AT&T’s Troubling Plan to Change HBO

The telecom giant, which just acquired Time Warner, is seeking to drastically change the premium-cable channel in order to compete with the likes of Netflix.

This past February, HBO added the most U.S. subscribers in its history, boosting its user base by 11 percent (the company has some 142 million global subscribers). The steady growth of the premium-cable and streaming service to $6.3 billion in revenue last year helped power its parent company, Time Warner, to $31.3 billion in revenue—a 7-percent overall jump despite dips in other divisions. Since the telecom giant AT&T began its bid in 2016 to acquire Time Warner, it came to be widely understood that HBO was one of the most prized parts of the deal, which became official in June after a lengthy legal battle.

The channel’s stature is what makes it baffling to learn of reports that the new Warner Media chief executive John Stankey recently lectured HBO employees on the hard times ahead. In the eyes of Stankey, an AT&T veteran, HBO is apparently too small, too nimble, and too boutique—ill-fitted for a media world that’s all about size. During a closed-door June 19 conversation with some 150 HBO staff, “Stankey never uttered the word ‘Netflix,’ but he did suggest that HBO would have to become more like a streaming giant to thrive in the new media landscape,” reported The New York Times. That means aggressive expansion, with a flood of new shows, to give HBO the kind of massive library Netflix is currently building.

Netflix is a production company of peerless scale when it comes to TV. It’s projected to spend $12 to $13 billion on original programming in 2018; meanwhile, HBO spent $2.5 billion on its shows in 2017. Netflix’s strategy is to overwhelm, pumping out fresh content at its subscribers and relying less and less on licensed material it doesn’t own. HBO has always had more of a “prestige” bent, taking a very long time to develop its shows and launching them with extreme fanfare, with an eye toward awards. But Stankey seems to view that deliberate pace as a result of laziness, and his desire to upend the network’s careful approach to putting out new shows (it only makes a handful per season) could mean the end of HBO as we know it.

“It’s going to be a tough year,” Stankey said the June meeting, according to a recording the Times obtained. “It’s going to be a lot of work to alter and change direction a little bit.” Expanding HBO’s viewer base would require more programming, released at a faster pace, well beyond the channel’s rotating Sunday night lineup that makes up the core of its original shows. “I want more hours of engagement ... You get more data and information about a customer that then allows you to do things like monetize through alternate models of advertising as well as subscriptions, which I think is very important to play in tomorrow’s world,” Stankey said.

HBO’s current profit model is simple but effective. People pay a fee (something like $15 a month) to subscribe; HBO uses that money to license movies and produce TV for subscribers to watch. Because of the company’s longtime reputation for high-quality, Emmy-winning shows like Game of Thrones and Big Little Lies, plenty of people subscribe, and HBO makes a lot of money.

Netflix’s business approach, again, is about scale and is underwritten by investors. The company has focused on getting more worldwide users and hiking its subscription fee to increase revenues. But producing more original shows means Netflix burns through more money—a March 2017 report found Netflix had a negative free cash flow of $2.1 billion. A few months later, the company said in a letter to shareholders that it would remain in the negative for years, but that the investment would crucially help the company spread across the globe.

As he assumes control at Warner Media, Stankey is correct in identifying HBO as the company’s only obvious Netflix rival. But the kind of staggering growth he wants will necessarily disrupt the calculated approach to development that has distinguished HBO for two decades. Due in part to the sheer quantity of its output, Netflix has managed to greenlight some critical hits. But it has not yet won an Emmy for best drama, comedy, or miniseries, while HBO still rules the roost at awards season. The premium-cable network has put out shows like The Sopranos, The Wire, Sex and the City, Deadwood, Six Feet Under, and Veep that helped define the so-called “Golden Age of Television”—which is now receding in the wake of Netflix’s content deluge. In response, Stankey wants HBO to become another titan in this era of streaming behemoths.

In this age, as Stankey made clear, “hours of engagement” are what matter most. Executives have long factored viewing data extracted from subscribers into their programming decisions, but online services can mine our viewing preferences much more minutely. The more data, the easier it is to understand what people want—at least that’s been Netflix’s guiding principle as it makes hits like House of Cards and Stranger Things, which are calibrated to play on audience nostalgia. But the idea that numbers alone will drive good or popular art is ludicrous; Netflix has made plenty of shows that haven’t hit the mark with audiences, like any other network.

Stankey isn’t the only executive worried about the rise of Netflix. Disney is preparing to launch its own streaming service, and its proposed acquisition of Fox would help fill out its library of properties. The future of media will certainly revolve around subscription-based streaming services. But Netflix is turning into a kind of broadcast-TV network: a big umbrella for lots of different kinds of programming. Founded more than 45 years ago, HBO has long been a challenge to broadcast television, staking its reputation on offering something different. As the slogan went, it’s not TV, it’s HBO. Now, Stankey wants to make it TV.