The Math Says HBO Shouldn't Go Direct, But They Left Innovation Out Of The Equation
from the take-it-to-the-bank dept
There's been plenty of talk about HBO and its ongoing refusal to offer a standalone internet offering for its content (unless you happen to live in the lovely Nordic region). A few months ago, this discussion took something of a viral turn with the website TakeMyMoneyHBO.com, which tried to calculate how much people would pay for standalone internet/mobile access to HBO content -- which suggested people would be willing to pay an average of about $12 per month. Now, we can all take online internet surveys with a pretty big grain of salt, but there clearly is a lot of interest in people getting such a service. The straight math says that at $12, it would be a good deal for HBO, which is rumored to actually get about $7 or $8 per subscriber via cable and satellite. But... as Ryan Lawler at TechCrunch wrote at the time, it's not that straightforward, and you can show how the math doesn't quite add up:More importantly, it wouldn’t include the cost of sales, marketing, and support — and this is where HBO would really get screwed. Going direct to online customers by pitching HBO GO over-the-top would mean losing the support of its cable, satellite, and IPTV distributors. And since the Comcasts and the Time Warner Cables of the world are the top marketing channel for premium networks like HBO, it would be nearly impossible for HBO to make up for the loss of the cable provider’s marketing team or promotions.Lawler insists the math doesn't add up because without that marketing push, the number of subscribers would be much lower. HBO claimed that Lawler's math was right. And it may be. For now. But that's really dangerous thinking.
Think about it: Every time someone signs up for cable or satellite service, one of the inevitable perks is a free six- or 12-month subscription to HBO. And those free subscriptions are rarely, if ever, cancelled once the trial period ends.
We've pointed out before that it's quite tempting for legacy players to think that they can wait out disruptive innovation. They talk about how the new products and services aren't good enough or don't make enough money to bother getting into that space. Often they'll directly talk about how the new services don't make the same amount of revenue as the old ones (or they'll make some crack about "dollars into dimes.") And, of course, they insist that when the money is there they'll make the switch. But, if you understand anything about the history of disruptive innovation, you know that if you wait until that point, you're already behind. Someone else has already taken over that market, and your "switch" is often seen as way too little, way too late (not to mention that it's often accompanied by massive bungling, as the slow entrance also means not really understanding enough about how that market works, while all your competitors spent all that time perfecting their solutions).
MG Siegler has a great post talking about this very concept as it relates to HBO, responding to Lawler (again) and his recent interview of an HBO exec during a panel at TechCrunch Disrupt. Once again, HBO insisted that Lawler was right and that "the math didn't make sense." But Siegler points out, correctly, that innovation beats math every single time. Siegler basically highlights the key point of Clayton Christensen's Innovator's Dilemma: it's really really tough for legacy players to eat their own cash cows and bet on something new. He points to another excellent article, by Farhad Manjoo at Slate, about how Apple actually does this really well, specifically how it totally cannibalized its cash-cow iPods with the iPhone:
Put it all together and you get remarkable story about a device that, under the normal rules of business, should not have been invented. Given the popularity of the iPod and its centrality to Apple’s bottom line, Apple should have been the last company on the planet to try to build something whose explicit purpose was to kill music players. Yet Apple’s inner circle knew that one day, a phone maker would solve the interface problem, creating a universal device that could make calls, play music and videos, and do everything else, too—a device that would eat the iPod’s lunch. Apple’s only chance at staving off that future was to invent the iPod killer itself. More than this simple business calculation, though, Apple’s brass saw the phone as an opportunity for real innovation.That, in a nuthsell, is what most companies fail to do. It's why Clayton Christensen's book sells so well, even though very, very few companies have any idea how to do what Apple did and "eat its own." But the point is there. If you focus on "the math," you're going to miss the market and be way, way too late. Back to Siegler:
Moore's statement about HBO is correct. The math is not in favor of selling HBO access directly to consumers. But if we're just thinking about this from a pure product perspective, I don’t think anyone would disagree that this is what we all want. HBO is choosing not to build the service we will love, they're choosing the short-term money. The safe bet. The math.He's right. And the more you look at the economics of innovation, the easier it is to understand why innovation always beats math. It's because "the math" that people do is of a static world, for the most part. They use past performance and metrics built on a different market. They don't understand how quickly a new market grows, and how much larger its overall potential is. And that's because we have difficulty in mentally dealing with non-zero sum markets, preferring to think that it's a one-for-one switch. But, it's not. Innovation expands markets in new and unexpected ways, often quite rapidly (though also, deceptively slowly at first, because the growth is often in a tangential market that people don't even recognize).
