HBO Needs to Restrategize as Competition for Movie Distribution Intensifies

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We estimate that HBO alone contributes about 20% to Time Warner's ( TWX ) value, thus making it one of the biggest value drivers for the company. Time Warner operates businesses like filmed entertainment and cable networks and competes with other media conglomerates like Disney ( DIS ), News Corp. ( NWS ), CBS ( CBS ) and Viacom ( VIA ). Our price estimate for Time Warner stands at $35.51 which is slightly below the current market price.

HBO derives its value primarily from being a premium movie channel and charging a high fee to its subscribers. The channel offers the latest and the best movies on TV. We estimate that HBO's average fee per subscriber was around $7.20 in 2010. The fee has risen slightly over the past few years given the demand for the channel due to its content, however going forward, there may be some pressure on the average subscription fee.

A few factors that we think might weigh in on HBO's average subscriber fee. These are essentially centered on  increasing competition that might challenge HBO's value proposition.


Increasing competition

An increasing number of ad-supported channels are bidding for movie licensing rights and are including that as part of their package. These channels are priced at a fraction of HBO costs and show movies, reality shows, and top rated-series. Additionally, increasing the availability of alternative mediums for films, including Netflix (NFLX), streaming, pay per view and on-demand online rentals etc. enables consumers to watch movies either for free or for a small amount. With an increasing number of channels and movies available on TV and through various channels, HBO as a leading incumbent, stands the most to lose in the event of price competition.

As Netflix's fees for movies mostly are around $10-20 and HBO's average subscriber fees is around $7.20, we believe it is unlikely that HBO and Netflix could reach some sort of distribution agreement as the economics wouldn't make sense and this could further eat into HBO's current business.

However, to counter competition from the likes of Netflix, HBO has launched its own streaming service that's called HBO Go that makes its programming available on the web for its subscribers. In all it looks like HBO wants to hold on to its premium status, but might find it difficult to do so as competition intensifies.

Have a different view? You can modify our chart above to reflect your views and see the resulting impact on Time Warner's price estimate.

See the complete $35.51 Trefis price estimate for Time Warner's stock.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: CBS , DIS , NWS , TWX , VIA

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