HBO's timid iTunes offer
Time Warner subsidiary HBO has gotten a fair amount of credit today for persuading Apple to abandon its one-price strategy for TV shows at the iTunes Store. That's an interesting development, and it could open the door for NBC to bring its shows back to the store. But what many of the reports overlooked was how little HBO decided to put onto the virtual iTunes shelves. The network is making available downloadable versions of older shows only, and charging premium prices for many of them to boot. Rather than trying to attract new customers and chase incremental dollars, it seems to be designed to cause the least possible offense to HBO's existing markets.
HBO spokesman Jeff Cusson said the network's full offering on iTunes will roll out over the next couple of months, so it will be more extensive than the current selection -- six shows, most of which are represented by just a portion of their episodes. But no show will be available before the corresponding full-season DVD is released, Cusson said. That's consistent with HBO's digital strategy thus far: no full-length program or episode is available online to non-subscribers until long after its first run. The exception was "In Treatment," which HBO offered briefly in full-length form on YouTube earlier this year in a bid to drum up viewership. Now, though, even that show is available only as clips.
Cusson declined to discuss HBO's strategy on the record, but I did get some insights from one of his networks' competitors. Showtime was among the first networks to take advantage of the iTunes Store when it debuted in 2006, and until HBO arrived, it was the only one to hold episodes back until after the entire season was over. Robert Hayes, general manager of Showtime Digital Media, said the delay reflects the network's concern that people would watch shows online instead of subscribing. "We're a billion-dollar-plus business," Hayes said. "Our main revenue stream is subscriptions.... [The delay] is kind of keeping that experience pure."
So why bother with iTunes at all? The amount of revenue is small even compared to DVD sales, let alone subscriptions. Hayes said the point isn't to generate revenue at iTunes and its other digital outlets, it's to recruit new subscribers by letting people sample Showtime's fare on the cheap. "It's a great opportunity for us to tap into a younger demographic," he said, noting that the audience for premium cable networks skews older. "We've introduced our programming to audiences that probably never would have watched it." These viewers may be coming late to the shows, but they like what they're seeing enough to talk up the product and, in some cases, subscribe. Showtime's customer base has grown over the past 18 months, Hayes said, and part of the reason is its work online.
Still, I can't help seeing reflections in Showtime and HBO's approach of the major record labels' failed strategy of diminishing the appeal of their online products to protect CD sales. Realistically, would anyone drop a subscription to a premium channel if he or she could watch episodes online for a fee? That might be true if the networks were the video equivalent of a Top 40 album -- in other words, if they offered one good show amid endless amounts of filler -- but I just don't see that happening with HBO or Showtime. For those who already have cable or satellite service (more than 80% of all U.S. households), subscribing to HBO or Showtime is clearly a better deal than buying individual episodes a la carte or on DVD. By trying so hard not to cannibalize their subscriber bases, HBO and Showtime prevent themselves from competing effectively with other online outlets for viewers who aren't subscribers today. After all, there's no shortage of ways to watch the networks' most popular shows online without paying for them. And the task of recruiting and retaining subscribers will only grow more difficult as people spend more time online and consume entertainment from a wider array of choices. The fragmentation of the TV audience caused by home video, game consoles and an explosion of cable channels will soon be exacerbated as TV manufacturers add Internet connections to their sets. That's why it makes sense to try to attract viewers with your best and most heavily promoted content wherever you can find them, rather than using the Net solely to promote business models developed long ago.
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I agree that this is a timid and short-sighted move. But I disagree that cannibalization is unlikely. I, for one, am eagerly anticipating the day I can cancel my entire cable TV subscription, and get all my TV needs ala carte via the Internet.
Yes, HBO is a pretty good incremental bargain, if you assume that I'm going to buy a cable TV subscription anyway. But for me (and probably a nontrivial number of others), HBO and Showtime content are what I'm most interested in, so the rest of the cable subscription feels like a very, very expensive ante in order to get HBO.
The good news for HBO is that I'm happy to pay them for ala carte access to my favorite shows, and they should be able to keep a bigger piece of my fees if they sell direct, rather than letting cable TV networks keep a cut.
Upshot: cable needs HBO more than HBO needs cable. The sooner HBO figures this out and cuts out the middleman, the sooner they'll take a bite out of Bit Torrent and start making more money.
Posted by: Fred von Lohmann | May 13, 2008 at 05:57 PM
Good points. Based on some of the things Hayes told me, I'm guessing that Showtime might offer online subscriptions once more people have Internet-enabled TVs. HBO is testing an online on-demand system in one city, but it's available only to subscribers. In effect, it's an effort to combat churn, not to expand the audience. I understand that reducing churn amounts to big dollars, but I'm still baffled as to why they wouldn't want to squeeze some revenue out of non-subscribers, too.
Posted by: Jon Healey | May 13, 2008 at 08:59 PM
Realistically, Internet delivery has always been a revenue loser compared to cable and satellite delivery because of piracy. HBO is testing the waters to see if this is still true, and I'm willing to bet they find it is.
