Betting on quality has made HBO a lot of money. But it now faces more intense and innovative competition. Time for another gamble?
Aug 20th 2011 | NEW YORK | from the print edition
Empire building the classy way
WHEN Terry Winter was producing episodes of “The Sopranos” ten years ago, his film crew hared all over New Jersey shooting in and around butchers’ shops, family homes and strip clubs. For his new series, Mr Winter has a world of his own. “Boardwalk Empire”, like “The Sopranos”, is a gangster drama made by HBO, a subscription-television company—but it is a period piece shot on a purpose-built 300-foot-long set in Brooklyn. There is a row of artfully tatty shops—a palmist, a photo studio, a display of baby incubators. One side of the set is dominated by a huge blue screen on which images of sky and sea are later superimposed. This is not cheap. The pilot episode of “Boardwalk Empire” cost almost $20m. But it takes more to please TV audiences these days, says Mr Winter.
If so, that is in large part HBO’s own fault. For more than a decade it has lavished good, smart product on its viewers, and in the process raised the entire industry’s creative game. In the late 1990s HBO pioneered an intelligent, patient style of storytelling that gloried in loose ends and morally ambiguous characters, a style “The Sopranos” came to epitomise. It lost its way around the middle of the last decade, when ambitious dramas like “Deadwood” and “Rome” failed to stick. But it is now back on form. It has three popular, admired dramas in “Boardwalk Empire” (pictured, right) “True Blood” (a vampire series set in Louisiana) and “Game of Thrones” (a fantasy set in the Seven Kingdoms of Westeros). This year HBO received 104 nominations for Emmys (the television Oscars, which will be dished out next month). That’s far more than anyone else.
It reliably makes money, too. HBO turned over $4 billion in 2010, estimates SNL Kagan, a research outfit. The previous year it accounted for one-quarter of the operating profit of its parent, Time Warner (which made $4.5 billion in all). Because the media conglomerate, once the world’s biggest, has slimmed down, and some of its businesses, such as magazines and DVDs, have been hit by the downturn, HBO has never looked more important to it.
But things are getting tougher. HBO is assailed by competition from old-media peers and new-media upstarts. The pay-TV ecosystem on which it depends is ailing. The way HBO responds to these pressures will shape the television business for years. The outfit that changed the kind of television people watch is poised to determine how they watch it.
HBO has always been innovative. It was the first cable channel to specialise in films—the initials stand for “Home Box Office”—and the first channel to be delivered via satellite. In 1991 HBO pioneered “multiplexing”, a way of distributing multiple channels without using more bandwidth. There are now seven HBO channels in America, including one for children and one in Spanish. Cinemax, an HBO-owned network with 12m American subscribers, has eight channels devoted to films. HBO also shows live boxing matches, the biggest of which are sold on a pay-per-view basis. It has networks in 60 countries and licenses programmes in many more. About 30% of HBO’s revenues come from outside America.
The offering for which HBO is now mostly known—original series—developed slowly. In the late 1980s it carried a gleefully unpleasant show called “Tales from the Crypt”. In 1992 it launched “The Larry Sanders Show”, a dyspeptic comedy about a talk-show host. Its first hour-long drama, “Oz”, began in 1997. Soon HBO’s content engine was whirring. By the early 2000s it had “The Sopranos”, “Sex and the City” and “The Wire” as well as ambitious mini-series like “Band of Brothers”.
In developing these shows the company made an unusual decision with far-reaching implications. Rather than buying programmes from outside studios, HBO would aim to own its content. The costs of any failures thus fall entirely on the company; but it does not have to share the spoils of success, and it gets to control how its shows are distributed on other channels and on the internet.
In America HBO is a premium network, meaning people must pay an additional $15 a month or so to subscribe to it on top of whatever they pay for a hundred-odd “basic” cable channels. That means it need carry no advertising, and can instead carry levels of sex, violence and bad language at which advertisers would blanch. No advertising also means the company focuses on pleasing subscribers rather than amassing huge audiences. “If you’re not paying for television, you’re not the customer,” says Jeff Bewkes, head of Time Warner. “You’re the product.”
Other companies are also exploiting the creative freedom that begins when the ad breaks end. Showtime, a premium network owned by CBS, has put on original shows like “Dexter”, “Nurse Jackie” and “Weeds” that have scooped up plenty of plaudits. Starz, which is run by Chris Albrecht, HBO’s former boss, is trying to pull off the same trick. On August 8th it announced a broad agreement to co-produce shows with BBC Worldwide, the British broadcaster’s commercial arm, which is moving into producing shows for American television.
Since 2000 Showtime and Starz have each added about 6.7m subscribers in America, more than twice as many as HBO (they have between 18m and 20m subscribers each, compared with HBO’s 28m). Showtime and Starz often cost less, and can be more attractive to distributors. When HBO adds a subscriber, it tends to split the new revenue about 50-50 with the cable or satellite broadcaster. The other premium networks are more likely to do flat-rate deals in which the distributors keep all the money from new subscriptions after paying a single licence fee. When choosing which channels to get behind with marketing, the cable companies act accordingly. HBO lost 680,000 subscribers between 2009 and 2010, although its revenues went up, which suggests that many of the viewers who disappeared had not been paying much.