Reed Hastings recently commented that Netflix (NASDAQ:NFLX) sales have surpassed HBO, and for those that miss the significance of this, HBO has been around for significantly longer than Netflix, and it's distributed as a premium package across all of the cable/network providers (Century Link, Comcast, Dish Network, Verizon Fi-OS, Time Warner Cable, AT&T U-Verse, etc.). HBO also enjoys some cost synergies with its parent company, Time Warner Inc. (NYSE:TWX)
I guess what's embarrassing Time Warner execs is that Netflix has a subscriber figure that dwarfs HBO, which was accomplished using a vastly different sales channel. HBO, by rough estimates, had 28.7 million subscribers in Q4 2013.
Netflix's content distribution is purely via the internet, and in some cases, the service is marketed via the application stores (Android Play Store, Apple App Store) or via streaming players (Roku, Apple TV, and Amazon Fire TV). Netflix's sales channel comes with some advantages, as it's not required for consumers to have a pre-existing cable subscription to buy the higher-tier service. Therefore, Netflix has more flexibility to grow in foreign markets.
The global subscriber base gives Netflix the ability to acquire more expensive content and in greater variety. Based on what I've seen, Netflix will soon become a combination of Viki (foreign movie/TV show streaming service), HBO (original programming), and its roots as an off-the-shelf movie provider (everything Walt Disney is on Netflix). As you can tell, the business model works extremely well.
The differential in profitability is due to the pricing differential of Netflix versus HBO. HBO prices its service at twice the amount, plus marketing expenses are rather limited, as it's sold as a part of a bundle with the various communication providers. Since HBO can piggyback off of the distribution capabilities of legacy cable providers, and prices its service for $15/month, HBO earns more profit than Netflix.
However, if we assume that at some point Netflix charges $15/month, grows its subscriber figure to 10x-20x that of HBO, and builds the largest content library amongst peers, maybe Netflix does "rule the world."
Quoted from Seeking Alpha news currents:
CEO Jeff Bewkes was spared any direct questions about the Netflix factor. Perhaps just as well after Bewkes in 2010 famously likened the metamorphosis of Netflix into a streaming giant to the Albanian army trying to take over the world.
At this point, Netflix might as well be compared to the German Blitzkrieg from World War 2, rather than the Albanian army of 2010.
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