew their long-term carriage agreement,” said Futuresource analyst John Bird. “Discovery said it was being paid less than it was 10 years ago, despite Sky subscription price rises and a claimed 20% increase in viewing of its channels on Sky platforms (the acquisition of Sky Germany and Italy in this period may well be a factor behind this assertion).”

But Bird added that the falling viewership was “almost certainly” due in a large part to the cannibalisation impact of on-demand viewing on traditional linear multichannel TV.

According to the latest survey in the Futuresource international consumer research program Living With Digital, 12% of UK respondents now say that SVOD services are their most frequently viewed video platform, up from 6% a year earlier, compared with 15% for pay-TV channels.

In terms of real numbers, there are now approaching 6 million Netflix and 4 million Amazon Prime Video users in the UK (many taking both).

“As total TV viewing hours are relatively flat, it is inevitable that viewing of these services (as well as other alternative platforms like YouTube) will be taking share from traditional linear TV channels,” Bird explained.

To ward off the impact from defecting viewers, Sky has made more content available on-demand and digitally, with an array of options that include Sky Q, Sky+, Boxed Sets, Sky Store, Sky Go and Sky Now, the latter of which will carry Sky’s full content portfolio online from 2018. Also, Futuresource said that viewing of Sky Atlantic (which carries HBO content) is 75% on-demand.

In the future, Discovery may need to negotiate carriage compensation that takes into account digital statistics within Sky’s various ancillary platforms.

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Tim Cook: TV Change is Coming

Apple doesn’t have a solid TV strategy yet. But CEO Tim Cook thinks he can see the writing on the wall—the much loathed cable-TV bundle is on its deathbed.

Speaking on the earnings call after Apple posted a record first quarter, Cook said (emphasis added):
The way that we participate in the changes that are going on in the media industry that I fully expect to accelerate from the cable bundle beginning to break down is, one, we started the new Apple TV a year ago, and we’re pleased with how that platform has come along. We have more things planned for it but it’s come a long way in a year, and it gives us a clear platform to build off of.

Apple is on the fourth generation of the Apple TV. It now has an app that makes recommendations across streaming-video services and has a universal search function; it is currently limited by only allowing you to find a program across a limited selection of third-party services, but it has the potential to become the online equivalent to a TV Guide for all programming. (The company is also developing a library of original content tied to its Apple Music subscription.)

Media experts have been forecasting the death of the traditional TV bundles for years (BTIG Research media analyst Rich Greenfield tweets with the hashtag “#goodluckbundle”)—and it hasn’t happened yet. But there has definitely been some movement, as Cook pointed out.

Popular cable networks like ESPN are losing subscribers because of unbundling, cord-cutting is becoming more common, TV brands like HBO offer their own subscriptions on platforms like Apple TV, and streaming services like Netflix are hitting member records.

So far, bundling hasn’t as yet disappeared in the US. It’s just taken on new forms.

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HBO outguns Netflix in SVOD customer satisfaction

It may have just released robust results for 2016, cementing its leadership in subscription video-on-demand (SVOD) but Netflix is not at the vanguard when it comes to customer satisfaction says Strategy Analytics.

In its Digital Media Strategy Analytics Strategies service report, the analyst ranks HBO Now as highest for customer satisfaction in 11 of the 14 categories of SVOD services examined. The report measured customer satisfaction is select categories across three key areas: the number and availability of TV shows/films, how easy it is to find them, and the overall value of the service.

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