Photographer: Albert Mollon/Getty Images

HBO Said to Push for Revamped Cable Deals to Fuel Most of Growth

  • Network wants more revenue from pay-TV providers like Comcast
  • Sci-fi drama ‘Westworld’ aims to silence critics of ‘Vinyl’

Last year, HBO added nearly 3 million U.S. subscribers, capping its biggest two-year gain in three decades. There was just one problem: It didn’t get paid for many of them.

Pay-TV companies that did a good job selling the channel were able to pocket more of the profits under the terms of their contracts with the network. Now, HBO wants to renegotiate to keep more money for itself. 

Time Warner Inc.’s premium cable channel is forging deals with the distributors that will contribute most of its growth in the U.S. in the coming years -- even more than the network’s online-only service, HBO Now, according to a person familiar with the network’s strategy.

The plan could gain steam if HBO can find new hits like “Game of Thrones” that cable, satellite and online TV services know fans can’t live without. HBO also must persuade TV distributors that HBO Now won’t undermine their business by making viewers more likely to cut the cord and get their “Silicon Valley” fix online.

And adding subscribers and revenue would help pay for HBO’s growing slate of original programming, which cost more than $1 billion this year. The budget must expand further as the company develops more shows like the new hit “Westworld” in an increasingly competitive industry for high-quality TV. Netflix Inc., by comparison, will spend about $5 billion on programming in 2016.

Click to read how Time Warner’s CEO contends with media’s changes

Consolidation in the cable industry may help HBO’s cause. Charter Communications Inc.’s acquisition of Time Warner Cable Inc. and AT&T Inc.’s purchase of DirecTV replaced two of the weaker sellers of HBO with stronger ones, according to the person familiar with the network’s strategy. HBO recently renewed a long-term contract with AT&T, with the phone carrier able to distribute the network online as well as in traditional TV packages. HBO is nearing an agreement with Charter, according to people familiar with the matter, and faces a key renewal coming up with Comcast Corp

The deals are the first with major cable providers since the network introduced HBO Now in April 2015. The test is whether HBO’s negotiating leverage with pay-TV companies has been diminished by the fact that consumers can get an online version of HBO in many more ways, such as Apple TV, Xbox or PlayStation.

HBO argues that its online channel hasn’t led to a rise in cord-cutting, and it’s trying to persuade pay-TV providers to package HBO Now with broadband internet for young or thrifty customers who were never going to buy the full suite of pay-TV channels anyway.

The network continues to look for new methods of digital distribution, disclosing in August that it’s in talks with Hulu LLC to include its channel in the streaming-video provider’s upcoming web TV service. Time Warner said that month that it acquired a 10 percent stake in Hulu.

For a Bloomberg Intelligence analysis of premium networks, click here.

Of course, distributors need to work with HBO in some form as long as the network is something viewers want. With a long history of success, including “The Sopranos” and “Sex and the City,” that’s rarely been a question. But competition from the likes of Netflix, Amazon.com Inc., Hulu and 21st Century Fox Inc.’s FX is now greater than ever, and HBO’s programming is at a crossroads.

‘Thrones’ Hole

“Game of Thrones,” HBO’s most popular show, will end its run in two seasons, leaving “a hole that needs to be filled,” said Benjamin Swinburne, a media analyst at Morgan Stanley. The channel in June canceled “Vinyl,” a series about the 1970s music business created by Mick Jagger and Martin Scorsese, after one season due to weak viewership.

In the last two years, HBO has canceled nine series after three seasons or less, including “The Newsroom,” “The Brink,” and “Togetherness,” according to Michael Nathanson, an analyst at MoffettNathanson LLC. A Morgan Stanley survey in April found Netflix topped HBO for the first time on the question of which provider has the best original content.

HBO’s new slate of shows have given the network reason for optimism. “Westworld,” a sci-fi drama set in a Wild West theme park, drew 3.3 million viewers in its Oct. 2 debut across TV, online and delayed viewing, making it the biggest premiere for a new HBO show since “True Detective” in 2014. Most viewers came back for the second episode, which attracted 2.7 million. Recent premieres for HBO’s “Divorce,” featuring “Sex and the City” lead Sarah Jessica Parker, and “Insecure,” with YouTube star Issa Rae, had about 1 million viewers on TV and online.

HBO aims to grow beyond its current 1 million HBO Now subscribers with new offerings aimed at younger, digital-savvy viewers, including Bill Simmons’s “Any Given Wednesday,” a daily news show from Vice that debuted this week, and upcoming programming from Jon Stewart.

Movie Deals

Many of HBO’s high-profile series -- “Game of Thrones,” “Silicon Valley,” “Veep” and “Last Week Tonight with John Oliver” -- saw record audiences this year. HBO has also renewed key film deals with major studios like Universal Pictures and 20th Century Fox through the next decade, according to MoffettNathanson. While the network’s original series get most of the attention from TV critics, much of HBO viewing still comes from its library of movies.

HBO’s occasional programming misses have had little effect on its business: Its revenue has increased each of the past four years and it generated $1.88 billion in operating income last year, up 5 percent from the year before.

“HBO is among a handful of gold-plated media television brands, independent of whether a premiere this week, last month or next month satisfies every expectation that all the world has,” Josh Sapan, chief executive officer of AMC Networks Inc., said in an interview.

Starz CEO Chris Albrecht, who led HBO as it looked for successors to “The Sopranos,” also predicted the network will be fine. But, he added, “It’s never easy when you have a giant show going off the air.”

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