Next year HBO is cutting the cord and selling its popular streaming video service HBO Go as a stand-alone product, as more Americans choose to watch the Web, not the TV. Viewers longing to see "Game of Thrones", "True Detective" and "Veep" will no longer have to pay big bucks for cable and satellite contracts. So, is this the end of pay-TV as we know it?
"HBO and ESPN are the two main reasons why people have cable and satellite TV," says Forrester analyst James McQuivey. "The whole industry has eyed them for years nervous that one day they would decide to do exactly what (HBO) said they'll do in 2015. We don't know until we see pricing and packaging how rapidly this will force a change in the way pay TV operators work, but it will definitely force a change."
Millions already have cancelled pay-TV subscriptions — up to 10 million U.S. households are currently broadband-only. And about 45 percent of Americans stream television shows at least once a month, according to research firm eMarketer. That number is expected to increase to 53 percent or 175 million people by 2018, it says.
Video streamers aren't falling behind on entertainment — so-called "cord-cutters" watched about 100 hours of video per month during the first half of this year, estimates the Internet research firm Sandvine. The trend accelerated as Netflix Inc.'s Internet video service expanded into original programming and bought the rights to show popular cable network shows such as "Breaking Bad" and "American Horror Story." Netflix's 36 million U.S. subscribers now watch about 100 minutes of Internet video each day, calculates BTIG Research analyst Rich Greenfield, based on Netflix disclosures about its customers' overall viewership patterns. Netflix-watching accounts for about one-third of U.S. Internet traffic in the evening, according to Sandvine.
Amazon.com Inc., Yahoo Inc. and Google's YouTube also offer Internet-only series as alternatives to pay TV.
"Internet TV is going to be everything in a couple years," Netflix CEO Reed Hastings told analysts during a Wednesday review of his company's third-quarter earnings.
Parris Lilly, 40, a network engineer for a software company in Temecula, California, currently pays $180 a month for Verizon's FiOS bundle of Internet access, phone and cable TV service. But that could change when the new HBO option debuts. Lilly estimates that if he goes streaming-only he could slash his monthly bill by $100.
"I've been wanting to cut the cord for a few years now but with a wife and three small children, I've been hesitant due to a lack of content that the whole house could enjoy," he said. "With the rise of Netflix, Hulu and Amazon I've been very close to pulling the trigger, and now with HBO offering a cable-free service the time seems right to do it."
Jasmine Chan, 26, a marketing manager in Washington, D.C., said she and her boyfriend already use streaming services like Hulu Plus and Amazon Prime. "With this announcement, we'll probably be canceling our cable TV service and stick with just Internet," Chan said.
HBO has about 30.4 million subscribers according to research firm SNL Kagan. HBO CEO Richard Plepler said Wednesday that the network's move is aimed at targeting the 80 million homes in the U.S. that do not have HBO but may want access to its content — and especially those broadband-only homes.
"That is a large and growing opportunity that should no longer be left untapped," Plepler said at parent Time Warner Inc.'s investor meeting in New York. "It is time to remove all barriers to those who want HBO."
The separate access also could encourage people who currently tap into HBO Go with their parents' cable subscription to buy their own. And it could convert some pirates to paying subscribers — Time Warner CEO Jeff Bewkes admitted on an earnings call last year that "Game of Thrones" is the most pirated show in the world, which he said was "better than an Emmy" for driving interest in the network.
Will this lead to a wave of pay-TV cancellations? Cable and satellite providers have long been against the unbundling of TV channel packages because they wouldn't be able to charge as much for an a la carte menu of stations. Pepler said HBO plans to work with current partners and "explore models with new partners," but did not give specifics. No pricing details were given, but Forrester's McQuivey expects stand-alone HBO Go could cost about $15 a month. That's more than the lowest payment option for Netflix, which starts at $9, but high enough to discourage many cable TV subscribers from cancelling their service. HBO is believed to get at least a $15 cut from the pay-TV packages that its service is bundled into.
Since "The Sopranos," HBO has been a model for premium cable networks looking to woo viewers. Netflix's Hastings has never tried to conceal that he has been trying to build an Internet version of HBO as he strives to reach his long-term goal of nearly doubling subscribers to 60 million in the U.S. The company has spent hundreds of millions of dollars to produce critically acclaimed series such as "House of Cards" and "Orange Is The New Black." In the past few weeks, Netflix made another HBO-like move by buying the rights to four exclusive movies starring Adam Sandler and a sequel to "Crouching Tiger, Hidden Dragon."
In a sign of the intensifying rivalry between the two services, HBO has steadfastly refused to license streaming rights to its award-winning series to Netflix. Instead, HBO struck a deal with Amazon's streaming service. Netflix's lower prices in the U.S. may pressure HBO into lowering its profit margins if it wants to lure subscribers away or encourage customers to buy both.
Breaking away from the cable and satellite providers may also force HBO to incur additional expenses to build up its own customer service and marketing departments. Those tasks have largely been handled by the pay-TV providers that include HBO in their packages.
So is a stand-alone alternative for sports fans on the horizon?
That's not likely anytime soon. ESPN owns rights to the NBA, NFL, Major League Baseball, college football playoffs and four of the five power conferences through at least 2021. Only the Big Ten contract ends soon among the network's biggest sports properties. Its business model is tied into long-term contracts with those sports leagues that have no reason, right now at least, to cut ties with networks and pay-TV providers.
Sports games are among the few programs that most viewers don't DVR (and fast-forward through commercials). That live-watching has translated into big advertising sales for networks and huge broadcasting rights fees for owners of NFL and NBA franchises and other professional sports teams. While the model for how fans watch games could evolve, most leagues are locked in to traditional contracts through the next decade.
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Liedtke reported from San Francisco. Sports Writer Rachel Cohen contributed from New York.
