"We are extremely lucky here on HBO, because we don't have advertisers," John Oliver said in August on his HBO show Last Week Tonight. "So if I want to say, for instance, that Cadbury Eggs are filled with dolphin sperm, or that Old Navy clothing makes you look like a tacky murderer, I can. And why? Because of HBO's business model, which nobody has been able to explain to me yet."
The line drew laughs, but Oliver was dead on. HBO's business model has been instrumental in the meteoric rise of not only Last Week Tonight, but also HBO's entire lineup. That business model goes like this: Households with cable TV pay extra to watch premium channels—and they can start paying to watch the channel online without a cable subscription in 2015. Although the network sells its original movies and shows in places like iTunes, subscriptions make up the vast majority of its revenue.
The fact that HBO has no ads means the network has no money tied up in its ratings. If each of its 43 million US subscribers watch 1,000 hours, 100 hours, or zero hours of "Game of Thrones" this year, it's all the same to the company's bottom line. Technically, HBO doesn't need viewers. It just needs subscribers.*
Compare HBO's business to most broadcast networks, like Fox, CBS, and NBC, who make most of their revenue from advertising, which depends on ratings. Broadcast TV won't survive on cable subscribers, alone. It needs viewers—and it tests and re-tests its shows to ensure that they will be watched by a sizable and sellable audience.
These are two business models living inside the same bundle. HBO is in the business of selling a brand. Broadcast networks are in the business of selling tickets.
If you don't think you can see microeconomics at work, just turn on your television. The networks relieved of the pressure to maximize audience tend to be the leaders in quality programming. HBO has won the most Primetime Emmy Awards for each of the last 13 years; its highbrow competitors, like Showtime and Netflix, follow a similar business model of subscriptions over ads. (Even AMC makes the majority of its income from subscription fees rather than advertising). Meanwhile, in the broadcast world over the past 13 years, the ad-dependent networks have played a mass-appeal game that has bequeathed to us populist entertainment with little chance of winning a best actor statue, including five Law & Order's, three NCIS's, and infinity reality shows.
It's too simplistic to say that broadcast business models will always give us Temptation Island (see: The Good Wife) or that subscription channels always produce The Wire (see: Arli$$). Great shows at HBO require world-class talent, exquisite vision at the programming level, a long-cultivated reputation as the place that creative show-runners sell their best stuff, and a dash of luck. Still, the subscriptions business model gives channels like HBO a special freedom in television—a freedom to pursue its own definition of quality over quantity.
This idea runs bigger than television and subscriptions. When you see a tower of unread New Yorker magazines spilling out of a bathroom wicker basket—or when you look at the November calendar page and realize you haven't been back to the gym you've paid since January—you are witnessing the virtues of a business model that charges us for our ambition rather than our behavior.
In November, a longform journalism start-up called Latterly will launch with a business model that might remind you of HBO.
Based in Bangkok, Thailand, Latterly will publish four new elaborate works of narrative journalism—with characters, plot, conflict, resolution, and all—on its website every month. The startup will charge readers $3 per month or $8 for a three-month subscription.
Aside from subscriptions, Latterly will have financial support from donors. But the list of obvious revenue sources ends there. There will be no ads—a quirk one sees occasionally with fledgling journalism startups these days. What’s more, the startup will apparently not care one drop about what takes off among readers and what doesn’t.
Who knows if this will work. Refusing advertising in journalism is a deeply risky strategy, since ads have long made news and entertainment—from 19th-century newspapers, to 20th-century radio and television, to 21st-century Web and mobile—affordable at a mass scale.
But for high-minded publishers writing for an elite audience, it makes less sense to sell attention on an article-by-article basis, because, well, just look where we pay attention online—quizzes, lists, comics, memes ... candy. We've always preferred the comics to the front-page news. But when the news came in a bundle, we had to buy Syria and gossip, together. In the unbundled world, most people find their gossip as easily as they ignore Syria. That can make it harder for solemn publishers to build a business through advertising alone—just as it would be challenging for HBO to green-light shows like Girls and The Wire if their quarterly profits were determined by mainstream viewership.
In publishing, as in television, maximizing attention is too often a race to the bottom. For companies in the business of producing quality over quantity, successes like HBO suggest another way. With subscriptions and other strategies to make money off your audiences' lofty aspirations rather than their sordid attention, it becomes easier to focus on art without worrying about ratings.
*In the long run, a network without viewers will become a network without subscribers. But since many people subscribe to HBO for one or two shows only, they might go months without watching the channel.
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