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Netflix, Inc. (NFLX) Wants To Become HBO

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Netflix, Inc. (NASDAQ:NFLX)Netflix, Inc. (NASDAQ:NFLX) CEO Reed Hastings thinks we’re on the brink of an entertainment revolution, one that will fundamentally change TV as we know it. In Hastings’ future, content companies will hold the cards, while the content distributors (mostly cable providers) will struggle.

To be fair, this vision isn’t very original: many have made similar arguments for years — predicting that cord-cutters would eventually spell the death of cable. To date, that hasn’t happened, and some are starting to doubt if it ever will.

But if Hastings is successful in executing his vision of transforming Netflix, it could start a chain reaction that will undermine the dominant cable paradigm.

Netflix wants to become HBO

I’ve written about Netflix’s transformation plans extensively in the past, and interested readers can view my prior articles on the subject. But in short, Netflix, Inc. (NASDAQ:NFLX) wants to become HBO.

A version of HBO that’s available directly to consumers, over the Internet. A premium network offering a robust package of original content and high-quality movies. To execute on this vision, Netflix has begun to shell out big bucks for quality, original programming while simultaneously allowing its non-exclusive, bulk content deals to expire.

Netflix hopes that a subscriber signing up in 2015 will do so because they want to watch the third season of House of Cards, or the second season of Orange is the New Black, or any of the other original shows Netflix, Inc. (NASDAQ:NFLX) currently has in the works. Not because they want to watch a bunch of old movies.

Netflix could soon outbid HBO for content

Just recently, Netflix edged out HBO in terms of total subscribers, at just under 30 million. But if Hastings can execute on his vision for Netflix, that subscriber edge could grow tremendously in the coming years.

Hastings believes Netflix, Inc. (NASDAQ:NFLX) can triple its current subscriber count, to around 90 million. That’s certainly an ambitious goal, but if Netflix continues to add great new original content, it might be possible.

HBO has long been stuck at around 30 million subscribers. That could be due to the size of the population, or the quality of the network’s programming. But price must be taken into account.

For someone to subscribe to HBO, they must pay a fee of $10-$20 per month on top of a cable bill that might be as high as $100. Contrast that with Netflix — one only needs Internet access and $8 per month.

For now, Netflix is not much of a threat to HBO. Time Warner Inc (NYSE:TWX) CEO Jeff Bewkes said on the company’s last earnings call that Netflix was having no effect on HBO’s subscriber numbers.

But imagine a world say, five years from now, where Netflix, Inc. (NASDAQ:NFLX) has 90 million subscribers to HBO’s 30 million. In that world, Netflix would have much more income to spend on content. Right now, there are few networks that have HBO’s financial firepower, so it can have its pick of shows.

But with Netflix moving into original content and growing its subscriber base, HBO’s days as top dog could be numbered.

Could Netflix force an HBO spin-off?

If Netflix is successful in surpassing HBO in terms of subscriber numbers, it would create a powerful incentive to spin HBO off.

Although there have been reports that Time Warner Inc (NYSE:TWX) is considering offering HBO to non-cable subscribers, officially, management remains adamant that its current HBO distribution methods are best.

This is likely fueled by the fact that Time Warner Inc (NYSE:TWX) has an incentive to keep its cable partners happy. After all, the company owns a number of other major networks (TBS, TNT) that are staple offerings on most cable subscriptions.

But if Netflix, Inc. (NASDAQ:NFLX) can demonstrate that selling directly to consumers is a better model, Time Warner might come under pressure by its investors to make a change.

Apps replace channels

Hastings believes that apps will one day replace channels. It’s not hard to see why. Current HBO subscribers get access to HBO GO — an online app with similar functionality to Netflix (but with HBO content).

Using the app is a much more pleasant experience than the actual HBO channel. Almost all of HBO’s current and past content is available for instant streaming in high definition.

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