HBO Versus Netflix: Here's A Crazy Idea

| About: Time Warner (TWX)

Summary

Netflix's deal for "Bright" is truly fascinating, and it changes the game in streaming content.

HBO may need to get into making original theatrical movies based on such a deal structure.

HBO also needs to rethink its strategy for competing with Netflix.

I was thinking about the recent deal between Netflix (NASDAQ:NFLX) and Hollywood. As described in this article, the streaming service is trying a new approach of not paying out extra money to talent beyond its upfront fee payments. The project in question, Bright, written by Max Landis and starring Will Smith, will cost $90 million.

The notion of just paying a single fee to talent instead of paying a fee plus profit participation is extremely important. It's obvious why Netflix did what it did: if there is essentially no theatrical release, Smith won't get a chance to bet on some upside financial windfall from a set percentage of the box office take. Netflix most likely decided it would be better to just pay off the major players in one simple transaction to get the deal to go through. In addition, Netflix wants to be able to program the movie whenever it wants, so eliminating exposure to continual compensation structures is a smart move.

All of this led me to think about HBO. The Time Warner (NYSE:TWX) service, a big Netflix competitor, will need to follow the lead of its rival. HBO will have to look to make similar deals with talent to build up its own library of unique products that cuts the multiplex chains out of the equation.

As it is now, HBO focuses on quality episodic series. It does a great job with that strategy. Shows like Game of Thrones continue to put the cable service at the head of the pop-culture table.

To grow, though, new strategies must be employed, ones that will excite the entertainment consumer all over again. This is where movies come in.

HBO could begin relationships with stars in the same way Netflix entered into an agreement with Adam Sandler. The idea is to disrupt the normal way in which movie output is handled. Sandler could have ignored Netflix and simply continued on at the multiplex. But why not pursue both avenues if the money is right?

Here's something else to consider. Something bigger: what if Time Warner had released Batman v Superman to the home screen via HBO instead of placing it on the silver screen?

Source: Time Warner

A decision like that contains not a small amount of insanity equity, to be sure. The future of movie distribution, and its separation from that of entertainment in the home, is getting more complex and increasingly cloudy. New ideas once thought as unimaginable need to be broached, and they have to involve the big players in a portfolio - it can't always be Adam Sandler making a deal with Netflix (that's not to say Sandler isn't a big player in the movie industry, but hearing about him making a film exclusively for Netflix isn't necessarily a significant surprise of scale).

It doesn't have to be either-or. The superhero match-up could have had a release that involved both the multiplex and the widescreen television. HBO might have asked for, as an example, $60 to view the movie for a short period of time on the channel's on-demand menu one week before the theatrical debut. The company could throw in a few months of HBO for the price. Following that, the movie goes away, and the consumer can continue sampling the channel. This is not dissimilar to a proposal I made concerning Hulu. (Time Warner might also want to consider taking some of its DC universe films and placing them exclusively on HBO. Of course, buying out the back-end for someone like Ben Affleck certainly would be an expensive proposition.)

Critics might suggest that something like this doesn't even need to be considered since releasing blockbuster product to theaters is still a good way of generating a large amount of revenue. What such criticism seems to ignore is something like the Screening Room initiative. This project hopes to charge a lot of money for a first-run movie to be available in the home even though it can also be accessed at the multiplex. Day-and-date distribution is important to studios because they potentially could make more money by having the product in multiple viewing channels, and it could be worth the risk of cannibalizing theatrical revenue.

In addition, some pundits have pointed out that the cost of marketing a film twice - once for theaters and once for physical/digital distribution - could be avoided. Still, it's unimaginable to most that a feature like the current Batman movie should put at risk its box office take - why not maximize it? Again, we come back to Netflix and HBO, and the need for multimedia companies to leverage its strongest intellectual properties to do some real damage to the competition in a most unexpected, disruptive manner.

Whatever form the concept of the Screening Room eventually takes, for it most likely will not always exist as it does at this stage in its development (assuming it does achieve some marketplace traction), is unknown, and perhaps it won't have much effect at all. Nevertheless, theaters and studios have to come to some agreement about exhibition in the home and its overlap with the first window.

I think Netflix is smart to get into the movie business, but both it and HBO will have to work harder to contain budget inflation. The $90 million deal at the top is probably still too expensive for Netflix's business model in a sense. As time goes on, Hollywood agents will look to maximize all the money it can get from the studios, and about the only solution that might make sense if Netflix and HBO want to continue making content featuring brand-name thespians and skilled behind-the-scenes talent is one which involves guaranteed commitments to a star's production company to buy a certain amount of pitches for future projects. Beyond that, saying no is about the only sure method of keeping costs low. With demand for top content, and top stars, being so strong, that admittedly is a difficult method to employ.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.