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 By going over-the-top - media lingo for being able to watch TV with
only a broadband connection - HBO has paved the way for a rocky
period of negotiations with cable and satellite companies - with
issues of pricing and distribution likely to loom large.
Indeed, CBS Corp upped the ante when it announced on Thursday a
digital product that provides content like "The Good Wife" without a
cable subscription for $5.99 per month.
"Truth be told, there is no way to put a positive spin on this for
the distributors," said Craig Moffett, senior research analyst at
MoffettNathanson.
Details about HBO's standalone product, slated to launch next year,
were scant. HBO Chief Executive Richard Plepler did not discuss
price or potential partners on Wednesday when he revealed the news
before Time Warner investors and analysts.
Still, the proposed online streaming service adds to a lengthening
list of ways for consumers to circumvent pricey cable subscriptions,
from Hulu to Netflix Inc <NFLX.O> and even a possible ESPN Internet
channel. ESPN is owned by Walt Disney Co <DIS.N>.
HBO is likely to face pressure from distributors to set the price
for its new offering at a level that will not cannibalize existing
subscriptions within the cable bundle. Barclays analysts speculated
in a research report that the service was likely to cost $18 a
month, which would be higher than the roughly $15 a month that cable
systems typically charge for HBO.
Some cable executives, speaking on condition of anonymity, said they
expect price and other issues to be points of tension in looming
talks over how the service will work.
In setting the price, HBO will face a balancing act between growing
its subscriptions and undercutting the cable companies, analysts
said.
Both Time Warner and its distributors are expected to bring carrots
and sticks to the negotiating table. HBO is targeting the 10 million
broadband only households in the United States who do not have cable
subscriptions.
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Part of the reason Time Warner is launching a standalone product is
to gain more leverage against the cable companies that it feels do
not do enough to promote HBO as a premium channel. Some cable
systems have as few as 14 percent of their subscribers taking HBO,
while others have as much as 44 percent, according to Plepler.
"They want to have the threat," said Thomas Lieu, portfolio manager
with Westwood Group, which has a stake in Time Warner.
Cable companies unhappy at being undercut by the freestanding HBO Go
could retaliate by cutting their promotion budgets for the premium
channel, one cable industry source said.
Other "sticks" could include slowing down delivery of the
freestanding HBO Go, reviving battles that cable operators such as
Comcast Corp fought earlier this year with Netflix, which ended with
the streaming service agreeing to pay the cable operator for faster
transmission speeds.
Plepler invoked "The Sopranos" mob character Paulie Walnuts when he
said that when these deals come up, "we will get our taste."
But as HBO thrashes out new commercial arrangements with
distributors, it will hardly have a monopoly on strong-arm tactics.
(Additional reporting by Lisa Richwine and Liana Baker; Editing by
Christian Plumb and Eric Effron)
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