HBO Standalone Streaming will Drive Growth for Time Warner in 2015 and 2016
- HBO will offer Standalone Streaming in the spring of 2015, which will drive growth over the next five years
- TWX long term guidance of $6/share and $8/share in 2016, and 2018, respectively
- EPS CAGR of 20% and 18%, in 2016, and 2018, respectively
- Initial price target of $120/share, based on 20x 2016 earnings of $6/share
How many people have cut-the-cord, cable cord that is, over
the years because they either couldn’t afford or couldn’t justify the monthly
expense associated with 200 plus cable channels in order to access HBO? Honestly, not that many, but I see a drastic
shift in Premium Cable viewing because HBO is going to offer a streaming
service that doesn’t require you to sign up for cable with any of the
traditional cable brands such as Comcast, Time Warner Cable or DirecTV. Think of it; instead of paying that cable and
internet bill of more than $100 per month, you would simply use your internet
TV or OTT box to subscribe directly to HBO. This
move by HBO is so drastic, that Cable companies are already taking the
appropriate steps to change the billing plans/packages with the hope that HBO’s
new streaming service doesn’t create too much churn. For example, the local cable company in Los Angeles, (TWC) is
offering 20 plus channels and HBO, for $30.00 per month (for the first 12
months). Personally, I don’t think the
cable companies are going to lose too many subscribers with the rollout of this
new plan, but I do feel that there will be an increase in HBO penetration
within the cable companies.
As of September, 2014, HBO
had 136 million global subscribers, and 46 million domestic premium pay
subscribers (U.S.), so there is a huge opportunity to save subscribers money on
their cable bill, without even growing the customer
base. At the same time, there are 10
million U.S. broadband only homes, of which, 4-5 million of these homes are
streaming only (Netflix or Hulu customers).
What is even more interesting, is that out of the 6.4 million
subscribers added from 2012 to September 2014, 70% or 4.5 million of the 6.4
million subscribers, were non-revenue generating subs. This will change during contract negotiations
with all of the cable/satellite companies.
I don’t want to speculate on the conversion from Cable to Streaming only,
or the rate of adoption when it comes to adding new subscribers, but I will
watch this closely to see what type of growth is generated from this
opportunity.
HBO also has a
thriving international business, which consist of $1.4 billion in revenue,
representing 25% of HBO’s revenue. This
revenue comes from 60 plus countries, consisting of 90 million subscribers,
with an ARPU range of $0.14 - $13.00.
Keep in mind that the lower end of that range is from markets such as
India, while the higher end of that range is from markets such as Europe.
Although HBO hasn’t said how much HBO Streaming is going to
cost, analysts are estimating a fee of approximately $15/month. At that price point, HBO will definitely
capture additional revenue from every subscriber who migrates from cable
companies, as well capture additional revenue from every new subscriber. This is the formula that will drive growth
for Time Warner (ticker: TWX) in 2015, and beyond.
There are many
other components of the Time Warner’s business that will add to the bottom
line; Warner Brothers and Turner, but I see HBO as the driver and game changer
for the industry. Looking at the TWX
long-range financial plan will offer adjusted EPS of $6/share in 2016, and adjusted
EPS of $8/share in 2018. Since TWX
earned 3.51/share in 2013, this growth is a CAGR of 20% from ’13 to ’16, and
18% from ’13 to ’18. Based on these
numbers, I expect TWX to trade at $120/share, based on 2016, earnings. 2015 Full-Year earnings guidance for TWX
should be announced on February 11, 2015, but I am more interested in HBO
subscriber growth in 2Q, as well as future quarters, in order to justify what
may seem to be a lofty price target of $120/share in 2016.
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HBO is not targeting all subs that have a broadband connection, only the ones that aren't currently in a contract with a distributor - see investor day transcript. Also, I don't think people are going to cut the cord just because HBO goes direct-to-consumer. People enjoy content, and you still need more than just HBO. HBO+NFLX+Sling TV could work, all for ~$45/month, but I still think you need sports (or more of it). For the skinny bundles (pointing at Sling TV), people want to choose their 10 channels.
ReplyDeleteAlso, pay-TV subs are not decreasing drastically, and have been pretty much flat. Not saying that they we are not in a secular shift, but I think it is far more gradual than the street thinks. Given what's going on with ratings and continued pressure in the ad market, distributors will gain more negotiating power in affiliate fee contracts with the content owners. Definitely would not short the cable stocks unless we saw Title II + hard broadband pricing regulation.
Good luck.
@Slim You make some valid points:
ReplyDeleteSkinny bundles are not for everyone
The cable companies will not die overnight because HSO is growing and more profitable than video
On another note, MSOs don't have contracts for there subscribers, the MSOs typically offer pricing guaranties, so there is a market for MSO subscribers to switch to the HBO Streaming platform, regardless of the marketing strategy. Furthermore, have you noticed a change in the cable companies' video offering? It is apparent that the cable companies are trying to limit the risk of churn by offering smaller bundle packages (not 200 channels to get HBO, but 20 channels to get HBO). I see this as a major win for HBO in the long run, because when it is time to renegotiate the HBO contract with the cable companies, HBO will be able to capture additional revenue. If I am not mistaken, the current structure of HBO contracts with the MSOs are a flat rate, regardless of subs added, so if the cable company has 100 or 1 million subs using HBO, the payment to TWX is the same every month/quarter. This structure will change in the future, I am sure of it.
Sports is the market of men, rather than women, so I would think that there is a portion of the population that won't focus on sports. I agree, people do want to choose their 10 channels, but people often settle for less than what they want when the costs outweigh the value of choice.
I think media is in a really exciting time, and I am just happy that a change is coming, as old media is adopting new ways to distribute its content.
Thank you for the comments, and I look forward to more of your expert insight.
Cheers,
Jon