Wednesday, June 1, 2011

Adding value to HBO

In the face of growing competition over time - from other pay channels, videocassettes and DVD (both sales and rentals), DVRs and Video-On-Demand, and now streaming services like Netflix, Amazon, & Google - HBO has been fairly successful in developing strategies to increase the value of its core product in order to keep it competitive.  These have included producing original series, offering an expanding bundle of targeted channels, and offering much of its programming through HBO On Demand (through cable and satellite VOD offerings).  Recent estimates suggest that HBO On Demand has reduced core subscriber churn (subscribers dropping the service) by as much as 15%, adding several billion dollars to HBOs value.

HBO is poised to move into the mobile market through a new service, called HBO Go.  The new service will offer access to HBO programming (to subscribers of HBO through other delivery systems) to Internet-connected mobile devices.  While the movie creates value for its customers (offering even more flexible options for accessing and using content), it's not seen as directly entering a new market (mobile).  Rather, the move seems more defensive - a response to the streaming services like Netflix that are already accessible on a wide range of Internet-connected devices, including mobile.  Still, moves to keep subscribers from defecting to other services should help reduce churn - some analysts forecast that HBO Go will cut churn by another 10% and helping to add more than $2 billion to HBO's value.

As with other services under the TV Everywhere umbrella, the key to keeping the value of HBO Go in-house is authentication; of making sure that content goes only to subscribers.  For now, there doesn't seem to be a plan to market HBO Go directly to consumers (instead of through cable or satellite service subscriptions.  HBO is entering the direct-to-consumer market indirectly (and partially) by making deals to market HBO-produced programming through the home video market, and through digital affiliates such as Amazon, Apple, and Google (which offer streaming access).  Ultimately, HBO may need to consider tapping that market more directly, taking its service direct-to-consumers.

The key to remaining successful in the long term is finding a mix of value sources that make the service worthwhile to a sufficient consumer base.  Not only in terms of finding new ways to add value, but also to be sensitive to changes in consumer's discretionary spending levels and shifting preferences.  The monthly cost of Pay TV subscriptions has increased 29% over the last five years while net incomes have fallen.  That is a significant contributor to the declining Pay TV penetration, even with the efforts to increase the value of their services to consumers through multiplexing (multiple channels) and expanded delivery options.  HBO has been working on adding value, but may eventually also want to consider shifting distribution to the cheaper, faster, IPTV model.

Source: "HBO Poised to Reinvent Itself -- Again", MediaPost Blogs - On Media

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