Time Warner Inc. (TWX) is looking to accelerate growth at HBO by expanding access to broadband customers who don’t subscribe to a traditional cable-TV package, according to people with knowledge of the plan.
The $49-a-month Internet Plus trial introduced last year with Comcast Corp. (CMCSA) may be offered through additional cable and Internet providers, said the people, who asked not to be named because the plans aren’t public. The package, which includes Web access, a limited number of TV channels and the HBO premium cable network, is aimed at the 10 million U.S. broadband customers, many of them younger, who don’t buy traditional cable TV, the people said.
The growth potential from rolling out HBO, home to “Game of Thrones” and “True Detective,” to new audiences is one reason why New York-based Time Warner on July 8 rejected a $75 billion takeover offer from 21st Century Fox Inc. (FOXA), the people said. One broader risk for cable programmers and distributors, who would need to sign on, is that some pay-TV customers may switch to the cheaper HBO Web bundle.
“There’s no secret we’re looking at all these distribution options,” said Quentin Schaffer, a spokesman for HBO, without commenting directly on the Web package.
HBO generated $1.79 billion in operating profit last year, a 16 percent gain over the previous year, exceeding the 10 percent advance from 2011 to 2012. Revenue advanced 4 percent to $4.9 billion.
Fox Chairman and Chief Executive Officer Rupert Murdoch valued the network at $20 billion in his bid for Time Warner, people familiar with the matter have said.
An Internet-based service could let HBO tap millions more potential viewers, especially outside the U.S., where pay TV penetration rates are much lower. In Europe, for example, about 40 percent of homes have a pay-TV subscription. By comparison, about 90 percent in the U.S. homes have cable TV, making the risk of cannibalization more profound for TV programmers considering online offerings.
“We are moving to a landscape where cable and pay-TV providers are trying to segment the market,” Amy Yong, an analyst with Macquarie Securities USA Inc., in New York. said in an interview. “There is a way to bundle with a broadband package but you have to be careful about not diluting the revenue of your average bill now.”
Time Warner has experimented with offering HBO as a standalone product outside the U.S., and found that it has increased cable-TV subscriptions, rather than cannibalized its main product.
An online HBO service in Sweden, Norway, Finland and Denmark, which can be bought separately from cable-TV or Internet service, has generated 380,000 subscriptions, according to the people. Subscriptions to HBO through traditional pay TV providers in those countries have also increased, they said.
HBO Go, the online and mobile version of the premium service, is available only to U.S. customers who subscribe to a cable-TV package.
HBO and its sister channel Cinemax added 2 million subscribers in the U.S. last year, bringing their domestic total to 43 million, the company has said. The two channels had about 127 million subscribers worldwide at year-end, according to Time Warner filings.
While HBO turned in subscriber growth that was the best in 17 years, it is adding customers more slowly than Netflix Inc. (NFLX), the pioneer in Web-based film and TV viewing.
Netflix, based in Los Gatos, California, reported a 25 percent increase in quarterly revenue this week, with its worldwide subscribers increasing by a third to 50.1 million. The company, which offers reruns and original programming such as “Orange Is the New Black,” has a market value of $25.4 billion.
Fox, also based in New York, made its bid for Time Warner last month. The $85-a-share cash-and-stock offer valued the owner of HBO, CNN and Warner Bros. at about $75 billion, excluding options that could raise the total equity value to $80 billion.
Yesterday, Fox announced a deal to consolidate its European satellite TV assets within its 39 percent owned British Sky Broadcasting Group Plc. The $9 billion deal gives Murdoch fire power to raise his Time Warner bid.
Time Warner rose 1.2 percent to $84.99 at the close in New York yesterday. The stock has risen 20 percent since July 15, the day before Fox’s bid was made public.
Fox, owner of the Fox News Channel, the FX network and film and TV studios, fell 0.3 percent to $32.81. The Class A shares have declined 6.8 percent since July 15.