Netflix Took Down Blockbuster. HBO is Next.


Quartz recently published an article suggesting that HBO was now “seriously considering” offering an online only subscription. I think they were a little optimistic in their interpretation of what Time Warner CEO Jeff Bewkes actually said:

What we’ve basically been doing, we’re looking at the market. We’ve been looking at our ability to service customers and our distributors. And basically 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…
The broadband opportunity is getting quite a bit bigger, and the ability of the plant to deliver something robust is getting stronger; and so the question you’re asking is becoming more viable, more interesting. What we’re trying to do is basically make sure that we’ve done everything we can with our distributors to take advantage and have them take advantage of what customers they could have. And we’ve got to keep looking actively. We’re seriously considering what is the best way to deal with online distribution.

This sounds like all distribution models are on the table. And why not? Last year, Netflix surpassed HBO in total subscribers with 29.17 million. In response, HBO started offering “Internet Plus” a stop gap measure to discourage cord cutting. This package includes Internet, basic television and HBO (Go is still treated as a value-add). First step right? No, not really.

Why you still need to pay for cable TV to get HBO Go:

A couple of years ago Dominic Balasuriya put together a script to data mine tweets using the #takemymoneyHBO trend on Twitter. He found that people were willing to spend around $12 on average for an online only subscription. According toTechCruch HBO currently receives “around $7 or $8 per subscriber.” So the question is, are they leaving money on the table? The answer is, mostly no.

I love HBO, but they are a victim of the old model. Time Warner owns multiple cable channels including TNT, TBS, and CNN. All these cable channels rely on cable fees and advertising dollars. But you say, HBO doesn’t have advertising. That’s true, but HBO is offered as a bundle with other channels. These channels help to subsidize each other. What might happen if HBO offered a real, online only alternative? People might cut cable TV completely — even faster than they are right now. Less customers mean cable providers will want to pay smaller fees. Less viewers means advertisers will want to spend less. HBO might (probably not) be able to survive on online only subscriptions, but Time Warner’s other channels wouldn’t.

All of this reminds me of what Netflix did to Blockbuster:

  • In 1997 Reed Hastings walks into a Blockbuster and gets slapped with a $40 late fee for being six weeks late on returning Apollo 13.
  • In 1998 he starts Netflix.
  • In 2000 Netflix proposed a sale to Blockbuster and was “nearly laughed out of the office.” That same year, Blockbuster had made 16% of its revenue, $800 million dollars, from late fees. If you’re making $800 million a year off late fees, would you invest in a company that let’s you keep movies for as long as you want for free? I would just to cover my ass, but hindsight…
  • In 2004 Blockbuster is at its peak. It has over 6 Billion in revenue, 9,000 stores and 60,000 employees. They decide to start an online subscription service. It’s too late, but they don’t even know it.
  • In 2007 Netflix announces their one billionth DVD delivery and the fact that they are switching to VOD.
  • By 2010 Netflix is valued at over a billion dollars. They’ve gone from the largest client of the USPS first class mail service to the most trafficked site at night in the US. Meanwhile, Blockbuster files chapter 11 bankruptcy with over a billion in debt.

It took Netflix twelve years to kill Blockbuster. Just six years to knock it down from its point of highest success.

Netflix already beats HBO at distribution because they own the digital space. While HBO attempts to keep customers from quitting cable TV and hems and haws about going really digital, Netflix continues to perfect its system. Even if HBO Go went direct tomorrow, they’d still lose. Their library is small and not as thoughtfully engineered as Netflix’s. Netflix analyzes user data to help them not only curate their library, but to also help them determine what original projects to invest in. This is ground-breaking stuff.

HBO makes awesome content. I watch everything they make, but unless they can figure out a way to become competitive digitally, maybe by developing a more sophisticated library and scaling up their content creation, I can’t imagine a future where True Detective doesn’t end up on Netflix. In 2012, Netflix launched their first original series, Lilyhammer. Can they do to HBO what they did to Blockbuster? Let’s see where HBO shakes out in 2024.

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