But if they don’t diverge from this path, it will lead to their demise. Innovation always beats math, eventually. That, you can take to the bank.
So they come up with spreadsheets and "models" that try to predict when the math says it's time to switch. And all of that time they're not innovating. But since the disruption is brewing in a much faster manner, and in a different spot than they really think it is, the time to switch is usually as soon as you realize the innovation is happening, not when the spreadsheet tells you to. It's not just about choosing "the safe bet" vs "the service we love." It's about how disruptive innovation guarantees that those who don't build for the markets of tomorrow, don't really have much of a market tomorrow.
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Filed Under: disruptive innovation, economics, hbo, hbo go, innovation, math
Companies: apple, hbo, time warner
Reader Comments
The First Word
“Kodak didn't want to cannibalize their film products with digital
HBO didn't want to cannibalize their cable products with standalone internet offerings
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In the end it's the same with music and movies too. You can still sell the physical goods and people will buy them. But for God sake, go for newer and innovative solutions. Sometimes the investment needed for those new markets is just ZERO.
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They've got to get out ahead of this, though. Film makers are approaching the half million dollar mark on Kickstarter already. HBO has a finite amount of time to stay relevant.
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Srsly, there are tons of possibilities if you actually embrace them.
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Then again, I was thinking of putting in "package" to my comment, but left it out, but it still fits it. Part of the thinking reminds me of the favorite system that Dish has (I'm not familiar with the others out there) where you can group the channels that you watch and leave everything else out, but why do we have to pay for those extra channels? Let us make our channel package and then pay for what we get, not for what we don't need!
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... Again, why can't it be done?
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Short Form
Answer: The math says wait.
Followup Question: What's that cloud of dust way down the road?
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Bah. Innovation as defined around here is pretty meh
Face it. Watching TV is pretty much a passive game. The only innovation that goes on is in delivering the product. As you point out, the cable companies do quite well with their inane subscription fees and crazy requirements to upgrade to watch the fancy content.
If they're doing so well, why would they want to choose the "innovation" on YouTube? That just seems to be a collection of mildly amusing cat videos shot with someone's cell phone. Only in your book is poor video quality and zero editing considered "innovation".
The fact is that it takes cash to do real video innovation like 3D movies, multichannel sound, etc. That's not going to come from some low-rent streaming site or the wide-open Internet.
I like the cat videos. I watch them occasionally. I even chuckle. But I don't see that as innovation. If I want innovation, I pay big bucks to HBO for "Game of Thrones" because I know that all of those innovative sets and things require cash.
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Re: Bah. Innovation as defined around here is pretty meh
Ok. If anyone ever does a good job and makes effective DRM that isn't cracked within a few days, we'll be sure to praise them...
That just seems to be a collection of mildly amusing cat videos shot with someone's cell phone. Only in your book is poor video quality and zero editing considered "innovation".
Sounds like you haven't been on YouTube in 5+ years. Time to check it out again, bob.
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Re: Re: Bah. Innovation as defined around here is pretty meh
DRM doesn't need to be perfect. It just needs to be enough of an impediment to help encourage people be honest. Door locks aren't perfect but they help keep honest people honest.
