How Netflix is Becoming a Realistic Competitor with HBO
Which company started by providing Hollywood films to subscribers using a growing technology, quickly rose above the others, and eventually raised the stakes by providing highly regarded original programming? Up until the last few years, the obvious answer was HBO. Ask that question today and the answer may instead be Netflix.
With the Emmy-winning “House of Cards” and “Orange is the New Black,” Netflix has done precisely what HBO did at the turn of the century, which is redefine itself as a haven for creators of quality programming, attracting subscribers and furthering its brand in the process. This is no coincidence; Chief Content Officer Ted Sarandos said his company has HBO squarely in its sights.
“The goal is to become HBO faster than HBO can become us,” Sarandos told GQ.
In the same article, Netflix CEO Reed Hastings expressed his contempt for how the entertainment business “manages dissatisfaction” by making consumers wait for everything. Hastings’ daring response? Releasing every episode of the new seasons of “House of Cards” and “Arrested Development” at the same time. Don’t look for “Game of Thrones” to follow that lead any time soon.
Different Worlds, Different Risks
In October 2013, Netflix passed HBO in total U.S. subscribers for the first time. While Netflix leaders were quick to point out that they still have a long way to go to match HBO’s worldwide numbers or Emmy successes, this was a major landmark. It was also a clear indication that the playing field for the two competitors, and video entertainment as a whole, is changing drastically.
In a sense, this is something of an apples-to-oranges comparison. Netflix is still far more comparable to Hulu and Amazon, just as HBO is in more direct competition with Showtime and The Movie Channel (or, in the original content on cable department, with AMC and FX). From the delivery method to the business model to the demographics, the similarities are relatively minor compared to the differences.
Netflix represents a different way of watching video and this has always been both a challenge and advantage. Once the bandwidth and infrastructure could support serious video streaming, consumers began to be receptive to the option of watching film and TV shows at virtually any place and time of their choosing. But by investing in original content, Netflix was risking a considerable share of its revenue at a time when the technology and viewing habits were still evolving rapidly.
By contrast, with mutually beneficial deals with every major cable provider, not to mention being a subsidiary of entertainment powerhouse Time Warner, HBO hasn’t had to worry much about developments in consumer technology since coaxial cable spread beyond select metropolitan areas in the 1970s. Original programming for HBO has always been a secondary venture, a minor risk.
Focus on Intangibles
A significant part of the Netflix equation is not quantifiable in terms of deals, sales or demographics. Sarandos made it clear his programming choices are based on his love of film and television and a keen appreciation for quality above all other considerations. To say Sarandos doesn’t consider a risk-versus-reward model is almost certainly naive, but as Harvey Weinstein said, “Ted built his business on taste — his good taste.”
That’s not to say that there’s any shortage of quality on HBO — now, that is. For the first decade of HBO’s existence, the company produced only a handful of shows, which focused on sports (“Inside the NFL”) and variety or stand-up comedy (“On Location,” “Standing Room Only”). Even the more popular and iconic ‘80s successes (from “Fraggle Rock” to “Tales from the Crypt”) gave more of a bonus for existing subscribers than a compelling reason to sign up.
It was only as the 1990s (“The Larry Sanders Show”) became the 2000s (“The Sopranos”) that HBO established itself as a major content creator. Producers, writers and directors started to rethink the accepted view that television had to play ad-sponsored second fiddle to Hollywood when it came to narrative depth, production values, and star power. And it came at a time when HBO had new threats to its core movie-playing model.
Cutting Cords and Corners
After a decade building its business through renting DVDs by mail, the company was one of a small minority of Silicon Valley startups to generate profits, but nevertheless began to shift its focus to streaming video. By this time, wrangling redistribution rights in Hollywood helped develop and cement the company’s credibility and prominence in the entertainment industry. And through its Red Envelope Entertainment division, Netflix already produced over 100 films between 2006 and 2009, which is valuable experience for a hopeful HBO-challenger.
HBO and Netflix are still viable competitors, each with their own strengths and weaknesses for consumers and investors. Just as Netflix is gaining a foothold outside their original model by striking deals with cable providers, HBO is making significant progress in digital delivery, with HBO Go. While this is a step, HBO has been criticized for hesitating at a direct subscription model for its HBO Go service.
To some, this suggests that HBO is too obligated to a massive cable TV industry and can’t see the writing on the digital wall. To others, including Hastings, the cord-cutting theory is overblown; HBO’s reluctance to jump headfirst into streaming simply makes good sense for now.
In the same press event where Hastings celebrated his company’s subscriber count passing HBO’s, he was also realistically cautious about proclaiming or predicting any overall victory.
“HBO is really focused on doing incredible work and they’ll probably do some of the best shows they ever do in the next five years,” Hastings said. “I don’t know when we’ll catch them. It’ll be a long time. They’ve been at it since 1972—that’s 40 years—and we’ve been at it in the streaming sense only seven years.”
While analysts express doubts that Netflix can sustain its stellar subscriber growth, nobody is questioning the quality and popularity of its original content. The company’s most recent high-profile project, “Lilyhammer,” starting Steven Van Zandt as a former New York mobster, is also one that may remind viewers most of HBO. It will be interesting to see if the show does for Netflix what “The Sopranos” did for HBO.
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