HBO's Big Decision and the Disruption of the Cable Business

HBO made a major announcement yesterday.  They informed investors that they would be offering a stand-alone digital subscription to customers outside of the usual cable distribution model.  Time Warner (parent company of HBO) indicated that the firm would be targeting customers (typically millennials) who have chosen to "cut the cord" - i.e., to go without a cable television subscription. 

Today's Wall Street Journal article about the move has quotes from several experts. Some indicate that the move is revolutionary, while others downplay its potential to disrupt the cable business.  One expert (USC's Jeff Cole) regards the announcement as a "seismic event."  On the other hand, Tom Larsen, an executive at Mediacom Communications, states, "I don't view it as overly disruptive."  Some cable companies regard the move as not disruptive so long as HBO does not undercut the price which the cable firms charge customers for HBO.

Where do I come down on this move?  In and of itself, I don't think it's hugely disruptive.  However, the strategic decision by HBO may have a large ripple effect.  We have already heard that CBS will follow suit and offer a streaming subscription service.  The next big shoe to drop could be Disney.  If that firm offered its networks (children's programming, ESPN networks) directly to consumers, that would be a major jolt to the cable business.  If consumers can package together subscriptions to Netflix, Disney/ESPN, and HBO, would they still purchase an expensive cable package? Many consumers would not.   Yes, the cable companies also make money selling broadband service.  However, that cannot make up for the loss of significant numbers of cable subscriptions.  The price that HBO charges for its standalone service may not be the key factor.  Why?  People are not thinking about HBO in isolation.  The key is whether other firms follow, and consumers can begin to patch together a whole set of desirable entertainment options for less than the total price of their cable package. 

The entertainment industry has been known for herd behavior in the past.   Consider the moves by many large players to vertically integrate in the 1990s (CBS/Viacom, AOL/Time Warner, Disney/ABC).  They watch each other closely.   Herd behavior can sometimes occur in an industry because managers are risk averse.  In this case, perhaps managers at other entertainment companies will view a move to sell directly to consumers as less risky if a few leaders, such as HBO and Disney, make the move first.  Bob Iger, the industry... and the consumer is watching...