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 Otto Berkes, who was previously a Microsoft executive, resigned from
the CTO position in December, only a matter of months before HBO is
expected to start selling the new product, and two senior vice
presidents on the technology team, Mark Thomas and Drew Angeloff,
are also leaving, sources familiar with the situation said.
The original plan discussed by the network's top executives was to
spend hundreds of millions of dollars to develop a sophisticated
streaming platform that would make HBO, one of the best-known
premium channels in the United States, capable of challenging
streaming video services from Netflix NFLX.O and Amazon AMZN.O head
on. Berkes, who was also a cofounder of Xbox, was a key part of that
ambitious project - he had been hired by HBO in 2011 to set up a new
office in Seattle, initially hiring 80 engineers with plans to grow
much bigger.
The idea was that the technology would not only support HBO but
potentially other Time Warner offerings, such as Turner Broadcasting
and Warner Bros. The platform, which would power a product that
doesn’t require a cable subscription, would be used globally and was
supposed to be ready in 2016, said the sources, who worked on that
effort.
But these sources said that much of the plan was changed when Rupert
Murdoch's Twenty-First Century Fox Inc FOXA.O made a surprise
takeover bid for Time Warner last summer.
To justify to shareholders why they shouldn't consider the
Australian-born media tycoon's overtures, Time Warner said that its
own strategic plan would deliver more value to shareholders than
Murdoch could.
COST CUTTING
In October, at its first investor day in four years, Time Warner
outlined a series of measures aimed at bolstering revenue growth and
cutting costs. Among those was an announcement by HBO’s CEO Richard
Plepler that the standalone HBO was going to launch in 2015, news
that quickly became the main headline from the event.
"Time Warner needed to show investors that they had a plan that the
Murdoch bid was not factoring in," said Michael Nathanson, a media
analyst at MoffettNathanson research.
At the time, HBO also decided to cancel the internal technology
investment, and to use a third party to provide the new HBO service,
a move in sync with a cost efficiency plan driven by Time Warner's
Chief Financial Officer Howard Averill.
The more ambitious platform was going to eat up too many dollars and
be too slow to come to market, sources familiar with Time Warner’s
thinking said.
The sources said the decision to speed up the standalone product was
not related to the battle with Murdoch. They said this year was
viewed as simply the right time for the initiative given that rival
media companies were starting to debut online offerings outside of a
traditional cable subscription. Dish Network is launching its own
$20 per month Internet service later this month and CBS CBS.N has
said that its Showtime network, the biggest direct competitor to
HBO, will sell its own separate offering later this year.
Shortly after the October announcement, HBO told its engineering
team about the decision to cancel plans to develop its own
technology platform. Instead of being developed internally,
technology would be handled by MLB Advanced Media, a subsidiary of
Major League Baseball best known for powering the technology that
streams live baseball games. Going with this vendor would save
millions, one of the sources close to Time Warner said.
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A person who had worked on the earlier HBO strategy said that
pulling back from building its own platform may come back to haunt
the network. “HBO and Time Warner lost the appetite for the
investment required to go big here,” the person said. “Old media
lost its nerve.”
The people who worked on the earlier effort say there are drawbacks
to having a third-party handle distribution of the product,
including having less control over how subscribers experience it.
They say HBO could be missing out on the long-term potential of
owning all of the software behind the standalone service.
An HBO spokesman, in a statement, said “any business strategy
undergoes many iterations,” and that it was confident in its
decision. "We believe we landed in exactly the right place with MLB
Advanced Media as our partner, and we will deliver a great product
later this year that fully lives up to the reputation of the HBO
brand," he said.
DEPARTURES
Among the casualties of the decision was Berkes. He left amid
tensions with HBO management over his role following the change in
strategy, the people who worked on the effort said. Thomas and
Angeloff are leaving for similar reasons, these people said.
The 80 or so employees in Seattle still have jobs but HBO is without
a CTO and has no immediate plans to hire a new one.
HBO declined to comment on the departures.
As for the big debut, the launch plans are still vague. Company
insiders had anticipated an April start date to leverage off the
fifth season of the top HBO series Game of Thrones. But a source
close to the matter said HBO has other big shows beginning in the
summer, such as a new series of True Detective, that any launch
could leverage off.
The pricing of the new product and how it will be sold could not be
learned. The company is exploring a number of options, including
selling the standalone through pay-TV providers like Comcast Corp
CMCSA.O, and through the likes of Apple AAPL.O and Amazon, one
source close to the company said.
(Reporting by Liana B. Baker; Editing by Martin Howell)
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