It's not TV, it's HBO. That was the slogan that
launched in the mid 90s, that ushered in some of the
most prestigious television shows ever made with nearly
550 Emmy wins over the last 20 years in about 80
million global subscribers. HBO has secured its spot as
the gold standard of storytelling on television. The story of HBO has always
been a promise of excellence in quality, and that's what
we always tried to deliver on. And I think we did
that. And that's why the company it was and remains
as vibrant as it is, and I think attracted so often
the attention of the best creative
people. Yet HBO has never been its
own standalone business. Surviving merger after
merger and acquisition after acquisition, with one of
them considered to be the worst deal in modern
American corporate history. Aol and Time Warner,
arguably the most disastrous merger in media history and
responsible for over $150 billion in write offs. What do you call a $160
billion catastrophe? It's a big problem. Again, HBO is finding itself
in the midst of a shakeup. Owned by Warner Bros.
Discovery. Since April 2022, current CEO David Zaslav
has looked at deep cost cutting measures and
announced on April 15th, 2023 it's rebranding HBO
Max to Max, and some believe that the company is gearing
up for yet another sale. The expectation is that
Warner Brothers Discovery will not stay. Warner
Brothers Discovery three to four years from now. I think it's just a matter
of managing the company as well as possible before
that next transaction. Despite its turbulent
business history, in every decade of its 50 year
existence, HBO has never ceased to change the
programing game from uncensored, uninterrupted
movies to setting up the template for prestige
television to revolutionizing sports stand
up comedy and documentaries. The question now, as
competition stiffens, can the network sustain yet
another major turn? When we think of HBO, we
typically think of this the best of the best in
television. But big budget award winning series wasn't
where HBO got its start. The birth of HBO coincided
with the modernization of TV and the emergence of cable
television in the 1970s. Cable wasn't as ubiquitous
as it is today, and in most cases, it was a necessity
for those living in rural regions or cities like New
York or San Francisco, where broadcast signals weren't
reaching customers. Hbo began as one of the
only pay-TV services on the market in 1972 under parent
company Sterling Communications. A year
later, it was spun off to Time Inc. So HBO started out as sort
of this add on cable channel that you would pay whatever
amount of money, 10 or $15 a month. It wouldn't come
with your standard bundle. In the beginning, it had
mostly movies on there. It was the. Only network that anybody
had ever tried that got off the ground where it wasn't
supported by advertising. And then in the 70 seconds,
which was when the big three networks, CBS, ABC, NBC,
they had 95% of the viewing. That's Jeff Bewkes. He began his 25 year career
at HBO in marketing and sales in 1979 and was named
CEO in 1995. By 2008, he became CEO of
Time Warner and ended his storied career in 2018. During his time as head of
HBO, he spearheaded some of the most successful TV
shows of our time The Sopranos, Sex and the City,
and Curb Your Enthusiasm. But that all came later. In the early days, there
was virtually no original content on HBO. In the 70 seconds and 80
seconds. Like, we don't have enough
money to make actual scripted series yet. I mean, the networks each
have 30 of them a week. You know, they got big
budgets, big stars. We can't afford that. We don't have money for
that. So we didn't go into series
as long as as long as we could. We
basically avoided it. With about 1 million
subscribers in the late 1970s. It was one the only
places outside of the movie theater where customers can
watch their favorite films uncut and ad free. With access to live boxing
matches, concerts and comedy specials. It truly made it
a customer's home box office. You know, we're basically
doing whatever the big budget networks weren't
interested in, or they couldn't do it because
they'd annoy the more conservative tastes in the
Midwest, or they'd piss off Ford Motor Company or
something like that. We didn't have to worry
about that, so we were kind of rolling. But with the popularity of
VHS and video rental stores like Blockbuster, HBO was
left with no choice but to make some big decisions at
the time where the company had little in their budget
to fund original content. And then Blockbuster comes
and basically takes our entire selling proposition
uncut Hollywood movies in your home. And they go
earlier. They're now available to
you six months before HBO. They're also uncut. And here's the next the key
thing, the big, big you no problem there on demand. You can watch them whenever
you want. We're sitting beside HBO
saying to ourselves, we're screwed. Our number one
reason why people subscribe to HBO is now being taken,
you know, by Blockbuster. And what are
we going to do? But in 1989, Time Inc, HBO's
parent company made a $14 billion deal to merge with
Warner Communications, creating the largest media
and entertainment conglomerate of its time. The Time Warner era ushered
in a multiplex model with multiple channels and
effort to reduce churn from subscribers and begin
launching original offerings, starting with
two comedies Dream On and The Larry Sanders Show. We call it the best hour on
TV. It literally is almost only
one hour because we only had we had ten half hours a
year, 10.5 hours a year. But you got 365 days a
year, 24 hours a day, unlike the broadcast networks. And we've got ten hours of
serious programing. That's it. We knew we had to be
different, right? It had to be, particularly
in the early years. Simply put, worth paying
for. By the late 1990s and early
2000, the network made big investments into original
content. Hbo followed up Dream On in