I don't see HBO embracing the Internet anytime soon; they may as well shoot themselves.
Posted by: Richard Bennett | May 15, 2008 at 02:03 PM
Richard, you've got to be kidding. Can you point to any Internet delivery business that has fueled piracy? On the contrary, pirates don't bother with encrypted files or paid downloads -- why should they, when they can get the source material for free or on the cheap (TV broadcasts, movies in theaters, promo DVDs sent to video stores, etc.)? Legitimate online distribution *competes* with piracy. Stayed tuned for a post in the next few days about how the major networks' online moves have diminished the appeal of BitTorrent downloading. HBO wouldn't promote piracy by going online; if anything, it would diminish it.
Posted by: Jon Healey | May 15, 2008 at 02:10 PM
Perhaps my point would be clearer if we start by looking at the impact of delivering entertainment product in digital formats generally, and then go from there to on-line distribution. It's fairly clear that the move from vinyl to CD has had the effect of reducing music sales, and it's also clear that the reason for this is prevalence of pirated music, no?
HBO programs are difficult to pirate at present. Sure, lots of people have digital cable and satellite with DVRs that have them just sitting there on a hard disk waiting to be shared with the rest of the world, but since most DVRs are closed systems (even ones that run Linux, such as TiVo,) it's a major hassle to offer them up with Limewire or BitTorrent. But if we can download HBO shows to generic PC, some people are going to share them with their anonymous friends all over the world, even if they had to pay a little bit to get them.
This is what happens with BBC programming today, a lot of friendly people in the UK put the latest shows on the piracy indexers so that people outside the UK can see them, and this is bound to have the effect of reducing BBC America sales in the long run, if it doesn't already.
When people can easily download HBO to their PCs, some number are going to "share," and then that number becomes large, they will in fact sell fewer cable subscriptions.
The question for HBO is simply whether the increase in revenue from on-line distribution offsets the loss of subscriptions. Surely you know that HBO has spent a lot of money already combating piracy, and is responsible for some of the funniest tactics: they polluted the piracy indexers with bad copies of Rome, which I think is hilarious. So no, HBO is not in a position to start and stop piracy of their product absolutely, but they do have some influence over how hot the bonfire is.
Posted by: Richard Bennett | May 15, 2008 at 05:47 PM
HBO programs are among the most pirated TV shows around. They're incredibly easy to find online -- start at OVguide.com and go from there. Again, it's far, far easier to pirate something that's broadcast than something that's streamed with encryption. You can get HBO on your PC simply by putting in a tuner card and hooking up your cable....
And BTW, the shift from vinyl to CDs led to an explosion in sales. It was only after 2000 that sales started to drop.
Posted by: Jon Healey | May 15, 2008 at 05:51 PM
To pirate video OTA or from analog cable, you need a capture card and not everybody has one. To pirate video from digital cable or satellite requires an even more specialized piece of hardware that very few people have (try to get a Cable Card for the PC.)
But to pirate video from any PC-resident format only requires a piece of software that can break the encryption, if any, and convert to MKV/H.264, and that's a free download someday soon if not already on account of DRM not working and all.
And yes, there was an initial boom in CD sales when the format was new and Internet piracy was less rampant than it is now, but surely you understand that the long-term consequences of digital music have been more piracy and fewer sales. That's not exactly rocket science.
Posted by: Richard Bennett | May 15, 2008 at 07:35 PM
I shouldn't extend this argument because we've both made our points, but I can't help myself.
The fact of the matter is, HBO is pervasively pirated today, and it's not doing any online distribution to speak of. I don't see how you can argue that making it available online would worsen the piracy. No one would bother to copy and redistribute the downloads -- bootlegs of the broadcasts would already be available, and once there's a free rip on the Net, why bother to make more copies?
Take a minute to search around the Net for Entourage. It's ridiculously easy to find, both as streams and as downloads. HBO isn't making a dime off this stuff. If it were offering programs digitally, it would at least have a chance at collecting some money from people who want to consume the programs that way.
Posted by: Jon Healey | May 15, 2008 at 09:18 PM
In my experience, there's a big difference in quality between the digital files created in-0 house by studios for on-line distribution (or digital OTA) and digital files created by a cheap analog capture card, and I expect that video quality is one of the differentiators that affects how we get our content. Music piracy really took off when the CD format was adopted, even though it was fairly common when people just copied cassettes. The motivation to buy the original instead of taping OTA from radio was largely one of quality.
HBO also has a large revenue base that will be affected by alternate sources of distribution and the fear of increased piracy on the part of Comcast, DirecTV, et. al.
I don't think these fears are completely irrational, given how much pirated HBO content is already available as the crappy analog captures you mention.
HBO isn't a charity, you know.
Posted by: Richard Bennett | May 16, 2008 at 03:38 AM