Winter is Coming to Westeros and HBO Is Ready to Capitalize

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Churn OTT

Recurly-OTT-Churn-Blog.pngThe battle for Westeros is about to heat up when the newest episode of HBO’s massively popular series, “Game of Thrones” airs on July 16th.  Winter is indeed coming. At the same time, the battle to rule the Over the Top (OTT) airwaves is also heating up. The main players (Netflix, HBO, Amazon Prime, and Hulu) are all seeking to create the next must-see series and gain huge numbers of new paying subscribers. 

The overwhelming popularity of “Game of Thrones” boosted HBO’s growth at a time when most premium cable networks saw their business contract. According to the LA Times, since 2011 the network has seen a 16% increase in domestic subscribers for both its HBO and Cinemax channels—with 2014 and 2015 experiencing the most explosive growth in HBO’s 40-year history.

Beyond boosting subscriptions, "Game of Thrones" also helped HBO launch their new stand-alone streaming service, HBO Now, in 2015, targeting 10 million broadband-only U.S. households. Well aware of the popularity of their "tent-pole series," the company timed the debut of the service to coincide with the airing of the fifth season of "Game of Thrones."

Digital Platforms Drive Sales

It should come as no surprise that digital streaming is the way of the future. Formerly cable-based networks have seen their subscriber numbers dwindle over the years as viewers ‘cut the cord’ and opt for streaming alternatives. According to a TimeWarner press release from last year, HBO’s digital platforms (which include HBO On Demand, HBO Go, and HBO Now) all helped to drive the network’s premier series to record-setting viewing levels.

HBO’s press release makes special note of the role that its subscription offerings plays in bolstering the network’s performance. As Richard Plepler, Chairman & CEO of HBO remarks, “These record audiences reflect the options we have built into our business model over the last few years. Combining the convenience of HBO On Demand and HBO GO with the subscription flexibility of HBO NOW, our programming is being exposed to an ever growing audience.”

Convenience and flexibility—some of the main benefits of the subscription model that Recurly is always touting!

Accelerated Growth

Fast forward a year, and while HBO Now still comprises only a small portion of the network’s 49 million domestic subscribers, the service is growing fast. In fact, it’s accelerating, says The Motley Fool. HBO recently announced that the new standalone subscription service has surpassed two million subscribers, with signups tripling in 2016 compared to the end of 2015. HBO’s press release also reports that, “viewing on HBO’s Digital Platforms comprise almost 40% of season six total viewing, with HBO GO and HBO NOW up a combined 91% vs. last season.”

But more than just convenience and flexibility for subscribers, The Motley Fool article goes on to say that this subscriber growth in HBO's OTT service, “will be key to fending off the negative impact of cord-cutting and mergers in the cable industry…. Additionally, it provides the potential for margin improvement as its subscriber base increases in scale.”

More Profitable Subscribers

This is because HBO’s OTT subscribers pay their subscription fees to HBO directly, whereas their pay-TV affiliates take a cut of approximately 50 percent—although the affiliates are also responsible for delivery, billing, customer service, etc. CFO Howard Averill expects HBO Now to be a “highly profitable revenue stream over time.” It will benefit from economies of scale as its subscriber base grows and has seen its churn rate come down as subscribers age, according to The Motley Fool.

It’s worth noting the one player though that might throw a wrench into HBO’s revenue goals: Amazon Prime. Last month, MarketRealist reported that around 50% of TimeWarner’s HBO Now subscribers come from Amazon Prime. Which means that Amazon is taking on the role of a TV-affiliate—and taking a share of HBO’s revenue. The report also points out that this role gives Amazon access to the consumer data and viewing patterns which they could use to improve its own OTT service, Prime Instant Video.

Winning the OTT Throne

The OTT space is indeed complex, with everyone jockeying for a winning position against their rivals. Small niche players seek to claim a share of the market, while the big, established players aim to increase their dominance. Content is certainly king, but service quality is important as well. One thing though is certain, OTT (and for two more seasons, Game of Thrones!) is here to stay and we have the subscription model to thank for both.

Read more posts about OTT and the subscription model here. And download our whitepaper, “A Recurly Guide for OTT Businesses: Recover Lost Revenue and Fight Churn” here.

 

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