Cord-cutting Game of Thrones fans, rejoice: Time Warner (TWX) will offer its HBO premium cable channel as a streaming video service starting next year. And make no mistake, the HBO streaming decision won’t disrupt the decades-old model of the Pay TV industry … it will blow it up like a neutron bomb.
Operators such Comcast (CMCSA) and DirecTV (DTV), which have long argued that the bundles of popular channels (HBO, ESPN and Comedy Central) along with less popular stations (JBS-Jewish Broadcasting Service) offer consumers the best value for their money, are in a bind.
Offering channels on an a-la-carte basis would cause networks to close, cost thousands of jobs and wouldn’t save consumer a dime — at least that’s the view of service providers. Now that theory, which I always thought was suspect, will be put to the test.
The HBO streaming service will force the industry into a tough spot. To prevent millions of customers from cutting the cord, pay TV companies will have to shrink the size of the hugely profitable bundles, cut the price of their service or both. Their promotional budgets will skyrocket, and I predict cable and satellite advertisements will become equally if not more obnoxious that the marketing being done by the wireless companies.
Apologies in advance for that last part.
Internet Will Be Crucial for Cable Providers
But before investors start fitting Comcast for a casket because of HBO streaming, it’s important to remember that they also are big players in the high-speed Internet market. In fact, Comcast is the biggest provider of the increasingly important service, and will have an even bigger foothold once the Time Warner Cable (TWC) gets approved by regulators. All that HBO video content won’t stream itself.
Moreover, HBO estimates that it will earn hundreds of millions of dollars from its new HBO streaming service, which means that other big cable channels such as CBS’s (CBS) Showtime, Discovery Communications’ (DISCA) Animal Planet, Disney’s (DIS) Disney Channel, Viacom’s (VIAB) Comedy Central and A&E Networks’ History could theoretically make big bucks as well.
If people needed another excuse to buy TWX stock, HBO streaming is as good a reason as any. Chief Executive Jeff Bewkes is making the offering a focal point of his efforts to prove Wall Street that he did the right thing in turning down Rupert Murdoch’s low-ball $75 billion unsolicited offer.
Bewkes has slimmed down Time Warner by shedding poorly performing assets such as AOL (AOL), Time Inc. (TIME) and Time Warner Cable (TWC). The company recently gave very bullish guidance, which should boost TWX stock as well.
The Net Neutrality Issue
One thing that HBO hasn’t made clear, however, is if its riches are contingent on paying Comcast and its rivals for extra-fast access to its network. Odds are that they will gong to have to do that since Netflix has already agreed to do precisely that in a deal that is worth billions to Comcast.
CEO Brian Roberts has got HBO over a barrel since customers service aren’t gong to tolerate poor quality streaming video for a millisecond. Neither will customers of the other channels that I predict will follow HBO down the streaming video path.
All that talk about net neutrality from President Obama and his liberal allies will in the end be just that … talk. FCC Chairman Tom Wheeler supports so-called Internet “fast lanes” as long as the deals are “commercially reasonable” which is a ill-defined concept that’s more of a “you know it when you see it” kind of thing — kind of like pornography.
This seems to be the right approach. Treating all Internet traffic the same sounds great in theory, but is going to be tough to pull off especially since video bandwidth hogs such as the soon-to-be launched HBO streaming continue to grow in popularity.
In the end, Comcast will come out a winner in changing face of the Pay TV industry, because the company, which is among the most hated in the U.S., always wins. With a price-to-earnings multiple of about 18, CMCSA stock — which hasn’t done squat this year — is right in line with most peers.
TWX and CMCSA stock aren’t going to impress your hipster friends, but they will do wonders for your portfolio.
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As of this writing, Jonathan Berr was long CBS. He also has a freelance relationship with the company.