How To Make A Pay Service Pay

Cable World, Nov 4, 2002

Byline: JONATHAN BLUM, KAGAN

HBO is almost without parallel in the pay-tier universe. The service had almost 60% more subscribers than Encore, its closest rival, in June 2002. HBO also grew nicely on DBS. Some 5.2 million satellite subs came to the service last year, up almost 13.6% from the previous period. HBO also knows how to market itself. It is probably only matched by ESPN and MTV in its ability to sell itself effectively. The network's current work for The Sopranos is just one example of many excellent campaigns.

HBO also does well financially. It runs an efficient, yet high-luster business with revenue climbing an estimated 7.9% for 2001. The company captured more operating profits than ever for the period with EBITDA margins jumping to 28.9% from 27.6%. The increase is solid in its own right, but is more impressive when measured against programming costs, which climbed both in absolute dollars and as a percentage of total expenses. Operating performance like this puts the company in a rare business class usually populated by superbrands like Mercedes-Benz and De Beers LV that can improve bottom-line performance while selling expensive-to-produce products.

Not surprisingly, HBO also has power within the industry. It captures more summer theatrical blockbusters in its pay window than other services, with more than 47% of summer box office hits coming to the service. It is also a leader in Emmy Awards, beating out CBS for total nominations in 2002 and tying NBC for wins in the same year.

If HBO has one threat, it is the emerging power of the Starz Encore Group led by the charismatic CEO John Sie. Starz Encore has been able to grow its subs faster than any other pay service, particularly on satellite, where it has roughly twice the penetration of HBO.

But these threats are relatively remote. Unless HBO wakes up one day and forgets how to market itself or pick hit shows, the service should remain the dominant pay-tier brand for the foreseeable future.

For a complete picture of HBO's market position and a full breakdown of the pay-TV market, see "The Pay TV Newsletter" at www.kagan.com.