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Oct 15, 2014 12:40 PM

HBO unleashes streaming from cable contracts

The Associated Press

NEW YORK (AP) Next year HBO is cutting the cord and selling its popular streaming video service HBO Go as a stand-alone product, as more Americans choose to watch the Web, not the TV. Viewers longing to watch "Game of Thrones", "True Detective" and "Veep" will no longer have to pay big bucks for cable and satellite contracts. Is this the end of pay-TV as we know it?

"HBO and ESPN are the two main reasons why people have cable and satellite TV," says Forrester analyst James McQuivey. "The whole industry has eyed them for years nervous that one day they would decide to do exactly what they said they'll do in 2015. We don't know until we see pricing and packaging how rapidly this will force a change in the way pay TV operators work, but it will definitely force a change."

Millions of households already have cancelled pay-TV subscriptions up to 10 million U.S. households are currently broadband-only. And about 45 percent of Americans stream television shows at least once a month, according to research firm eMarketer. That number is expected to increase to 53 percent or 175 million people by 2018, it says.

Video streamers aren't falling behind on entertainment cord-cutters watched about 100 hours of video per month during the first half of this year, estimates the Internet research firm Sandvine. The trend accelerated as Netflix's Internet video service expanded into original programming and bought the rights to show popular cable network shows such as "Breaking Bad" and "American Horror Story." Netflix's 36 million U.S. subscribers now watch about 100 minutes of Internet video each day, calculates BTIG Research analyst Rich Greenfield, based on Netflix disclosures about its customers' overall viewership patterns. Netflix-watching accounts for about one-third of U.S. Internet traffic in the evening, according to Sandvine.

Amazon.com Inc., Yahoo Inc. and Google's YouTube also offer Internet-only series as alternatives to pay TV.

HBO CEO Richard Plepler said Wednesday that the network's move is aimed at targeting the 80 million homes in the U.S. that do not have HBO but may want access to its content and especially those broadband-only homes.

"That is a large and growing opportunity that should no longer be left untapped," Plepler said at parent Time Warner Inc.'s investor meeting in New York. "It is time to remove all barriers to those who want HBO."

Will this lead to a wave of pay-TV cancellations? Cable and satellite providers have long been against the unbundling of TV channel packages because they wouldn't be able to charge as much for an a la carte menu of stations. Pepler said HBO plans to work with current partners and "explore models with new partners," but did not give specifics. No pricing details were given, but Forrester's McQuivey expects stand-alone HBO Go could cost about $15 a month. That's more than the lowest payment option for Netflix, which starts at $8.99, but high enough to discourage many cable TV subscribers from cancelling their service. HBO is believed to get at least a $15 cut from the pay-TV packages that its service is bundled into.

Since "The Sopranos," HBO has been a model for premium cable networks looking to woo viewers. Netflix CEO Reed Hastings has never tried to conceal that he has been trying to build an Internet version of HBO as he strives to reach his long-term goal of having 60 million subscribers in the U.S. The company has spent hundreds of millions of dollars to produce critically acclaimed series such as "House of Cards" and "Orange Is The New Black." In the past few weeks, Netflix made another HBO-like move by buying the rights to four exclusive movies starring Adam Sandler and a sequel to "Crouching Tiger, Hidden Dragon."

In a sign of the intensifying rivalry between the two services, HBO has steadfastly refused to license streaming rights to its award-winning series to Netflix. Instead, HBO struck a deal with Amazon's streaming service. Netflix's U.S. rates currently start at $9 per month, a price that may pressure HBO to lower its profit margins if it wants to lure subscribers away or encourage customers to buy both.

Breaking away from the cable and satellite providers may also force HBO to incur additional expenses to build up its own customer service and marketing departments. Those tasks have largely been handled by the pay-TV providers that include HBO in their packages. HBO has been offering its streaming HBO Go service to HBO subscribers as well as some Internet subscribers who pay extra for the streaming service only. It has also offered a stand-alone service in Scandinavia for several years.


Liedtke reported from San Francisco.


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