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.