Michael Wolff on Why Time Warner Should Say No to HBO Spinoff

Illustration by Thomas Kuhlenbeck

Sure, the company's $30 billion crown jewel might rival Netflix on its own, but that's the reason to keep it, not sell, despite the digital cheerleaders.

This story first appeared in the Dec. 18 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.

Recently, The New Yorker, which considers itself an arbiter of media business reputations and metatrends, suggested Time Warner should spin off HBO. This then became the focus of a theory for deconstructing the fate of dinosaur media conglomerates: a Superman analysis in which coveted assets blast off from a doomed planet Krypton.

In a spinoff, a new public company is carved out of an existing entity, with shareholders of the original now owning shares in this new company. New Yorker financial columnist James Surowiecki theorizes that HBO is undervalued within Time Warner and that CEO Jeff Bewkes could realize HBO's full purported $30 billion worth in a spinoff. Similarly, Surowiecki says, Disney should have spun off its choicest asset, ESPN, in 2014, before it began losing subscribers: "It's hard to argue that Disney wouldn't have been better off banking $50 billion in 2014."

The first and critical flaw in this argument is the misunderstanding that, in a spinoff, the company doing the spin gets the money. In fact, all value goes to its shareholders. The originating company doesn't bank anything (and Disney actually shares ownership of ESPN with Hearst, complicating any spin-out plan). It might be true that a spinoff of HBO would be good for HBO shareholders, but it is much harder to argue how this would be good for Time Warner shareholders deprived of both the value and the leverage of one of its key assets. Hence, in Surowiecki's scenario, the HBO side might go up, while the Time Warner side might go down, meaning nobody would make anything, but rather lose millions in the cost of such a deal.

The column is premised on the pro-digital-media assertion by the analyst Richard Greenfield that, "The way people watch TV really is changing dramatically. And no traditional media company is doing a good job of dealing with it." This in itself would cause immediate eye-rolling on the part of most executives at traditional media companies, because Greenfield is the analyst who is constantly quoted on the subject of TV's transformation and of the industry's inability to adapt.

Surowiecki and Greenfield's point is about cord-cutting, a Greenfield-promoted anxiety that contributed to the drop in television stocks this summer and fall. It's the tech position: TV viewers — well, younger ones anyway — are fleeing to digital distribution platforms. Traditional television sees the flight as an expansion of the TV universe: more people watching more content that the industry owns, if not, per se, more television.

Curiously, the success of HBO — which, independently constituted, Surowiecki seems to suggest, could be a supercharged Netflix — now is dependent on the cord-connected universe. HBO makes a profit of $2 billion a year, whereas Netflix, with similar revenue and costs, makes hardly anything. A key difference is that HBO subscriptions are sold in cable packages, whereas Netflix bears the cost of its own sales. Part of HBO's strength in creating favorable deals for itself is the complex leverage it has with cable operators because of its relationship to Time Warner's Turner cable channels. Similarly, the Turner channels would suffer without HBO, even as HBO's leaders have begun to chart a digital-only path with the HBO Now service, available without a cable subscription.

It is true that Time Warner is the spinoff king. It divested itself of virtually all of its low-growth assets during the past decade. First its music division, then its cable system, then AOL, then its publishing group — all gone. This strategy has doubled down on cable television's extraordinary gains in profitability. Such growth recently has slowed, arguably not because consumers are less interested in television but because of the technology businesses' efforts to compete for a place in the ever-more-lucrative video marketplace. It's not a weak market, but, increasingly, a war for dominance in a strong market. (In this, Time Warner, like other traditional media companies, arguably holds a content currency that digital competitors will increasingly bid up.)

The New Yorker piece might reasonably be read as another variation of the tech echo-chamber PR campaign to favorably position its digital platforms, still offering low returns, against traditional ones. "HBO looks set to thrive in a cord-cutting world; Time Warner's cable networks are more likely to struggle," says Surowiecki, adopting the tech industry view without offering details.

Even if he is correct in identifying HBO as a notable survivor in the television wars and Time Warner's other yet-highly profitable assets are on their way to tanking, the argument would be backward: Time Warner ought then to spin off everything else and keep HBO. If HBO is such a great business, then the folks at Time Warner who have so successfully managed it — Bewkes once ran HBO — ought to keep doing just that.