Just weeks after closing its acquisition of Time Warner, AT&T has begun the process of revamping HBO’s traditional success formula, with Netflix envy apparently the main catalyst. According to a new NY Times article detailing a town hall meeting that Warner Media CEO John Stankey had with HBO employees, the new strategy boils down to wanting HBO to produce vastly more content with a goal of driving up engagement time and growth.
That sounds a lot like the formula that Netflix has employed for years, spending billions of dollars per year on scores of original programs in a global land grab for subscribers, while de-emphasizing profit maximization. Of course Wall Street has fallen in love with Netflix’s approach. Conversely, HBO has pursued a more limited “boutique” content strategy, with a few key marquee programs, while maximizing profitability.
At the end of Q1 ’18, Netflix had 57 million domestic subscribers and 68 million international subscribers, while at the end of 2017, HBO had 54 million domestic subscribers (including HBO Now) and 88 million international subscribers.
AT&T clearly has higher ambitions for HBO in the streaming era. The article (which is based on a recording of the town hall) quotes Stankey as saying, “We need hours a day. It’s not hours a week and it’s not hours a month. We need hours a day. You are competing with devices that sit in people’s hands that capture their attention every 15 minutes.” To support this, Stankey said, “I do believe there needs to be stepped-up investment,” though he didn’t say by how much.
(Stankey also made an incongruous point about how more engagement leads to more customer and data and information which opens up advertising model as well, leading to the question of whether ads could one day show up on HBO.)
At a higher level, though, Stankey makes a fair point - one of the ways that Netflix’s massive investment in content has altered the TV industry’s dynamic is that subscribers have become conditioned to knowing there will always be a new program to watch/binge. Netflix does a great job of rotating new content into the featured section of its apps and also recommending new programs based on past viewing behavior. Because its content library is now so deep, Netflix can drive up its engagement time, to the detriment of competitors. And because it’s global reach is so significant and resources so vast, virtually every A-lister is interested in working with Netflix, thereby increasing content quality.
By contrast, HBO’s emphasis on tentpole programs that are only intermittently released (is the next season of “Game of Thrones” EVER going to show up?), means there’s less reason to retain your subscription or even subscribe in the first place. In the past, when HBO subscriptions ran through a pay-TV operator, the friction of calling to drop HBO created inertia. But now with HBO’s growth coming through its own HBO Now service and through skinny bundles where there’s virtually no friction to dropping a service, retention is a much, much bigger issue.
The looming question is whether HBO can change its spots: can it evolve from a boutique operation to a Netflix model based on volume, while retaining its brand value and programming appeal? AT&T clearly believes it can and must. HBO’s CEO Richard Plepler has doubted it in the past saying “More is not better, only better is better.” But now, acceding to the new corporate dictum, Plepler has added a word salad rejoinder, “More isn’t better, only better is better - but we need a lot more to be even better.”
Can AT&T and HBO pull this transition off, or will the initiative become another New Coke fiasco? It’s way too early to tell. But what’s clear is that Netflix is continuing to re-write the rules of the TV industry. AT&T is responding to this, with billions of dollars riding on HBO’s ability to catch up.