So let's hear some praise for the systems like the one that NBC deployed to make sure that people pay into the cable TV system. It worked well enough.
As for your crack about YouTube, I continue to stumble upon plenty of pirated music mashed up with pirated still images. It's nice that they're licensing some legit content but that only makes my point again. It's only a matter of time until they start charging for subscriptions. Advertising doesn't pay very well and so the stars on YouTube are things like Annoying Orange. The production budget on that is something like five or six dollars for new fruit.
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Re: Re: Re: Bah. Innovation as defined around here is pretty meh
How do doors make people honest? Aren't the TPP negotiations going on behind closed doors and not once are we given a straight, honest answer about what's going on? I don't think DRM is good to build honesty.
Yay... and I'm doing that as flat as humanly possible.
... Though I have no opinion on the Annoying Orange, they do have a deal with Cartoon Network so money won't be an issue.
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Re: Re: Re: Bah. Innovation as defined around here is pretty meh
Apple didn't build itself with DRM. They had to have DRM laced music files in order to get the catalogs from the music publishers. They succeeded in spit of DRM not because of it. They were vehemently opposed to DRM and pushed back against the RIAA idiots to get it removed from the entire library.
You should at least get your facts straight if you're going to argue them.
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Re: Re: Re: Bah. Innovation as defined around here is pretty meh
Except it is one of the reasons that push people towards piracy. I've downloaded a DRM free copy of all my legit content or circumvented using open source software.
So let's hear some praise for the systems like the one that NBC deployed to make sure that people pay into the cable TV system. It worked well enough.
And then disruption came and it's failing. Thank God because NBC was able to force ppl into pay due to a Government granted monopoly and we are seeing this monopoly fall in pieces.
As for your crack about YouTube, I continue to stumble upon plenty of pirated music mashed up with pirated still images.
Fair use as far as I'm concerned. Sure there are the ones that just lump a bunch of images together to actually make the music available but.. So what? The music is being spread around, it's proven that youngsters now discover most of their songs and bands via Youtube (they use it much like radio). So the artists should be DEAD worried if they aren't on lousy slideshows all around youtube.
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Either that, or you do and you're scared to death of it.
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Re: Bah. Innovation as defined around here is pretty meh
Hey bob, did you know that designing ads for spamvertising takes a pretty deep know-how of color theory, design hierarchy and psychology? Does that mean spam is innovative?
"If they're doing so well, why would they want to choose the "innovation" of Netflix?"
FTFY
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Re: Bah. Innovation as defined around here is pretty meh
Innovation? No, I believe the word you're looking for is "gimmick". 3D does nothing to improve the story nor the acting.
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Re: Bah. Innovation as defined around here is pretty meh
Yup the great wall of the North they built must have cost billions to build! Maybe even more considering global warming and stuff!
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Re: Bah. Innovation as defined around here is pretty meh
They aren't a replacement yet, but they are good enough to be used in some situations.
Or if you are interested in long form content you might look at the Tromafilms channel on youtube. or look at the 3D channel on youtube, or look at ultra-high res videos (assuming you have a display capable of showing 4K content.) Some things will succeed, others will fail. If you don't try new things it is inevitable that you will eventually fail.
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Obviously, cause DRM offers no benefit whatsoever to the customer.
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Wow. I've never seen anyone define NOT sharing as sharing. This may have to become the new definition of "chutzpah".
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Strongest reality distortion field in the world.
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He's either invented his own reality or his own language, and seems incapable of communicating on the same level as everybody else.
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Also, I can't tell what you're saying in your second sentence. You're missing a few words, but then it still won't make any sense whatsoever.
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Re: Re: Re: Bah. Innovation as defined around here is pretty meh
Including DRM with your product is forcing your customers to purchase malware and making it easy for the pirates to offer a free product that is superior in every way.
