This is a guest post by Lee Milstein, you can find his bio below.
Thank you very much for taking the time to explain your stance on why I won’t soon be able to subscribe to HBO GO without first becoming a cable customer. To paraphrase your argument, you indicate 3 primary motivations for keeping your service as an add-on and not making a direct consumer offering. Those motivations are:
- You don’t have a direct customer business today and would have to staff up, primarily for billing and support to be able to make an offering;
- You don’t believe you’d be better off (financially) trying to go after individuals directly; and
- You make too much in guaranteed payments from your existing customer base (the cable MSOs) to risk pissing them off.
You’re stance, while rational and understandable is also wrong. Taking each point in turn:
You do have a direct customer relationship today.
You already maintain an active user database on your website, complete with authenticated email registration, and you offer technical support to your users on the same site. So, the issue is not that you LACK consumer touch points, it is that you believe them to be insufficient. I think you’re better off than you realize.
Apple has proven that, with a good enough product, you don’t need free customer support. AppleCare subscriptions or one-time incident fees are required for support for streaming services from Apple, and I’d be willing to bear the same lack of support for you. In fact, NOT offering support may help your cause (more on that later).
Further, online payment is an opportunity to partner with players such as Google, Square, Amazon, PayPal and others in what is amounting to one of the most brutal fights in our digital world. For the right deal, any one of them would likely be willing to help you get transactions working. Plus, you have DRM covered as part of the streaming protocol and with very little effort, you can do what Spotify does, allowing only 1 stream to run at a time on the same authenticated account. You already have most of what you need.
The Direct-to-Consumer Opportunity is Big, and not Mutually Exclusive with the MSO offering.
In your letter to MG and in other public statements/posts, you’ve pointed to the 100M cable subscribers (70% of which don’t subscribe to HBO today) compared to only 3M broadband customers as a reason to stick ONLY with your current model. BUT, the broadband subscribers represent a mere fraction of the potential market for HBO GO, and it is a group of users that has been marketed to efficiently for decades.
The real potential customer base includes tablets and smart phones, not just broadband subscribers. With over 25M tablet devices and roughly 400M iPhones/Android phones now on the market, after making some assumptions about geographies, the potential domestic user base is likely to be in the range of 200M subscribers, not 3! That’s twice as large as the cable base, and they’re worth more money to you.
Assuming you get 50% of a subscriber’s monthly payment from cable; that means your 28M subs net you approximately $196M per month in the US (again, let’s leave out your international revenues, which are both substantial and need not be impacted at the outset). If you need to make that whole number with digital subscribers (at the $20 monthly rate suggested in MG’s letter), you need only roughly 10M subscribers to make even money. You can have 1/3 the number of subs for the same receipts! Netflix, even after all of this summer’s hoopla is estimated to have around 20M subscribers and they don’t have the original programming that is the biggest draw for HBO. You can’t do half as well as Netflix? Plus, the cable MSOs have had decades to attract HBO subscribers for you and still haven’t surpassed the 30% mark. What’s going to change? Direct is a much bigger opportunity than you’re suggesting
The MSOs aren’t going anywhere.
But it would be fair to agree with the above and still not be willing to risk guaranteed revenue if indeed the MSO revenue would be put substantially at risk. It wouldn’t be.
There are at least 3 arguments worth highlighting here:
- Making an offering won’t take your MSO revenue to zero. The cable companies won’t drop you (you’re still worth too much money to them), so they’ll simply renegotiate, but again, not substantially. It is fair to assume that not only will a material percentage of people continue to subscribe through their MSO, but a naked offering from HBO can help highlight a cable offering as premium. The vast majority of Americans have access to local broadcast channels free over-the-air, yet choose to subscribe to cable. Making a similar argument for the benefit of HBO isn’t much of a stretch. Cable still offers the easiest, most reliable means of accessing ANY programming. Any IP-delivered video service is likely to stop at least once during playback to buffer, and require you to switch inputs if you want to watch the game. Cable doesn’t. Plus, there are other conveniences including direct-billing, discounts on bundled services, DVR functionality, AND robust customer service that will bolster the MSO offering. Cable shouldn’t be impacted materially.
- Broadband subscriptions benefit the cable operators. More and better streaming video offerings help drive broadband subscription and that is a good thing for the cable companies. Access, unlike cable is a high-margin business with little incremental cost for adding a new userPlus, any new broadband subscriber offers cable a chance to convince users to take or retain core bundled services. Cable knows you aren’t killing their business by offering something of value that requires broadband.
- Consumer interest won’t last forever. Finally, you can’t expect consumers to wait for you to deliver what they want. Cord-cutting isn’t the issue, but accessing programming via the device and at the time of a user’s choosing is. Taking a quote from Steve Jobs out of the Walter Isaacson biography, “If you don’t cannibalize yourself, someone else will.” With Amazon, Apple, Google, Netflix, Disney and many others offering direct-to-consumer access to movies and programming, people have to make trade-offs. I’d sooner pay for the series you’re making, but if you won’t let me, I’ll eventually give up. I’m not alone.
To Be Fair.
But, to be fair, I understand your unwillingness to do it TODAY. You’ve got enough money coming in and your building a large enough stockpile of great original programming to license out if you choose to do so. There’s very little urgency.
I don’t blame you for waiting, but you don’t have to. I’ll sign up today. You’ll make more money and grow your audience. I hope you’ll reconsider.
About Lee Milstein: Trained as a lawyer, but a tech guy at heart, Lee is on a quest to better media through the use of technology. Currently doing business development deals for AOL, Lee previously ran Business and Corporate Development at DivX and once took a class called “Mobile Robotics” that he never heard the end of from his friends. Read more on Lee’s blog.
The problem with your audience assumptions is that you mix up individuals with households There are roughly 105M or so households in the US, of which 90% or so pay for a multi-channel service of some sort. That leaves only 11M or so new customers that you COULD add my going direct.
I doubt that a household of 4 is going to drop cable and pick up HBO direct and have 4 separate accounts – $80 a month if not more. Yet your argument is predicated on just this type of thesis.
I buy all your points, BTW, and I think this will happen sooner if not later. Just wanted to point out the math differences between households and individuals in the US.
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