HBO Ain’t Broke – Is New Owner AT&T Trying to Fix It?

Network has to balance new boss John Stankey’s desire for scale without hurting well-established prestige brand

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Is it enough for HBO to be “not TV” anymore under new owner AT&T? WarnerMedia CEO John Stankey’s recent comment that the pay cable network “must get bigger and broader” to compete with new streaming giants like Netflix could undermine what has been a very successful business model, industry observers say.

“It will be very hard for AT&T to simultaneously increase HBO’s production slate while at the same time boosting their profitability,” MoffettNathanson analyst Craig Moffett told TheWrap.

HBO has been the envy of the TV industry for the better part of two decades, likening itself to a bespoke shop vs Netflix’s “throw-everything-and-anything-at-the-wall” strategy. This has allowed HBO to lure A-list talent that helps them grab critical acclaim and Emmy trophies, while maintaining strong profits.

Over the last three years, HBO has spent more than $2 billion annually on content, which has yielded nearly $6 billion in profit.

During an employee town hall meeting shortly after AT&T’s acquisition of Time Warner closed last month, according to the New York Times, Stankey called on HBO to substantially increase its subscribers and the time its viewers spent watching — and hinted at new investment to ramp up content.

“Increasing their programming budget and growing international distribution are probably two of the key areas that could help grow their business,” said said Deana Myers, research director at Kagan, S&P Global Market Intelligence.

But that content push could also come with a financial down side, Myers noted: “This would probably cut into their margins.”

HBO and WarnerMedia declined to comment for this story.

The new push to compete with Netflix reflects the streaming giant’s status as a Wall Street darling whose growth has exploded over the past few years to 118 million subscribers globally.

“At a time when the traditional video industry is in decline, it is easy to look at the subscriber growth from Netflix and fear them,” continued Myers. “HBO needs to keep evolving and embracing new technologies which is something they have been good at in the past.”

While HBO’s model has been about cautious spending and generating a profit, Netflix has been about spending — ramping up its investment in programming to roughly $8 billion this year alone.

Still, Netflix’s obsession with growth hasn’t delivered too much in the way of profits so far. The company has funded its global expansion through incurring more and more debt, with a negative free cash flow of $287 million during its most recent quarter.

“We continue to forecast free cash flow of -$3 to -$4 billion in 2018, and to be free cash flow negative for several more years as our original content spend rapidly grows,” Netflix CEO Reed Hastings said in the company’s letter to shareholders in April. “We have about $2.6 billion in cash and we will continue to raise debt as needed to fund our increase in original content.”

Stankey has intimated that AT&T is ready to invest heavier in HBO than Time Warner did, so an expanded operation could come organically.

In years past, HBO was able to spend more on dramas than just about everyone else in traditional TV, but deep-pocketed tech giants are shifting expectations. Apple, Hulu and Amazon are all spending ambitiously to compete with HBO for big-time creative talent including Jennifer Aniston, Jordan Peele and Oprah Winfrey.

Apple even cut deals with some of the content creators currently working with HBO, including Reese Witherspoon and Sesame Workshop.

“The key will be to convince those people that sort of atmosphere still exists at HBO and that their talents will be appreciated,” said Alan Wolk, co-founder and lead analyst at media consulting firm TV[R]EV. “Because if that disappears, so does the real talent and the high quality programming. Money can only take you so far.”

HBO will also have to balance the desire for scale while maintaing its well-established prestige brand. “There’s a certain snob factor to saying the show is on HBO, both within entertainment community and with viewers,” said Wolk. “If you start going more mass market, then you lose that.”

For many, AT&T’s new plans for HBO are the natural result of a merger of two companies from different parts of the industry (distribution vs. content). HBO CEO Richard Plepler ran the network with very little corporate interference from Time Warner. Stankey’s town hall showed that AT&T will not be hand-off owners.

“There are bound to be some difficulties,” said Myers. “When two companies with such different cultures merge, there are almost always bumps.”