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Re: Re: Re: Bah. Innovation as defined around here is pretty meh
I don't need to pirate for entertainment. Watching you squirm as a John-Steele-supporting, library-hating shitstain is plenty entertaining. You still haven't told us what your "product" is, bob! How can we avoid pirating (read: perusing) it if we don't even know what it is? But hey - since you support John Steele I think we can hazard a few good guesses.
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Re: Re: Re: Bah. Innovation as defined around here is pretty meh
Indeed you are, bob. It's jut how you roll.
If I'm a customer, I don't want to be only sucker actually paying for something while I everyone else is getting a free ride by downloading it and sharing it.
So, you enjoying the media you paid for depends on whether everyone else paid too? Yeah, that makes sense.
DRM helps with that.
DRM that's been broken every time, that DRM? Man, it's just too easy to prove you wrong.
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Re: Bah. Innovation as defined around here is pretty meh
And yet the internet kids crack any DRM in days, DRM itself annoys legit consumers and those minds could be being used in useful creations. Why the hell would any1 prise something that takes value away from the product?
Face it. Watching TV is pretty much a passive game.
Yes and that's why most of my friends don't watch TV at all. But it can be active, there's enough technology to allow people to mount their own 'channels' the way they want.
That just seems to be a collection of mildly amusing cat videos shot with someone's cell phone.
If you search for cat videos on Youtube you'll obviously find cat videos. Try refining your terms. Also sometimes Youtube is about HOSTING the videos. Most videos I find come from outside sources that use Youtube as a platform.
The fact is that it takes cash to do real video innovation like 3D movies, multichannel sound, etc.
And those all came from outside the damned studios. Thank the tech companies for that.
If I want innovation, I pay big bucks to HBO for "Game of Thrones" because I know that all of those innovative sets and things require cash.
http://takemymoneyhbo.com/
We want to pay, HBO doesn't want to provide us the service =)
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Re: Re: Bah. Innovation as defined around here is pretty meh
The problem is that everyone is freeloading off of everyone else. The fees for sports are subsidized by the fees from the folks who watch the macrame channel. The fees for the macrame channel are subsidized by those who watch sports.
The industry desperately needs to collect $100+ from each house on average or it will go into a big collapse. So that's why they want to insist that you buy cable. They don't want to charge you $100 for the HBO alone.
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Re: Re: Re: Bah. Innovation as defined around here is pretty meh
You know what caused that? Lack of foresight.
It's their own fault.
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Re: Re: Re: Bah. Innovation as defined around here is pretty meh
And you keep babbling "freeload" like a parrot when we are precisely discussing I want to pay but HBO doesn't let me. Reminds of those scratched vinyls...
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Re: Re: Re: Bah. Innovation as defined around here is pretty meh
Sounds like we have a product which is severely overvalued, and is being propped up by extortionist business practices.
There are way too many cable tv channels, and way, way too little worthwhile programming.
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IF hbo made more money on direct to consumer online sales (per show) than it does selling its series to international channels, it would do so. You can NOT have worldwide VOD and intl sales.
Secondly, if it unbundles from comcast, who pays for the new pilots and series? I see you dishing a couple bucks for game of thrones - but no one has mentioned n1 ladies detective agency, bored to death, etc. And the upcoming pilots? Think HBO on its own can sustain the millions of dollars in deficit finance before nabbing 2.99 from you?
They should be thinking about innovation. But don't pretend you know the answer.
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Re: Re: Re: Re: Re: Bah. Innovation as defined around here is pretty meh
Not enough to understand what they're trying to say rather than finding a pithy name to call them in order to reject their opinions.
But, hey, these are only the people don't/can't currently subscribe to HBO that they're supposed to be trying to get to subscribe. Why should their opinion matter, huh? Why should "I don't subscribe to HBO and this is why" be a valid statement, as long as you can reject people for reading a site they possibly don't visit (I know I don't).
"but no one has mentioned n1 ladies detective agency, bored to death, etc. "
Well, I've certainly never heard of either of these shows. Should I have done?
