What comes after HBO cuts the cord

What’s the real reason?
“It’s all about proving it was right for Time Warner to continue to go it alone rather than merge [with FOX],” said Jackdaw Research analyst Jan Dawson. “This announcement is about saying, ‘We have ideas, we have a way to increase the value of HBO and, therefore, Time Warner, without having to merge the business.’”

How is this going to work?
HBO intends to use the standalone streaming service to expand its audience beyond the roughly 30 million pay TV subscribers it commands in the country today. Of the 80 million U.S. homes without HBO, 10 million pay for broadband but don’t subscribe to any pay TV service — a figure HBO CEO Richard Pleper expects to rise in the coming years. That’s HBO’s primary target. But the standalone service is also a defensive move, as more consumers forgo pricey cable bundles and rely solely on premium streaming services like Netflix, Amazon Prime and Hulu Plus for their video fix, said Dawson.

“The realistic scenario is they get some small fraction of the 10 million and they keep some number of the cord cutters,” he said. “They’ll be doing quite well if they get a couple million subscribers within the first six to nine months.”

Could it really go direct to consumers?
There is a precedent to HBO selling direct-to-consumer: HBO Nordic. HBO has amassed over 380,000 streaming subscribers in Denmark, Finland, Norway and Sweden, where HBO sells its Nordic service as a standalone product without any third-party distribution partners.

So it’s declaring war on cable companies?
Not so fast. The most intriguing detail of HBO’s big reveal is Pleper’s vague assertion that the company will work with both current and new partners on the standalone Internet service. Regarding online distribution, that will manifest in one of three ways:

• HBO will sell the service directly to consumers itself, cutting out its longtime distribution partners and shouldering a host of new infrastructural, operational and marketing costs, while keeping 100 percent of online subscriber revenue.
• HBO will sell a direct service alongside similar Web-only offerings from multi-channel video programming distributors (MVPDs) like Comcast, Verizon and Time Warner Cable.
• HBO will offer the Web service exclusively through MVPDs, avoiding major new expenses while simultaneously maintaining revenue-sharing agreements with those distributors.

HBO representatives did not respond to multiple requests for comment on its distribution intentions, but several experts who spoke with Digiday suspect HBO will try not to alienate its longtime distribution partners, which have enabled HBO to reach over 30 million pay TV subscribers.

“The cable companies could well be among the obvious partners, if for no other reason than because HBO will want some marketing power behind this initiative, and cable companies are already shilling for HBO,” said Dawson.

“I would be surprised if [HBO executives] didn’t do any close partnerships with their telco partners,” said Aaron Shapiro, CEO of digital agency Huge, which built the HBO Go portal. “That seems like the least disruptive move to their existing business model to keep everybody happy.”

How much is this going to cost?
That’s not clear. HBO didn’t announce a price point for the service, but it’s unlikely to be directly competitive with Netflix, Hulu Plus or Amazon Prime, which all cost around $8 a month, analysts who spoke with Digiday agreed. HBO costs between $15 to $20 as part of cable packages. That’s likely to remain consistent whether or not HBO partners with MVPDs, they said.

“I don’t see standalone pricing being any less than what it costs now. If it was [cheaper], pay TV subscribers would have an incentive to cancel,” cannibalizing an existing revenue stream and frustrating key distribution partners, said IHS television analyst Erik Brannon. “But at the same time, I don’t see them being able to get a premium compared to pay TV pricing either.”

Could they pull this off technically?
HBO shouldn’t face much difficulty scaling up its technical infrastructure given the strong framework it already has with its HBO Go portal. It has faced some hiccups during periods of peak demand, like “Game of Thrones” premiere nights, but those should be few and far between as HBO invests more heavily in its paid streaming service, said Shapiro, who oversaw HBO Go’s development at Huge. Telcos, meanwhile, could subsidize cable package defectors by charging HBO peering fees — money paid to ensure a steady stream — he added.

Will others follow HBO’s lead?
Don’t be surprised. HBO’s push toward unbundling could pave the way for other premium channels to do the same, from competing properties like Showtime and Starz to other major players like sports giant ESPN, noted Brannon.

“When it comes to premium channels, HBO always leads the way,” he said. “HBO was the first out in the market. They were the first to embrace TV everywhere widely. HBO leads, Showtime follows and Starz catches up.”