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Cable Technology Feature Article

September 17, 2014

HBO Inches Closer to OTT Distribution in US Market

By Gary Kim, Contributing Editor

It has been reasonable to predict that one day, a content owner would break with precedent and offer content direct to consumers, over the top, and without the requirement to buy that same product as part of a linear, bundled video subscription.

Some have predicted HBO would be first to do so, as HBO already does so in the Nordic countries, and has sold its service as an over the top product since 2012.

That logically suggests HBO would be willing to do so elsewhere - where such a tack might make HBO’s owner Time Warner (News - Alert), more money than restricting over the top sales.

Time Warner has gradually warmed to the idea of doing so, even in big legacy markets such as the United States, judging by public statements over the past few years.

As recently as 2013, though, top HBO executives continued to insist there was no business model in the U.S. market.

But business viability is coming closer, Time Warner CEO Jeff Bewkes indicates.

“Up until now, it looked to us as though the best and main opportunity was to focus on improving the penetration, the offering, the servicing, the interface, the monetization of HBO through the existing affiliate system,” Bewkes said.

“So now the broadband opportunity (over the top delivery) is getting quite a bit bigger, and the ability of the plant to deliver something robust is getting stronger,” said Bewkes.

That doesn’t mean the tipping point has been reached. It hasn’t.

But the new language does suggest the advent of over the top HBO streaming is closer than it has been in the past.

“We’re seriously considering what is the best way to deal with online distribution,” said Bewkes.

HBO is a logical candidate to move first for several reasons. HBO historically has been marketed as a premium add-on to the basic linear video subscription.

In other words, customers had to first buy a basic cable subscription of some sort before they were eligible to buy HBO or other “premium channels.”

In part for that reason, premium channel buy rates always have been a fraction of basic plan purchases, although it can be argued that aggregate purchases of premium channel subscriptions amounts to about 88 percent of basic tier buy rates.

In 2013, about 23 percent of U.S. households purchased Showtime, while about 29 percent of households bought HBO.

Purchases of Cinemax penetration stood at nearly 14 percent, while Starz penetration was 22 percent.

So the challenge for HBO remains: how much incremental purchasing could it gain by offering an over the top product and how much might it lose in support and revenue from video distributors.

At least so far, the risk has been deemed too high. But thinking is evolving and the big issue is what happens once HBO really does make a change.

Edited by Stefania Viscusi

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