Mini Case: HBO and the making of “better”
“We’re not trying to do the most, more is not better, only better is better” is how Richard Plepler, Chairman and CEO of Home Box Office, Inc. (HBO) reflects on his company, long regarded as the gold standard of quality in the entertainment industry, facing competition from upcoming rivals like Netflix, Hulu
Netflix alone invested over $6 billion and launched around 30 new shows in 2017, followed by Amazon with $4.5 billion in original content for its Amazon Prime streaming service, and Hulu with $2.5 billion.
HBO is third on the list with $2.7 billion, however instead of trying to outcompete Netflix and the other guys in dollars invested, HBO chose the path of being a highly differentiated network and becoming more selective about the content it invests in.
Although it only possesses a few more than 20 original scripted series, those include widely successful hits like The Sopranos, Sex and the City and Game of Thrones which have all become cult hits among fans.
That number is still low however compared to Netflix’s almost 100 original scripted shows, but HBO strikes additional revenues by cutting deals with cable providers and other outlets.
To put these companies’ numbers in the right context, Netflix’s revenues ($11 billion) already doubled HBO’s ($6 billion) in 2017, but its profits ($800 million) were a bit over a third of HBO’s ($2.15 billion) in the same period.
That doesn’t mean that HBO’s strategy is better than Netflix’s; they are just at different stages and following different game plans.
Both HBO and Netflix are very successful in their own terms. HBO is achieving high profits through a strategy based on differentiation and a business network built on more than 40 years in operation, offering content that is unique and considered high quality by their consumers, while the fast-upcoming player Netflix on the other hand is pursuing rapid growth, reinvesting earnings aggressively in new content to cut dependency on other companies.
With a different strategy, Amazon Prime, which started out as a more conservative player, has canceled low-budget niche shows like I Love Dick, One Mississippi and Jean-Claude Van Johnson to pursue more mainstream titles along the lines of HBO’s Game of Thrones and The Lord of the Rings, but it has made clear that its intention is not to be the king of content but to have a healthy portfolio that is appealing to its customers.
Can HBO outcompete Netflix at online streaming? The simple answer is no, and it doesn’t need to.
HBO’s value chain has been optimized to extract value from premium cable subscriptions and licensing deals with TV networks, so arguably it would be highly inefficient to try to outcompete Netflix in online streaming.
Netflix’s streaming business model has been entirely designed since its inception to be an “over the top” (OTT) service, that is, to operate as a standalone business that streams content online directly to users, bypassing conventional broadcasting channels such as cable television.
That means that Netflix’s model has been optimized from A to Z to deliver a great online experience and all buyers need to use its service is a reliable internet connection, which makes Netflix’s potential market huge.
To support its business model, Netflix was a pioneer in the implementation of “recommender” algorithms that crunch massive amounts of users’ data to make accurate recommendations, and introducing streaming techniques that optimize content quality even at slower internet speeds.
In 2009, the company awarded $1 million for the creation of its recommender algorithm in a widely publicized competition.
HBO, on the other hand, initially saw its online presence as an extension to its premium cable offer which for decades has been the core of the company’s revenues.
It launched its HBO GO app in 2010, three years after Netflix launched its streaming service, and only HBO customers could stream through the app. Until then, the market potential for HBO was people with cable who could afford their premium subscription service.
It wasn’t until 2015 that the company launched its HBO Now service offering the network’s premium content directly to users who were not subscribers to its cable service.
However, because of HBO’s licensing agreements, the service was not available worldwide.
Although HBO has been streaming online for over a decade now, it stills lags behind in terms of its online functionality, features and availability worldwide, and its service is priced above Netflix, even though it features only a fraction of the content volume.
That’s because global online streaming is not HBO’s core business, and its main users for decades have been consumers of cable TV and the networks around the world who license its content.
That means that most of its revenues come from premium cable subscriptions and licensing deals.
HBO is highly profitable with a boutique approach to curated content, where it carefully hand-picks what it features, while Netflix on the other hand has gone shotgun hunting after the masses and is buying content in chunks from acclaimed directors and producers.
They are both profitable at what they do, and each has come to master its business model. However, HBO faces a problem that Netflix doesn’t: demand for cable TV is shrinking, and market growth seems to be happening abroad as more users around the globe get access to reliable internet, so the network needs to rethink its strategy to deal with these new realities.
Wu, Sun. Strategy for Executives, this book can now be downloaded for free here.
Flint, Joe. HBO to Talent: You Won’t Get This Much Love at Netflix. The Wall Street Journal. January 2018. URL: https://wsj.com/articles/hbo-to-talent-you-wont-get-this-much-love-at-netflix-1516031557
Netflix Prize Wikipedia page. URL: https://en.wikipedia.org/wiki/Netflix_Prize