Netflix reports earnings later today and optimism reigns, with 2 million new U.S. subscribers expected, according to a Bloomberg survey. Leading into today, the company was further bolstered by a report from the research firm NPD that it was gaining customers at the expense of premium channels like HBO, Showtime and Starz. This was the very strategy Netflix CEO Reed Hastings hoped to pull off — to get better at being HBO before HBO got good at being like Netflix — so the news should have been pretty exciting. And sure enough, the NPD report was everywhere: “Netflix Is Slowly Destroying HBO’s Customer Base,” read Business Insider’s headline, one of many. There’s just one problem: It isn’t true.
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In a battle of dueling market-researchers, the firm SNL Kagan, which has been tracking cable for about as long as there has been cable, confirmed that each of the pay channels actually gained subscribers over the past year. HBO added 600,000, Showtime pulled in 900,000 and Starz picked up 1.2 million, according to Variety. The three networks all strongly disputed NPD and backed Kagan. ““The (NPD) study does not accurately reflect actual subscriber counts,” Showtime said. HBO told Variety NPD was “simply incorrect.” While the cable channels altogether gained only about half of the 6 million new domestic subscribers Netflix managed, their results belie the claim that Netflix is doing significant damage to the cable business model. If anything, what seems to be happening is that Netflix is becoming the most popular “premium channel” of them all.
That, in fact, is Netflix’s ideal scenario. It just went live on cable boxes in Sweden, with Com Hem. And, because those boxes are powered by Tivo software, searching for content brings up Netflix content alongside cable programming. I saw a demo of the service at CES in Las Vegas earlier this month and it was simple and clean. While Netflix has managed to get similar deals in the U.K. and Denmark, it thus far has been unable to convince any U.S. operators to carry its service as a “channel.”
One thing that might change the equation is if cable itself gets shaken up. Intel spent the better part of two years working on a new service called OnCue that they hoped to launch as a cable competitor. It would serve popular cable channels over your broadband connection with a fancy new user interface and some unique features for recording programs. Unfortunately, as they were preparing to close deals for content, the company shifted strategy and has sold off the venture to Verizon. It’s less clear whether Verizon will do much more than use the service to improve it’s Fios TV at this point, though it could launch it outside Fios territory as an alternative to Comcast, Cox, et al.
But OnCue isn’t the only service of its kind being planned. Sony has a similar offering in the works that I reported on last August. It reiterated its commitment to the service at CES as well. Others are sniffing around. While Amazon denied a rumor it was interested, there seems little doubt that Apple’s dalliance with television centers around a cable-like offering that somehow rewrites the rules of how you decide when, what and where to watch.
Which brings us back to HBO. So far, the network’s incredibly popular programming has been tethered to the requirement you buy cable service along with it. While this frustrates “cord cutters” that have or want to drop cable, it serves HBO quite well. The company receives about half the revenue people pay for the channel, which is somewhere around the $8 Netflix receives. But it doesn’t spend much on servers to distribute it as most of its 29 million viewers watch on plain old television. HBO, though, does offer HBO Go, a fantastic streaming app. And that app has provided a bit of a backdoor to get HBO without cable. So long as you have someone’s account info and they aren’t watching Go at that moment, you can use their account and access everything on the network.
What’s fascinating is HBO CEO Richard Plepler is well aware of this and he doesn’t much care: “To us, it’s a terrific marketing vehicle for the next generation of viewers, and it is actually not material at all to business growth,” he told BuzzFeed last week. Pleper went on to say that they were looking at ways to curb password sharing, but that at the moment young people using their parents passwords were the next wave of customers for HBO. And he was happy to have them watching. “What we’re in the business of doing is building addicts.”
Of course, if those addicts ultimately choose never to subscribe to cable, Pleper has a problem right? Well, not necessarily. While the model works for HBO today, it doesn’t plan to ignore a changing marketplace and let Netflix just “Blockbuster it” out of existence. ”If the market changes, we are not going to be caught without the ability to pivot,” he said, explaining that they have gone direct to the consumer in with HBO Nordic in Scandinavia and could do so in the U.S. as well if that ends up making sense.
For its part, Netflix has taken its own baby steps to curb password sharing. Basic accounts are now limited to two simultaneous users at once for $7.99 while upgrading to a “family plan” at $11.99 gives you four different programs at once. This, of course, is still a bargain for people sharing an account who don’t happen to be members of the same household. But if Netflix decides that it needs to crack down further, it can too. In the meantime, though, the focus is on adding customers through things like Netflix originals and better techniques to help you find something to watch. I’ll be back later with more on what the company has to say about this and everything else.