the Larry Sanders Show with bold bets that will turn
into critical darlings like The Sopranos and Sex and
the City. From there, the network
went on a hot streak of original programing. They said to the broader
creative community, Look over here, there's
extraordinary work being done. And that becomes a
virtuous circle, right? Writers talk to writers,
directors to directors, the creative community, to each
other, agents to agents. Something's happening over
there, you know. Early 1990s, all the way
through. Now, of course, when
Michael, Patrick King and Sarah Jessica came with Sex
and the City and David Chase came with The Sopranos and
Tom Hanks and Steven Spielberg with Band of
Brothers. The door had been opened that these kinds of
bets were worth taking, not only because you were going
to resonate in popular culture, but it was great
business. At the peak of the Dotcom
era. HBO's parent company, Time
Warner, was on the verge of another merger with AOL. One at the time would
become the largest deal in merger history. But just a few short months
after the deal closed in 2002, AOL Time Warner was
feeling the effects of the bursting.com bubble. Advertisement. Revenue for
AOL started drying up all while the world was
shifting from dial up Internet to cable
broadband. Aol Time Warner reported
losses of $98 billion that year, the largest corporate
net loss in US history. To put that in perspective,
in 2001, just a year prior, the company's net loss was
just $4.9 billion. The road to recovery was a
tough one for the entertainment segment of
AOL Time Warner. It wasn't until 2009 that
Time Warner was spun off from AOL, and Jeff Bewkes
took over the reins as CEO. And ultimately, he made the
company a pure content company. I think. What Jeff was very adamant
about for my colleagues at Turner and at Warner
Brothers and at HBO was You guys do what it is that you
do at Warner Brothers, make great television, make
great movies. Turner Make great
television. Get your sports rights, CNN continue to be
the important brand that you are, and HBO make great
programing. And so they did. Marking its fourth time
exchanging hands, the network decided to dive
deep into original programing, driving more
subscribers to the business than ever. During Time
Warner's uncoupling from AOL. Leadership shifted
after about 12 years in various leadership
positions within the company. Richard Plepler
took over as CEO. When when I began in 2007
for the team and for myself was let's make sure
that we remember what brought us to the
dance right in the first place, which was becoming a
home where the best people wanted to work. So, look,
we didn't we didn't overthink it. We knew that the
environment was increasingly competitive. We knew that
there were other places for people to go if
if we weren't quick to respond. And I think our mission was
to make sure we picked well and we invited the right
people to keep coming back. And even if we said no to
some things, we made sure that we were respectful of
the creative people who were coming to us,
urging them to come back. Hit shows like Game of
Thrones, True Detective, Veep, Insecure and many
more dominated the zeitgeist in entertainment, raking in
228 primetime Emmy wins between 2009 and 2017. While the success of its
original programing was exploding on screen, its
domestic growth took several more years to get up and
running. In the United States. Cable TV subscriptions
peaked around the year 2012 at about 100 million US
households. So at this point, there was
already evidence that millions of Americans were
canceling traditional cable TV. And the main reason why
was it had gotten too expensive. Year after year
after year, these programing companies would push 5 to
10% increases, and all of that increases would
basically go straight to consumers. Now, it was
like, well, you're paying 100 or $120 a month and
you're getting all of this content that you're no
longer watching. Between 2009 and 2017, HBO
under Time Warner was the most distributed pay TV
service in the US. However, it came at a time
where domestic growth was undercut by cord cutting
and steep competition from other streamers. To combat this, HBO set its
sights on two major efforts international growth and
streaming. By 2011, HBO had a total of
93 million subscribers. Of those, about 40 million
were domestic. Hbo Go launched in 2011. It was a streaming offering
only available to those subscribed to HBO through
their cable provider. Between 2011 and 2014,
global subscriptions increased while domestic
growth plateaued. The fundamental question for
me in 2012 2013 was how do we continue
to grow in a world where there are more and more
broadband only homes? And that's how we built our
digital product? In 2015, HBO now launched. It was a streaming service
that circumvented the need for a cable subscription. When we decided at HBO that
we needed to develop a digital product. I think there were only 3
million homes in the United States that were broadband
only homes by the time we introduced HBO. Now in Cupertino with Apple
in March of 2015. I think there were 10
or 11 million. You know, now there are
tens of millions of broadband only homes,
meaning if you want to be in the homes of your consumer,
you need to have a product which can be delivered
through broadband, either direct to consumer or
wholesale through another digital distributor. So it
was an obvious decision for us and we evolved to be
able to do that. But at the end of the day. It's about the content. But the transition to a
digital platform was not without outside turmoil as
another merger was on the way. Rupert Murdoch made an
attempt to buy Time Warner for $80 billion, but
bookies stopped that deal since Murdoch's Fox wasn't
worth the $85 a share. Fox said it was worth. So when I was talking
privately to Rupert and Chase. Was telling them,
No, we're not doing this. It first of all, it's not
