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Should HBO Be Worried about Netflix?

hbo netflixNetflix has been a media darling lately, and for good reason. Exceeding people’s expectations, Netflix added 2.3 million new subscribers in 2013 and had a net income of $48 million, compared to $8 million a year ago according to Variety. With the new season of the critically acclaimed House of Cards starting and a second season premier date announced for the popular Orange is the New Black, buzz about Netflix hasn’t slowed down yet in 2014. Behind the scenes, Netflix is embarking on an ambitious plan to expand internationally, having borrowed $400 million to help kick-start growth in the European market. So should media powerhouses like HBO feel threatened?

But HBO is the seasoned champion in the paid television subscriber game. HBO’s global subscriber count far outmatches Netflix’s, with 114 million compared to Netflix’s 36 million subscribers. HBO also has a more established presence in the industry, with more creative achievements such as Golden Globe Awards and Emmys. and more leverage when it comes to fielding ideas for new shows and scripts.

If anything, Netflix’s success could be a competitive impetus for HBO to avoid becoming complacent and continue to produce quality programming. Netflix can also show HBO which alternative delivery methods work and which ones may turn out to be a waste of resources. Take Netflix’s DVD subscription service for example, which is hemorrhaging subscribers (to the tune of about 5 million per year), in spite of being a big cash cow for Netflix for years, according to Gigaom. While DVD rentals may be profitable for the provider, customers prefer streaming programs online immediately as opposed to waiting for physical DVDs in the mail. Netflix’s success in online streaming confirmed that the real potential for premium television subscriptions is in content licensing, something that HBO has plenty of.

Netflix vs. HBO

netflix hbo chart

Other than Netflix’s plunging DVD subscription rates, the company has some other challenges to face that HBO doesn’t really have to worry about:

  • A high churn rate: Netflix no longer officially discloses their churn rate (the amount of customers who drop the service). However the Wall Street Journal estimates that as many as 50% of users drop the service.
  • A low net income: While Netflix grabbed headlines by generating revenues comparable to HBO’s, its operating income is in fact much lower because of the money Netflix needs to spend on technology development.
  • Net neutrality: This is a developing issue, but with recent court rulings against net neutrality, the potential is there for internet service providers to throttle Web service such as Netflix. The Comcast-Time Warner cable merger adds more bullying power to the broadband service providers to either slow down Netflix’s streaming services or charge them a premium to deliver their content online.

HBO (combined with its Cinemax division) has a viewing audience that compares to Showtime’s and surpasses that of Starz, according to Businessweek. This demonstrates that HBO has the stability to not only handle direct competitors but also alternative model competitors, such as Netflix (and Hulu, Amazon Prime, etc.). As you can see,  media buzz may give you the highlights, but it doesn’t always show which way the game is going. For now, HBO is still a solid contender in the premium television subscription market.

What do you think? Is Netflix a real competitive threat to HBO? Do you think think that Netflix’s explosive success will continue in the long run?

Image by Pando Daily
via the New York Times

   
 
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