While Netflix (NASDAQ:NFLX) continues to expand international footprint, its business on the home turf is being challenged by Time Warner (NYSE:TWX). owned cable and satellite network, HBO. In the recent, “Spring Forward” event hosted by Apple (NASDAQ:AAPL), HBO announced its three-month contract to offer on-demand access to its hit shows exclusively through Apple devices for $14.99 a month. Apple users can directly access hit HBO shows through the HBO Now app on iPhone, iPad, iPod touch and Apple TV.
The shows that will be offered include Game of Thrones, Silicon Valley, The Sopranos and Last Week Tonight as well as HBO’s movies. Though this will boost HBO’s business, which is directly marketing its content to viewers, Netflix might have to face stiff competition.
While Netflix fell 1.9% ($8.49) on Monday’s closing, Time Warner gained 1.3% ($1.08).
Cable Network Vs. Online Video
The rapid growth in Internet usage and increase in data consumption have revolutionized the entertainment industry. Now, viewers prefer to watch their favorite movies and shows at their convenience on their preferred device instead of television or silver screen. Given the ease and mobility offered by the connected devices, the contemporary entertainment space appears to be ruled by online video streaming companies, especially in the developed markets like the U.S. where Internet usage is at its saturation point.
For some time now, streaming services like Netflix, Hulu, Amazon.com’s (NASDAQ:AMZN) Amazon Prime Instant Video and Google (NASDAQ:GOOGL)’s YouTube have made Internet TV quite popular, resulting in large number of cord cutters. Hefty cable bills also contributed to the increase, as subscribers switched from expensive cable connections to low-cost TV channel subscriptions through free broadcast or over-the-top (OTT) broadcast via the Internet.
Advertising revenues, a major revenue source for cable companies, is also shifting toward digital video advertising, compelling television networks from traditional broadcasting methods.
According to research firm eMarketer, digital video advertising is growing at a rate of 43.5% year over year and by 2017, it would represent 15% of the digital advertising market. Hence, cable network companies are striving to offer online video streaming services to gain from this trend.
How the Change Would Affect HBO-Netflix Relationship
The two names in the broadcasting business are now competing head-to-head. Time Warner currently has a streaming service — HBO GO — that requires users to have a cable subscription to access HBO content online. With the launch of HBO Now, users will no longer have to subscribe to cable services, thus targeting cord cutters who use online video services like Netflix for video content and television programming.
HBO will be able to expand its services in territories, usually served by cable operators, without directing a lot of resources for marketing and customer service.
According to reports, given the extended reach, HBO will be able to increase its penetration to around 80 million households that currently do not view HBO. It is most likely that the other popular channels will follow suit, putting pricing pressure on the existing players, like Netflix. Going forward, we see a significant impact on Netflix’s association with carriers like Comcast (NASDAQ:CMCSA), Verizon and AT&T (NYSE:T) as these companies offer a ready source of revenues from viewers under paid contracts.
Conclusion
Time Warner has undertaken aggressive restructuring measures and remains confident of performing better as a standalone company, focusing on new business models such as the newly launched video streaming services. Further, Netflix has increased its focus on developing original content to reduce its dependence on content providers like HBO. It remains to be seen which of the players fares better in the competition.
Netflix currently has a Zacks Rank #3 (Hold).