"Think HBO on its own can sustain the millions of dollars in deficit finance before nabbing 2.99 from you?"
Many other companies do, utilising various types of business model that don't depend on locking out a large potential audience. Why can't HBO?
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Re: Bah. Innovation as defined around here is pretty meh
Let that sink in. The people who make the shows and buy the movie rights selling directly to their customers and completely cutting out the middleman. Now they have a symbiotic relationship but even the major networks have cut out cable providers and introduced things like Hulu.
Its not even a very big innovation, for instance Netflix is experimenting with inhouse productions, but the fact that HBO is so popular, and is a big part of why people get an expensive cable package they don't want, means they can charge subscribers, or try out advertising themselves, or sell on iTunes, and sell directly to the consumer with no one to piss off. I would buy HBO, but there is no way in hell I am going to get cable for it, and I know I'm not alone. So people tend to pirate, because that is far easier than a whole cable thing, but not as easy as a subscription with guaranteed quality. They get more money, we pay less, and the dirty cable companies get pushed out.
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Re: Bah. Innovation as defined around here is pretty meh
Never mind the pirates, Big Content has to worry about it's own back catalog available for purchase in Walmart at cut throat prices.
The real question is who is going to provide the better mouse trap.
Incumbent land line monopolies are dinosaurs that don't even notice the asteroid burning through the sky.
If you think 3D is an "innovation" then you're just another one of the dinosaurs.
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Re: Bah. Innovation as defined around here is pretty meh
2. Spending lots of money on something doesn't increase it's quality. 3D doesn't increase quality. Multi-channel sound doesn't increase quality. $200 million movies aren't better quality. The best movies I've seen in the last 10 years have been under $50 million, and many of them have been documentaries. The worst movies I've seen in the last 10 years have all cost more than $150 million to make. Apparently, you are in love with Hollywood's overpolished turds.
3. I have watched three HBO series lately: The Pacific, John Adams, and Boardwalk Empire. How did I get them? My local library. Who needs piracy? Who needs cable? My taxes provide all the entertainment I need. Why don't you rant against "big libraries"?
4. You must have an appalling ability to find quality original content on Youtube. It's out there, and it's more entertaining and informative than what Hollywood comes up with. Oh, and there's Vimeo too. It's not all about Google.
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Re: Re: Bah. Innovation as defined around here is pretty meh
Beyond the original stuff, they were better in the 70s.
Between the various competing networks and the various exclusives you end up needing to buy it all to get it all and that ads up. I suspect that this same problem will plague streaming. (no service or app will have it all)
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Making it hard to see your product just means I won't see your product.
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Re: Bah. Innovation as defined around here is pretty meh
Let's take for example "Table Top" from the Geek and Sundry channel ( http://www.youtube.com/user/geekandsundry ) it's a studio produced show in an up to 1 hour format that is uploaded in 1080p hosted by Wil Wheaton in which he sits down and plays a different table top game each week with 4 guests. Those guests range from the head of Blizzard to writers artist and actors that I admire. It's funny, well produce, hosted by a guy I like that shows content I enjoy with people I'm interested in.
Geek and Sundry is also currently doing "Written by a Kid" where they create short films based on a story told by a kid. These films are produce each week by a different and wide ranging set of talent and actors. It's also going to be home to the new season of The Guild that is a short form comedy show about an MMO guild that is as good or better than a lot of crappy sitcoms you'll find on TV.
That's just one channel and there are any number of others offering content that is on a par or better with content on TV that would never have been greenlit for production on it.
You want to talk about innovation and yet you simply dismiss the innovation that is coming out of the best of youtube because of the worst of it. If we apply the same logic medium in which you claim to see innovation you should judge the market in which that innovation is coming from by the lest innovative thing in it.
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Re: Bah. Innovation as defined around here is pretty meh
You fail ay using youtube, here's an awesome video related to GoT.
