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With HBO’s new OTT service, Tony Soprano gets a ‘taste’ of broadband

According to HBO chairman and CEO Richard Plepler, the roughly 10 million broadband-only (i.e. no pay-TV) households in the U.S. represent a “large and growing opportunity that should no longer be left untapped.” So HBO will try to tap it starting next year by launching a standalone over-the-top version of the pay-TV network aimed at non-pay-TV households.

I suspect the opportunity he has in mind involves more than simply those 10 million broadband-only households, however, or even the 70 million pay-TV households that do not currently subscribe to HBO. While details were scarce at Wednesday’s investors day presentation as to the pricing and content of the new service, or how exactly it will be offered, Plepler tipped his hand by quoting “The Sopranos.”

“We will work with our current partners. And, we will explore models with new partners,” Plepler said in the official press release. In follow up comments, however, he was slightly more explicit about what that means, saying that HBO wants to “rework” is partnerships with its current  distributors and noting in particular the “hundreds of millions” of dollars they currently rake in that are not being shared with the network.

“We’ll get our taste,” he said, evoking America’s favorite mob family.

I doubt pay-TV distributors missed the significance of the reference.

Like a lot of networks these days, HBO is hungrily eyeing the fat margins cable operators are earning from their broadband business, which greatly exceed those being earned from the TV side of their business. For the networks, shrinking video margins among their affiliates and the flat or declining base of pay-TV households represent impediments to their own future revenue growth because they place a practical limit on how high the carriage and retransmission fees the networks earn from pay-TV providers ultimately can go.

Meanwhile, most of those pay-TV operators continue to earn a growing share of their revenue from providing broadband service, which is currently unencumbered by content fees.

The networks would very much like to change that arrangement, however, which is why carriage and retransmission disputes that result in networks being blacked out on cable systems increasingly also result in the networks blocking online access to their content by the cable operator’s broadband subscribers. To the networks, it’s all one big bucket of money — or should be.

As I noted in a post last year, network executives are occasionally even indiscreetly explicit about their intentions, as CBS executive VP of planning, policy and government relations Martin Franks was in testimony to the New York City Council over a blackout involving Time Warner Cable subscribers.

In response to a claim that MVPDs do not have the profit margins to absorb the price hikes being demanded by CBS and other networks, Franks pointed to the “handsome profit margins” cable operators earn from the broadband side of their business.

“They could easily choose to absorb these programming costs and still be very profitable,” he said.

At a time of declining TV ratings, a flat pay-TV base and the flight of advertising dollars to digital platforms, that untapped bucket of broadband money is pretty much the only “large and growing opportunity” available to the networks. And I suspect that’s where HBO is really going with the new OTT service.

Going direct to consumers over-the-top would give the networks access to some of that money, but it would also encourage cord-cutting and cord-shaving, making it ultimately self-defeating. Without any inside knowledge, my bet is that the new HBO service will be structured to leave service providers in the loop one way or another — including and especially broadband-only service providers — the better to bleed them for what will amount to carriage fees.

If it works for HBO, moreover — if HBO gets its “taste” of the broadband action — don’t expect Netflix and Amazon to be far behind in looking for their own cuts from ISPs.