Analyst Predicts 'Modest' HBO Subscriber Declines Amid Challenges From Netflix

Abbot Genser

Barclays' Anthony DiClemente cuts his price target on parent Time Warner, arguing that "substitution threats to HBO gather momentum."

NEW YORK - Barclays Capital analyst Anthony DiClemente expects "modest" subscriber declines for Time Warner's HBO ahead amid Netflix's continued growth and other competing options for consumers' attention.

In a report entitled "Can HBO Avoid True Blood?," he said on Friday that "substitution threats to HBO gather momentum." Meanwhile, Netflix itself is also facing new challengers. The new issue of The Hollywood Reporter analyzes how the assault on Netflix will shake out.

DiClemente predicted HBO subscriber declines of 1.4 percent this year and a 0.5 percent drop in 2012. But he said the pay network will still be able to grow operating income before depreciation and amortization in the mid-single digit percentage range thanks to built-in fee increases from TV distributors.

TW CFO John Martin recently predicted "very, very stable" U.S. paid subscriber trends this year.

His "incrementally more bearish outlook on HBO’s operating performance" led DiClemente to somewhat reduce his 2011 financial outlook on TW and cut his price target on TW's stock by $2 to $36. He also launched a below Wall Street average earnings estimate for 2012.

"The emergence of more intense competition in the film/TV distribution business, both in the early windows following theatrical release (Netflix, Redbox) as well as the pay TV window (Starz, Showtime, Epix, Netflix), has presented a competitive threat to HBO, which can no longer be ignored," DiClemente said.
"New channels of filmed content delivery are becoming increasingly attractive to the consumer both in terms of price and convenience, possibly whittling the value of HBO's content rights or HBO itself."

Particularly the emergence of Netflix as "an attractively-priced broadband distributor with a gradually-improving content offering presents a new form of competition which may weigh on HBO subscriber growth," the analyst argued.

DiClemente said he decided to take a closer look at HBO's position in the subscription video space amid Netflix's  foray into original programming with its play for House of Cards.

In 2010, HBO lost about 1.6 million subscribers, the majority of which were promotional and non-revenue generating customers.

DiClemente has an "equal weight" rating on TW shares.