AT&T's Troubling Plan to Change HBO
 
The telecom giant, which just acquired Time Warner, is seeking to
drastically change the premium-cable channel in order to compete with the
likes of Netflix.
David Sims
Jul 9, 2018
 
HBO CEO Richard Plepler talks about HBO Now for Apple TV during an Apple
event in San Francisco.
AP / Eric Risberg
 
This past February, HBO added the most U.S. subscribers in its history,
boosting its user base by 11 percent (the company has some 142 million
global subscribers). The steady growth of the premium-cable and streaming
service to $6.3 billion in revenue last year helped power its parent
company, Time Warner, to $31.3 billion in revenue-a 7-percent overall jump
despite dips in other divisions. Since the telecom giant AT&T began its
bid in 2016 to acquire Time Warner, it came to be widely understood that
HBO was one of the most prized parts of the deal, which became official in
June after a lengthy legal battle.
 
The channel's stature is what makes it baffling to learn of reports that
the new Warner Media chief executive John Stankey recently lectured HBO
employees on the hard times ahead. In the eyes of Stankey, an AT&T
veteran, HBO is apparently too small, too nimble, and too
boutique-ill-fitted for a media world that's all about size. During a
closed-door June 19 conversation with some 150 HBO staff, "Stankey
never uttered the word `Netflix,' but he did suggest that HBO would have to
become more like a streaming giant to thrive in the new media
landscape," reported The New York Times. That means aggressive
expansion, with a flood of new shows, to give HBO the kind of massive
library Netflix is currently building.
 
Netflix is a production company of peerless scale when it comes to TV. It's
projected to spend $12 to $13 billion on original programming in 2018;
meanwhile, HBO spent $2.5 billion on its shows in 2017. Netflix's strategy
is to overwhelm, pumping out fresh content at its subscribers and relying
less and less on licensed material it doesn't own. HBO has always had more
of a "prestige" bent, taking a very long time to develop its
shows and launching them with extreme fanfare, with an eye toward awards.
But Stankey seems to view that deliberate pace as a result of laziness, and
his desire to upend the network's careful approach to putting out new shows
(it only makes a handful per season) could mean the end of HBO as we know
it.
 
"It's going to be a tough year," Stankey said the June meeting,
according to a recording the Times obtained. "It's going to be a lot
of work to alter and change direction a little bit." Expanding HBO's
viewer base would require more programming, released at a faster pace, well
beyond the channel's rotating Sunday night lineup that makes up the core of
its original shows. "I want more hours of engagement ... You get more
data and information about a customer that then allows you to do things
like monetize through alternate models of advertising as well as
subscriptions, which I think is very important to play in tomorrow's
world," Stankey said.
 
HBO's current profit model is simple but effective. People pay a fee
(something like $15 a month) to subscribe; HBO uses that money to license
movies and produce TV for subscribers to watch. Because of the company's
longtime reputation for high-quality, Emmy-winning shows like Game of
Thrones and Big Little Lies, plenty of people subscribe, and HBO makes a
lot of money.
 
Netflix's business approach, again, is about scale and is underwritten by
investors. The company has focused on getting more worldwide users and
hiking its subscription fee to increase revenues. But producing more
original shows means Netflix burns through more money-a March 2017 report
found Netflix had a negative free cash flow of $2.1 billion. A few months
later, the company said in a letter to shareholders that it would remain in
the negative for years, but that the investment would crucially help the
company spread across the globe.
 
As he assumes control at Warner Media, Stankey is correct in identifying
HBO as the company's only obvious Netflix rival. But the kind of staggering
growth he wants will necessarily disrupt the calculated approach to
development that has distinguished HBO for two decades. Due in part to the
sheer quantity of its output, Netflix has managed to greenlight some
critical hits. But it has not yet won an Emmy for best drama, comedy, or
miniseries, while HBO still rules the roost at awards season. The
premium-cable network has put out shows like The Sopranos, The Wire, Sex
and the City, Deadwood, Six Feet Under, and Veep that helped define the
so-called "Golden Age of Television"-which is now receding in the
wake of Netflix's content deluge. In response, Stankey wants HBO to become
another titan in this era of streaming behemoths.
 
In this age, as Stankey made clear, "hours of engagement" are
what matter most. Executives have long factored viewing data extracted from
subscribers into their programming decisions, but online services can mine
our viewing preferences much more minutely. The more data, the easier it is
to understand what people want-at least that's been Netflix's guiding
principle as it makes hits like House of Cards and Stranger Things, which
are calibrated to play on audience nostalgia. But the idea that numbers
alone will drive good or popular art is ludicrous; Netflix has made plenty
of shows that haven't hit the mark with audiences, like any other network.
 
Stankey isn't the only executive worried about the rise of Netflix. Disney
is preparing to launch its own streaming service, and its proposed
acquisition of Fox would help fill out its library of properties. The
future of media will certainly revolve around subscription-based streaming
services. But Netflix is turning into a kind of broadcast-TV network: a big
umbrella for lots of different kinds of programming. Founded more than 45
years ago, HBO has long been a challenge to broadcast television, staking
its reputation on offering something different. As the slogan went, it's
not TV, it's HBO. Now, Stankey wants to make it TV.
 
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    Derek Thompson
 
 
Regards,
 
Roger

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