Introduction
This issue’s content is quite exciting. Do you have a Netflix subscription? Do you have an HBO Max subscription? For the first question, most people might answer "Yes," while for the second, most would likely say "No." This newsletter explores how HBO’s perfectly reasonable decisions caused them to fall behind Netflix in the streaming market.
Online Version of HBO → Netflix
Back in 2000, HBO offered a variety of self-produced shows and movies across different genres, all ad-free and funded entirely by subscription fees. Subscribers could watch their favorite HBO programs at home. Sounds like Netflix, right?
In fact, when Netflix rose to prominence, its CEO in 2013 stated, “The goal was to become HBO faster than HBO could become Netflix.” Clearly, Netflix aimed to be the online version of HBO: producing high-quality dramas, series, and movies, relying solely on subscription revenue without ads.
Typically, imitators don’t surpass the original. So why did HBO fall behind Netflix in the streaming platform race? Couldn’t HBO just launch an online platform to outdo the copycat Netflix?
HBO’s deliberate decisions led to their lag behind Netflix; HBO chose not to fully commit to the streaming platform.
HBO didn’t fall behind Netflix because they couldn’t produce better original dramas. Before Netflix emerged, HBO was synonymous with quality drama. HBO’s lag was intentional, driven by a series of “reasonable” decisions. Before diving into HBO’s decision-making, let’s examine the revenue model of HBO and its parent company, Time Warner.
To access HBO content in the U.S., users first need a cable TV subscription, costing around $100 per month. However, a cable subscription only provides access to channels like CNN or TBS. To watch HBO, users must pay an additional $15 per month.
In Taiwan, for example, users need to subscribe to cable TV (commonly called “Channel 4”) for about NT$600 monthly, then pay extra to unlock premium channels like HBO.
HBO splits its $15 monthly subscription revenue, with roughly half going to cable providers as a carriage fee. So, while HBO charges $15 per month, they only retain about $7–8. In comparison, in 2010, Netflix’s subscription fee was $7.99 per month.
If HBO could keep 100% of the $7–8 by going fully online, why didn’t they launch a streaming service to crush Netflix and dominate the market while earning the same revenue?
Perfectly Reasonable Reasons
Reason 1: Time Warner, HBO’s parent company, has investments in cable providers and other cable channels.
Time Warner owns Time Warner Cable, a major cable provider that, in 2016, was the second-largest in the U.S. Cable providers earn more when more people subscribe to cable and premium channels like HBO (and they earn a lot).
Time Warner also owns cable channels like CNN, which are accessible with a basic cable subscription. If HBO shifted to a streaming-first model, it would hurt its own cable provider and other cable channel businesses. HBO was a major selling point for cable subscriptions, bringing Time Warner billions in revenue through cable and satellite providers.
Reason 2: HBO’s shareholders wouldn’t approve.
In a post-retirement interview, HBO’s then-CEO Jeffrey Bewkes noted that HBO’s primary shareholders were institutional investors who valued the stable revenue from cable. Entering a costly streaming war with Netflix would have been unacceptable to them. Additionally, these shareholders often held stakes in Netflix, Amazon, and other streaming platforms. They didn’t want their investments competing and burning cash. For them, HBO should focus on cable revenue, while Netflix handles streaming revenue, maximizing their overall returns.
Reason 3: Time Warner, HBO’s parent company, was consistently profitable with stable dividends.
Did Netflix’s rise cause Time Warner, HBO’s parent, to lose money?
Time Warner’s dividends grew from $0.80 per share in 2012 to $1.60 in 2018, nearly doubling. Its stock price also rose steadily, from about $25 in 2010 to $100 by 2018. HBO didn’t suffer losses due to Netflix’s growth; in fact, its revenue and stock price kept climbing. In 2013, Time Warner’s operating profit was $1.8 billion, compared to Netflix’s $228 million.
Based on these three highly reasonable reasons, HBO chose not to jump into the streaming platform war.
Reflection: Companies aren’t foolish; their decisions have reasons.
Looking at these reasons, it’s clear why HBO entered the streaming market so late. Many commentators, netizens, and critics assumed HBO was run by outdated executives who didn’t understand market trends and were doomed to fail. In reality, HBO played its cards very strategically. However, this calculated approach led to HBO’s streaming market share lagging far behind Netflix (Netflix has about 2.5 times more subscribers than HBO Max).
This newsletter teaches us that every decision involves a tug-of-war between various stakeholders’ interests, not just surface-level intuition or apparent foolishness. This raises a thought-provoking question: when pushing for change, failure often stems not from stubbornness or stupidity but from misaligned interests and perspectives among stakeholders.
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