Netflix v. HBO: Will More Subscribers + More Revenue on Netflix = More Profits?

In the three month period ending June 30th, 2014, Netflix surpassed HBO in subscriber revenue - US$1.146B vs US$1.141B - according to an August 7th, 2014 Facebook post by Netflix CEO Reed Hastings.

That's a first.

What's more, in the second quarter of 2014, Netflix reported 36.2 million US subscribers (plus an additional 13.8 million international customers). 

Compare that to an SNL Kagan estimate (as reported by Bloomberg on Oct. 21st, 2013) that put HBO at just 28.7 million US subscribers as of September 2013.

Although Netflix is not (according to Reed Hastings) as profitable as HBO yet, the trend away from traditional subscription TV and toward online platforms seems to be unstoppable. As reported in Variety on January 20th, 2014:

"Total U.S. households that subscribe to HBO, Showtime, Starz and other premium TV channels declined by 6 percentage points over an 18-month span, from 38% in March 2012 to 32% in August 2013, according to a report from research firm NPD Group. Over the same period, households subscribing to Netflix and other subscription video-on-demand services including Hulu Plus and Amazon Prime Instant Video rose 4 percentage points, from 23% to 27%."

So will Netflix inevitably beat HBO at profitability?


But - even with more subscribers and revenue - that goal may prove difficult. 


As more buyers enter the market (Amazon Prime, Hulu, etc.), Netflix' costs for acquiring content are likely to increase steeply.

HBO offers a fundamentally different service right now - providing far fewer titles at any given time than Netflix.

And there are promising revenue streams that HBO has yet to tap.

For example, what if HBO figures out how to sell their exclusive content - like Game of Thrones - in ways that make extra revenue for HBO while appealing to cord cutters

I've been saying for a while that the cost associated with Netflix obtaining film and TV licenses (the content that Netflix needs to survive, and was able to acquire cheaply in years past) will continue to grow.

Obviously, no one can say for sure how the new world of home entertainment will evolve. 

Neither Netflix or HBO is in the clear.

But both brands have had canny leadership - and a demonstrated ability to adapt.

To his credit, Reed Hastings was able to pivot Netflix - shifting from DVDs through the mail to take advantage of the online appetite for motion pictures. 

And more recently there's been another pivot at Netflix into original content. That move - into production - for those of us old enough to remember, is reminiscent of the shift HBO made years ago into original content, starting with concert and comedy specials back in the 70s. 

Find a comfortable spot in front of the TV (or mobile device) and make some popcorn. This is going to be interesting.

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