HBO Go's success proves content is still king

Within days of Time Warner-owned premium cable network HBO extending its HBO Go streaming service to iOS and Android devices, more than a million consumers have already downloaded the application from the App Store and Android Market, according to network co-president Eric Kessler. Boasting "every episode of every season of your favorite HBO shows, plus hit movies and much more," HBO Go currently features over 1,400 titles in all--the service is free to HBO subscribers across cable and satellite providers including Comcast, DirecTV, Dish Network, Cox Communications, AT&T (NYSE:T) U-verse TV and Verizon (NYSE:VZ) FiOS TV. "[One million] is a great milestone to hit so quickly, but what is even more exciting is that we are seeing continued enthusiasm and activity each day," Kessler said last week during an appearance at the Streaming Media East 2011 conference in New York City.

The success of HBO Go follows in the wake of reports that HBO's cable subscribership reached a five-year low in 2010--together with sister channel Cinemax, HBO lost about 1.6 million subscribers last year, while movie rental and streaming video juggernaut Netflix added close to 8 million. Many analysts contend that Netflix's rise and HBO's decline signal a growing consumer appetite for viewing movies and television programming over connected devices instead of conventional pay TV, and that may be true. But HBO Go (available across desktops, laptops and tablets as well as smartphones) offers something Netflix doesn't: HBO content. HBO first indicated plans to expand HBO Go to mobile devices in August 2010, and at that time, Kessler told Bloomberg the network planned to widen the scope of its digital efforts in lieu of signing a distribution deal with Netflix. "There is value in exclusivity," Kessler said, stating consumers "are willing to pay a premium for high quality, exclusive content."

HBO currently serves roughly 28.6 million U.S. subscribers--the 1 million subscribers accessing HBO Go via smartphone may represent just a small fraction of the overall viewing segment, but the surge in iPhone and Android app adoption is still impressive. As smartphones continue to improve, tablets become more widespread and operator networks grow more robust, more and more consumers are going to actively seek out movies and TV shows to view on the go--and if accessing HBO Go on phones and iPads means concurrently subscribing to the conventional HBO cable service, then so be it. HBO has long defied the traditional economics of television consumption, after all: I've been a subscriber for more than a decade, contentedly paying for some of the most innovative and entertaining original series ever produced (among them The Sopranos, The Wire and Eastbound and Down), as well as original documentaries and live boxing, while rarely if ever watching the Hollywood features that still make up the bulk of the network's programming slate. All told, I probably watch fewer than three hours of HBO content in any given week, but those three hours are so consistently compelling that I'd be willing to pay far more than the $10 per month I currently fork over. Year in and year out, HBO delivers the best original content on American television--wherever and whenever that content is available, I will watch it. I'd wager most HBO subscribers feel the same way.

The question is whether HBO will continue offering HBO Go as a free supplement to its existing cable/satellite offering, or if the network might consider spinning off the streaming service as a separate premium effort as mobile viewership expands, especially since iTunes subscriptions, in-app purchases and other digital commerce breakthroughs enable a host of new revenue models unthinkable on cable. Moreover, some analysts are calling for Time Warner to spin off HBO as its own independent entity, offering subscriptions directly to consumers.

In a recent research note, BTIG's Richard Greenfield contends "The HBO Go iPad app essentially eliminates the multichannel video provider from a consumer's mind after they authenticate the first time, with launches on gaming systems and IP-connected TVs largely removing the visibility of the [service provider] on the living room television later this year. The next logical step is to be able to sell a subscription directly to consumers. HBO could lower the price of its service to expand its sub base beyond the 30 mm subscriber ceiling it has hit historically, while at the same time capturing more gross margin dollars per subscriber (as the ‘middleman' is eliminated)."

Mobile devices and streaming media services are reshaping the playing field for all broadcast and cable networks, of course, but HBO is arguably the only one with the quality and quantity of content--as well as the die-hard subscriber base--necessary to successfully undergo such a radical overhaul of its current business model. In the short term, HBO continues to experiment with the possibilities of digital programming: On May 22 at 10:00 pm ET, the network will debut the seventh episode of its new fantasy series Game of Thrones a week early, exclusively on HBO Go. The episode will not air on HBO proper until its regularly scheduled time at 9:00 pm on May 29. It's the first time HBO Go has offered a program that hasn't yet reached the broadcast airwaves, but it's almost certainly not the last time: Without a reliance on advertiser dollars, the network can roll out its content anytime and anywhere it wants, nurturing viewer enthusiasm for new shows and new digital outlets while staying steps ahead of the competition in the process. It's not TV--it's HBO Go.--Jason