VideoNuze has learned that Netflix has struck a deal to acquire HBO from Time Warner and intends to dissolve HBO's linear cable channels, with its programs to be incorporated into Netflix's streaming library, available solely on the iPad. Terms of the deal are not yet known, but it is expected to be for stock only, with Time Warner becoming the biggest shareholder in Netflix. VideoNuze interviewed all the key participants late last night.
The deal is a stunning move for all parties, and reflects the fast-changing nature of the online video and pay-TV industries. First and foremost, the deal appears to be a stark reversal of opinion by Time Warner CEO Jeff Bewkes who has consistently diminished Netflix's prospects. Bewkes commented, "My informal recent remarks, comparing Netflix's rise to the Albanian army's chances of taking over the world got me thinking afterwards, geez, is it possible that I've underestimated Albania's might, and therefore Netflix's potential? So I decided to study up on my history, and it turns out that back in 1378, Albania actually conquered almost three-quarters of the world's population. That was an eye-opener and really made me second-guess myself."
Meanwhile, it turns out that Bewkes' confidential M&A advisor has been none other than Gerald Levin, Time Warner's former CEO, who struck the infamous merger deal with AOL at the top of the Internet bubble. Bewkes went on, "Jerry's been whispering in my ear for years that AOL could have made us all billionaires, but we did the deal far too late into the bubble's cycle. So he's told me over the years - when you see the first signs that a bubble is forming again, that's when you should do another big stock-based transaction, even if it means selling the company's crown jewels. Since most of my compensation is tied to our stock's performance, grabbing a big chunk of stock in a highflier like Netflix could make the $26 million I earned in 2010 easily look like chump-change when this deal plays out long-term."
From Netflix's standpoint, gaining access to HBO's massive library of popular original shows is an enormous coup, and is sure to accelerate its subscriber growth. The dissolution of HBO's popular cable channels however seems to fly in the face of conventional wisdom, given the billions of dollars the channels generate in annual fees.
Anticipating reaction, Reed Hastings, Netflix's CEO commented, "We know we're taking some risk by eliminating the HBO channels, but it's all part of our master plan for world domination. One of the things Steve Jobs keeps advising me is 'THINK BOLDLY' rather than in the incremental, data-driven way we've managed the company so successfully to date. So we're swinging for the fences here. By pulling HBO out of the cable ecosystem, we think we can once and for all deal the industry a death blow. We've decided that we're just too impatient for the death-by-a-thousand-cuts cord-cutting process to unfold. And remember: Wall Street is so madly in love with us that even if our stock drops by a few points initially on the deal, all we'll need to do is announce another short-term streaming content deal with a studio and it'll bounce right back. At least that's what Steve says will happen, and like everyone else, I never question Steve."
In another twist, the HBO content will not be available in the overall Netflix streaming library, but rather in a new special section to be available only on iPads. Hastings continued, "This wasn't part of our original plan for HBO, but we've been closely monitoring the blowback Time Warner Cable has generated from cable networks over its iPad app and just couldn't let the opportunity pass. I mean, these cable network guys are such a bunch of Luddites for turning their backs on the iPad that we wanted to highlight how much we 'get it' and they don't."
Wrapping up, Hastings noted, "Steve's been egging me on to do something like this for a while because he's had it up to his eyeballs with trying to work with the cable community and is on a mission to destroy it (except the Disney-ABC networks of course). Like all egomaniacal CEOs, my goal is to attain super-human Jobsian status in the world. Steve says the best way to do that is to hitch Netflix's wagon firmly to the iPad and let its magical powers take over. So that's what we're doing."
Note, if you're shaking your head and saying "What the _____? then have a look at the calendar and notice today's April Fool's Day. It's the one day each year that I have license to take a more comedic view of the industry's events. Hopefully you're still laughing.
VideoNuze is the authoritative online source for original analysis and news aggregation focused on the burgeoning online video industry. Founded in 2007 by Will Richmond, a 20-year veteran of the broadband, cable TV, content and technology industries, VideoNuze is read by executive-level decision-makers who need to get beyond the standard headlines and achieve a deep understanding of online video’s disruptive impact.