NEW YORK---Time Warner, Inc.'s (TWX) decision to offer its HBO multi-channel premium pay television service in an over-the-top (OTT) platform capitalizes on its position as the industry's leading premium cable network and on HBO's initial success with its authenticated HBO Go service. Fitch Ratings believes the launch of a streaming OTT service is in step with HBO's operating objectives to maintain its content and programming leadership, invest in technology to improve customer experience and service capabilities while increasing domestic subscriber penetration and capitalizing on revenue growth opportunities.
TWX's announcement, along with CBS Corporation's new multi-platform digital subscription service unveiled on Thursday Oct. 16 is in part an acknowledgement of the ongoing shift in video content consumption patterns that increasingly skew to online or digital streaming formats. In addition, earlier this month, ESPN announced that a framework has been created to allow ESPN enhanced digital rights to provide National Basketball Association (NBA) content for multiple ESPN platforms, including ESPN.com and WatchESPN. The parties have also established a framework for ESPN and the NBA to negotiate the launch of a new OTT offering in which the league would receive an equity interest. In parallel, TWX also received enhanced digital rights for NBA games on both its cable networks and Bleacher Report through the company's expanded television rights agreement with the NBA.
TWX's new OTT service is in line with its overriding strategy to leverage content creation and production capabilities and to align monetization opportunities with evolving media consumption trends. Overall, Fitch does not view the OTT service as a material threat or benefit to TWX's credit profile over the near term. However, the service does position HBO to capture meaningful revenue and cash flow growth opportunities, which in turn can improve financial flexibility and strengthen TWX's credit profile within the current ratings. Fitch notes execution risks are present related to the build out of business support infrastructure if the company elects to distribute at a retail level.
Central to HBO's growth plans is working with established multichannel video programming distribution (MVPD) partners to increase domestic penetration of HBO's service, convert non-revenue generating subscribers and address a growing market of potential subscribers outside the multichannel video service universe. HBO intends to initially target the OTT service at an estimated 10 million broadband-only domestic households that do not have access to HBO service and views the OTT service and incremental to its multi-prong strategy to expand its domestic subscriber base and grow revenues. HBO has built a domestic subscriber base in excess of 30 million subscribers including the addition of approximately 2.5 million subscribers during 2014 (across both the HBO and Cinemax brands).
Specific details of the new HBO service, including timing and pricing, have not yet been announced, but Fitch expects TWX to deploy the OTT service with a rational pricing and service model and to maintain the current ecosystem with its MVPD partners. Deployment of the OTT service can range in any combination from offering the service through existing MVPD partners (broadband-only plus HBO for example), establish new partners and delivery platforms, and a direct to consumer retail model. HBO will need to balance the service and economics of the OTT service with its embedded subscriber base to ensure its legacy subscriber base is not cannibalized by the OTT service.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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