TV Stations are facing challenges from the internet.

Dow Jones

   By Nat Worden 

NEW YORK -(Dow Jones)- HBO, home of popular TV shows like “Big Love” and “True Blood,” faces a key test of its business model this year after its subscriber rolls declined to an estimated five-year low in 2010, causing concerns among investors about the threat of emerging online video competitors.

HBO and Cinemax, Time Warner Inc.’s (TWX) stable of premium cable networks, together lost about 1.6 million subscribers last year, while Netflix Inc. (NFLX) added nearly 8 million–a performance that was widely viewed as evidence that some consumers have an appetite for viewing movies and TV shows on broadband instead of pay-TV.

HBO and Cinemax increased their revenue last year despite the subscriber declines as the losses came largely from customers who didn’t affect their business financially. That’s because HBO still met its subscriber guarantees to its cable and satellite partners, and Time Warner has said the declines were largely caused by the promotional activity of its distributors.

Now, though, two main factors cited by Time Warner executives as causes behind the subscriber declines are history, and HBO is under pressure to recoup subscribers and fend off skepticism about its competitive position in a rapidly shifting media landscape.

“With the continued momentum in original programming, increased rollout of [an online HBO service for subscribers] and international growth, we feel confident about our 2011 business performance,” a spokesman for HBO said.

Specifically, Time Warner Chief Executive Jeff Bewkes has said a majority of the 2010 declines were caused by a promotional offering for Cinemax launched by satellite TV provider Dish Network Corp. (DISH) in response to the economic downturn in 2008 and 2009. In an effort to keep customers from dropping its service, Dish began offering Cinemax for a year for one penny to subscribers in late 2008, and the offering was in place until early 2010, causing a drop-off in HBO subscribers at that time.

Bewkes also cited a lack of promotion for HBO from another major distributor, which was satellite TV provider DirecTV Group Inc. (DTV) according to people familiar with the matter. DirecTV’s affiliate contract with HBO ran out last year during behind-the-scenes negotiations over a renewal between the two companies. As a result, the satellite giant halted its promotional efforts for HBO, causing yet another drag on the channel’s subscribers.

DirecTV resumed its HBO promotions in January after gaining on-demand rights to HBO programming, and the two companies are nearing a contract renewal, according to people familiar with the matter.

In addition, Bewkes has said economic weakness weighed on HBO’s subscriber results last year. Continued malaise in the U.S. housing market, in particular, caused the first-ever quarterly subscriber declines across the entire pay-TV industry in the second and third quarters of 2010, but HBO’s premium network competitors overcame those headwinds.

Showtime, owned by CBS Corp. (CBS, CBSA), saw its subscriber rolls grow by roughly 1.6 million, to 19.5 million, while Starz, owned by Liberty Media Corp. (LSTZA, LINTA, LCAPA), increased subscribers by 1.3 million, to 18.2 million, estimated Michael Morris, analyst with Davenport & Co.

Morris estimates HBO finished 2010 with about 28 million subscribers, its lowest level since the end of 2005, according to estimates from SNL Kagan. Morris estimates that HBO’s subscriber levels have stabilized in the current quarter and may grow 1%. The network has enjoyed recent critical success with its original series “True Blood” and “Boardwalk Empire,” but it has yet to find another breakout hit in the same league with “The Sopranos” or “Sex and the City.”

Chris Albrecht, the executive who led HBO when the success of those shows cemented its brand as one of the most powerful in media, now leads Starz, where he’s tasked with cobbling together a new slate of original programming. Starz, along with Epix LLC–a joint venture between Time Warner rivals Viacom Inc. (VIA, VIAB), Lions Gate Entertainment Inc. (LGF) and Metro-Goldwyn-Mayer Inc.–provides some of the most potent content available in Netflix’s streaming video service, including movie content from studios owned by Walt Disney Co. (DIS) and Sony Corp. (SNE).

Meanwhile, some investors have lost enthusiasm for HBO’s position as a premium network that’s only available as an upgrade to traditional pay-TV subscriptions–a position that some view as limiting the network’s growth potential. That has led to questions about whether Time Warner could offer HBO as part of the basic cable tier for higher affiliate fees, or whether it could be offered direct to consumers over broadband outside of pay-TV offerings.

“[Time Warner’s] tone seems to have become a bit more open to those sorts of possibilities,” Morris said.

On a recent conference call, Bewkes ruled out making HBO part of basic cable. He said offering it direct to consumers over broadband is possible, but the company has no plans to take that step.

“There are significant benefits in having our distributors marketing [HBO], doing the customer service, providing the infrastructure, both the video-on-demand streaming to your big TV, and the Internet infrastructure that supports broadband delivery to your house,” he said. “These are not small items, and I think everyone has to think carefully about what is needed to maintain the capability of the broadband infrastructure to deliver video.”

-By Nat Worden, Dow Jones Newswires; 212-416-2472; nat.worden@dowjones.com

(END) Dow Jones Newswires

03-10-11 1415ET

Read more: Time Warner Faces Pressure To Recoup HBO Subscriber Losses – Investing – Dow Jones Newswire – SmartMoney.com http://www.smartmoney.com/news/on/?story=on-20110310-000556#ixzz1HDRyHGar


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