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HBO's Digital Strategy? - Broadcasting & Cable

HBO's Digital Strategy?

While Showtime and Starz plunge into broadband, the leading premium channel takes it slow
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In the past year’s multiplatform party, HBO has been something of a wallflower. While broadcast and cable networks—including the network’s pay-cable competitors Showtime and Starz—are building broadband players and putting shows on iTunes, the leading premium cable channel has offered little more than a limited cellular deal, promotional podcasts and a forthcoming branded comedy site with corporate cousin AOL. For the network that famously boasted “It’s not TV—it’s HBO,” good old television appears to be the only platform that matters.

This is cause for frustration among those who want to watch The Sopranos online and scorn from those who think the network is afraid of a multiplatform future. But HBO says it is exploring plans to distribute its programming online—so long as those plans don’t jeopardize its subscription-based business model or its licensing agreements with cable operators, which account for 80% of HBO’s revenue.

“There’s not a business model presenting itself today that will replicate the existing subscription model we have,” says HBO COO Bill Nelson.

That model, he says, depends on preserving the integrity of HBO’s brand as a premium source for first-run movies, sports and original programming. “There’s not a disaggregated alternative available to our subscription model that comes anywhere near the financial results,” he adds.

With some 28 million subscribers, HBO is still a growing business. Indeed, subscription revenue is projected to be up year-to-year in 2006 from $2.88 billion to $3.03 billion, according to Morgan Stanley. And the “disaggregated” content that it does offer—in the form of DVDs of its series and documentaries, and selected titles on its video-on-demand (VOD) service—has not hurt that bottom line.

UPHOLDING A SUBSCRIPTION MODEL

HBO reports that it is in talks with Apple, Microsoft and others about selling shows at some point in the future, but the company hasn’t agreed on financial terms with any of them.

No wonder: With the latest 12-episode cycle of The Sopranos retailing at $100, one can imagine why selling episodes piecemeal on iTunes at the going rate of $1.99 a pop doesn’t seem so alluring.

The network upheld its business model when it partnered with Cingular last summer on HBO Mobile, a subscription-based cellphone service that offers mini-episodes of its Entourage series and full episodes of selected shows. (HBO declines to provide a subscriber count, but a representative puts the number “in the thousands,” noting that it is offered in only a fraction of the country.)

But even when announcing the service at the Television Critics Association tour in July, HBO Chairman/CEO Chris Albrecht struck a dismissive tone about multiplatform ventures, assuring the crowd that “you won’t be seeing HBO throwing new episodes up on iPod.” Whether the garbled reference to iTunes was calculated malapropism or genuine ignorance is unclear, but some have interpreted that attitude as fear of the unknown.

“They don’t know what technology will do to their businesses, so they stay away from it, and I think that’s a big mistake,” says Dan Rayburn, executive VP for online-industry Website Streaming Media.com. “It’s a matter of not understanding the market opportunity for new channels of digital distribution.”

Meanwhile, Showtime and Starz, which similarly rely on subscriptions and cable-operator licensing fees, have offered free streams and paid downloads of shows and movies online.

Showtime, which has half the subscribers of HBO, was the first pay-cable network to sell content on iTunes and Amazon. It has also streamed clips on its own site and on YouTube and paired with Yahoo! and several cable operators to offer free streaming previews via broadband.

To promote the second cycle of series Sleeper Cell, Showtime is offering the first cycle for free on its operators’ sites. And an interactive campaign with Dish Network, in which viewers can order the channel by clicking their remotes, earned the network two Emmys and thousands of upgrades since launching in 2003.

WORKING WITH OPERATORS

In January, Starz launched Vongo, a $9.99-a-month, Web-based movie service. The network has encouraged operators to offer it to their subscribers as an incentive to buy bundled broadband service, but none has signed on yet.

“We feel like we are ready to go and we’re running in place,” says Bob Greene, Starz Entertainment executive VP of advanced services. “I don’t think the cable industry specifically has a clear definition of what they think they should do—if anything—with content over the Internet.”

HBO is exploring a partnership with operators on a subscription-based broadband version of the channel. Whether the channel can succeed with operators where Starz has not remains to be seen, but Nelson is confident that “the HBO brand is at a certain level that certainly attracts consumer attention and drives consumer demand, and our cable partners understand that.”

But some industry observers question a strategy that puts the cart before the horse. “People watch shows, not channels,” says Steve Safran, president of digital consulting company Safran Media Group. “What makes HBO special? Just because you’re special under the old distribution method does not make you special anymore.”

Says Nelson, “We’re always looking to be on any platform we believe can extend our brand and bring our content to the consumer. We are being aggressive, and we will conduct business and make agreements when it makes overall financial sense for us.”

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