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Re: Bah. Innovation as defined around here is pretty meh
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No HBO for me then.
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"Maybe they could just offer a lower fee for those with a cable subscription and launch the independent service anyway?"
This.
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1. So every add I see for Game of Thrones or other HBO shows is paid for by the cable co.'s?
2. At this point who hasn't heard of HBO?
3. Cable Companies continue raising rates and charging for a everything little thing(like 2.50 per month per remote)and when difficult decision need to be made to save and few bucks HBO and other pay services go bye bye including Cable itself! So they might be helping in one end but totally screwing it up on the other!
4. I might be willing to sign up for HBO GO standalone but somewhere between 5.00 to 9.00 per month tops. I see no real value of paying more when Amazon, Netflix provide more for less.
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This isn't true at all and I'm calling it out for its accuracy. Based on comments from cable subscribers who are hit with a shocking increase of the next month's cable bill after the free trial, you can bet more turn off the service than keep it.
Because it's certainly not $12/mo, or the $7/$8 proposed per month fee would be.
And you can bet people would definitely drop the more ridiculously over-priced cable version to help pay for the rest of the entertainment these industries artificially mark up in price but expect everyone to afford.
Then again, the online version only fuels the next battle forthcoming when these industries do adapt: nickel and diming the hell out of every American with monthly subscriptions to 20,032 sites because each will host exclusive content.
This stuff makes me sick thinking about it.
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On a more serious note, I'm one of those people who only has the internet, iTunes, and a cell phone. I don't want a cable subscription to watch your show. I can watch the newest episode of Doctor Who the day after it airs, and that's a pretty good deal for me.
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Still trying to figure out how you slept through an MBA. You seem to have missed so much!
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People should learn from past mistakes, my friend. Try it, doesn't hurt and might be thrilling.
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DRM isn't the only problem out there.
I do spend money on HBO via their traditional cable TV distribution. For all it is Triassic in relation to modern Internet distribution it does fit my basic objective. I get to trade dollars for entertainment. I don't trade my time and the chance to bombard me with messages persuading me to act against my interests for entertainment. I don't trade personal information about myself, family or friends to people intending to use it to persuade us to act against our interests for entertainment. I trade dollars and like it that way.
So, sure, it might be nice to just buy The Newsroom or Game of Thrones or whatever at my convenience and it would be really nice to save it all on a jukebox. Despite this HBO is doing something right which matters to me.
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Kodak didn't want to cannibalize their film products with digital
HBO didn't want to cannibalize their cable products with standalone internet offerings
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I never saw myself as someone that would even consider cancelling cable. Live sports and blackout restrictions have me stuck into paying the crazy bills, and a few other quality channels like HBO, AMC, and FX have helped me justify it. That's until now, when I realized that its just not worth the $750 dollars a year I pay for essentially 3 or 4 services that I want.
Eventually the prices just aren't going to be justifiable for people that can see more and more quality entertainment going over the top, priced closer to what they are actually worth
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and it's hard to believe that the awesome quality of many HBO shows doesn't act as its own advertisement. I mean, Game of Thrones isn't the most torrented show this year because of some cable company's advertising campaign.
It's because it's brilliant cinema. And that's rare enough these days that word gets around.
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Proxy?
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Content producers don't really have to innovate
I'm not sure it would be in their interest to get in that business. Partnering with other companies who provide the access and focusing on making content is probably what HBO should do.
Now getting HBO on Hulu or Netflix might be a very wise decision.
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Summary: Current HBO subscribers + [Current HBO subscribers x 2 (torrents) x 2 (streaming) x .4 (40%)] x $12/month = more profit than what they make today.
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That 70s Channel.
If they adapt, some of those freeloaders will start paying. They may even attract new customers that are interested in HBO but not the cable baggage that comes along with it.
HBO needs to channel it's management from the 70s back when they were the leading edge.
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Eat it's Own
(probably a little off, but the same idea)
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