Why HBO Go doesn't pull out all the stops

Analysis: New online strategy only benefits subscribers

Even before HBO officially unveiled its new broadband strategy Wednesday, the buzz had been building for HBO Go.

"Spending 30 seconds with HBO Go makes you want to throw out your cable box," wrote Pali Capital Richard Greenfield last month, when the site was in beta deployment.

But as it turns out, tossing cable equipment would be a bad idea because those who don't buy the cable box can't partake of HBO Go. And yet HBO Go doesn't require usage of a cable box because it exists online.

Confused? Welcome to the growing tension that lies at the heart of HBO in the digital age.

HBO Go offers only its subscribers a deep, on-demand trove of HBO programs to be streamed online. Though starting small with Verizon's Fios TV, it's the most significant enhancement to HBO's business since the 2001 introduction of HBO On Demand, which has grown to the point that it adds 20% of the audience to the average HBO program.

But HBO Go is a supplement, not an alternative, to HBO's existing monthly subscription. An alternative would be an understandable assumption because online video typically allows viewers to bypass traditional windows to access content when, where and how they want it.

No one is better situated than HBO to make this a reality given the strength of its brand. Like almost no one else in the media universe, it has conditioned the marketplace to pay for its product. And the Internet threatens to render the whole notion of distributors like Comcast or DirecTV an unnecessary middleman because HBO can go straight to consumers selling video from its own website.

But in the short term, HBO is beholden to Comcast and its ilk because they fork over billions of dollars in affiliate fees. That's why cable programming is nowhere near as freely available online as broadcast content is; new initiatives like Comcast's XFinity TV will erect "authentication" hurdles that make online programming the exclusive preserve of its subscribers.

And while new content aggregators could represent new revenue streams that will lessen HBO's reliance on Comcast, that won't make much of a difference when Comcast acquires stakes in those aggregators, like Hulu, which is partly owned by NBC Universal. The Internet itself isn't even safe harbor considering Comcast is in the business of selling online access, too.

HBO finds itself caught between two worlds, and HBO Go is a pure expression of that complicated reality. The very notion that HBO is even bothering to launch it as a standalone branded entity tells you it has an eye on a future where that matters. That's not the case currently on Comcast, where the HBO Go offering is subsumed by the cable operator's Fancast platform.

HBO has always played hard to get -- literally. HBO's channels are a tier unto itself that can't be purchased without buying the basic tier separately. Even if a customer has the basic tier and wants to sample just one episode of an HBO series, HBO On Demand can't be accessed without buying HBO's channels. Sure, one can go to iTunes to buy an individual episode, but those episodes are dated enough not to cannibalize another key HBO concern: its DVD business. Or, if you're really patient, wait several years until HBO syndicates its programs onto basic-cable channels.

There's got to be some wiggle room in HBO's existing windows beyond its modest iTunes outlay that allows for fresher programming to be rented in some piecemeal fashion without cannibalizing what seems like a distinctly different consumer segment: those looking to buy entire seasons at a price 10 times more expensive.

Still, there's no denying the existing barriers to entry have long paid off handsomely for HBO, which is projected to deliver to more than $1.5 billion of Time Warner's pre-tax earnings for this fiscal year.

HBO co-president Eric Kessler knows what side his bread is buttered, and gives no indications he has an eye on the next course. "We benefit tremendously from our partnership with television providers," he said. "We're not interested in disaggregating the content."

And why should they be? The market for online video distribution is infinitesimal compared with the pay-TV universe -- today. But a smart business like HBO thinks long term, and built into any strategy has to be a hedge that keeps a toe dangling in new pools of consumption, even if puddle deep. HBO should think of the Internet less as a VIP wing for its paying customers and more as a zone for expanding their ranks beyond its impressive though plateauing subscriber base of approximately 30 million.