worth $85 a share. It's worth $68 a share. You know it and I know it. There's no price that you
can afford that we would accept because you don't
have it's literally you're trying to buy a dinner that
you don't have money for the dinner. You can't do it. Time Warner ended up selling
to AT&T, a massive merger that potentially changed
the brand image of HBO and one that is viewed as one
of the worst mergers in US history just behind the AOL
Time Warner deal. That deal was catastrophic,
not as catastrophic as AOL, but it was definitely
deleterious to HBO and Time Warner's health. At&t agreed to buy Time
Warner for roughly $85.4 billion in 2016, a deal
that took nearly two years to complete as it was met
by pushback by regulators and the DOJ. We're disappointed that it
took 18 months to get here, but we are relieved that
it's finally behind us and we look forward to closing
this transaction in the upcoming days. While changing hands several
times, one thing had remained constant the
quality of HBO's content. In 2018, the network
brought home 23 Emmys and continued to grow its
audience worldwide. But things were slowly
changing under the AT&T leadership. The streaming
wars were in full force at that time. Vertical brands
HBO, Turner and Warner Brothers slowly began to
shift to streaming. Under AT&T, Time Warner
became WarnerMedia, and it looked to activate HBO's
prestigious brand to the wider world of streaming. Instead of using HBO Go and
now as standalone products, it looked to make a new
streaming service. Legacy media companies like
Disney, NBC Universal began securing the rights to
their iconic shows and films in preparation to launch
their own respective platforms Disney Plus and
Peacock. At&t, in its newly
rebranded WarnerMedia, had a massive catalog of content
and wanted to capitalize on it. In 2019, just one year
after closing the acquisition, WarnerMedia
announces HBO Max. So the thinking with HBO Max
was we'll take this prestige programing. If we want to
compete with Netflix, we need to add non HBO
programing to HBO, and that will get us over the hump
here where we can start to target these tens of
millions of Americans who have never subscribed to
HBO. The buildup of HBO Max's
announcement was met with AT&T stock seeing a steady
climb leading up to the official unveiling on
October 29th, 2019. At&t stock hit over $29 per
share. But when HBO Max finally
debuted in May 2020, its launch was a bit rocky, and
it happened to coincide with the pandemic. Still, AT&T
saw somewhat of a needed boost. The issue was that there
were already streaming service products out there
that had HBO in the name that were not HBO Max, but
kind of sounded like HBO Max like HBO Go and HBO now. The launch of HBO Max, which
was just mean. It was malpractice. And it's not just the
naming confusion, which was just atrocious and just
unnecessary, but the actual launch itself was a
disaster. The tech was terrible and
they didn't have all their ducks in a row. They
weren't on Roku or Fire one, number one. And number two,
for just amount of streaming or at least dongles in the
United States. But I believe at the time
those two controlled somewhere around 50% of all
streams on TVs in the United States. How do you launch
without half of your ecosystem? Hbo Max and its plan to
compete with rivals is fairly simple Continue to
spend big on content. At the time, the market was
very much cheering Netflix on from a spending
standpoint. In other words, the more
money Netflix spent on content, the more its stock
seemed to rise and the market was cheering on more
and more spending. But they were cheering on
more and more spending for Netflix. They weren't
cheering on more and more spending for all companies. The fact of the matter was
that AT&T was a wireless company and it cost
billions and billions of dollars for your capital
expenditures to be a wireless company. So AT&T was caught. They were caught in a bind. So now you have to spend
billions of dollars in two directions. And by the way,
you now have tens of billions of dollars in debt
because you just did this large transaction to buy
Time Warner. As the pandemic wreaked
havoc on Warnermedia's brands focus on theatrical
releases, then WarnerMedia CEO Jason Kilar announced
that all theatrical releases will be released on HBO Max
on the same day. The AT&T and Warner media
merger never found solid ground in its early days. It was met by an
unprecedented pandemic that crippled Warnermedia's
theatrical vertical. And while HBO Max saw
revenue growth and subscriptions hitting 73.8
million by 2021, the costly streaming venture mounted
$6 billion in operating expenses in 2020 alone. As for its stock, AT&T
never regained its pre-pandemic highs. Warnermedia accumulated
more debt as Wall Street urged AT&T to invest in its
technology and communication business rather than its
media. At&t needed to spin off its
expensive and risky merger. In May 2021, just one year
after HBO, Max officially launched AT&T announced
it's spinning off WarnerMedia to Discovery
for $43 billion for Discovery. It took on
roughly $55 billion in debt when the deal closed in
April 2022. Hbo parent company will go
through another name change, Warner Brothers Discovery. The newly formed Warner
Brothers Discovery has had one clear direction from
current CEO David Zaslav. Cut costs and generate cash
as fast as possible. David Zaslav started to put
into place these a variety of different ways to cut
costs. Thousands of people were
laid off at the company. CNN Plus, which was this
new news streaming service, was immediately rejected. That saved something like
$350 million off the top. Many older library programs
that were on the HBO max streaming service were
eliminated. With the addition of HBO Max
to Discovery's business. Its direct to consumer
segment jumped from $860 million to $7.3 billion in
revenue, with a total of 96.1 million subscribers
throughout the various mergers and acquisitions. Hbo has continued to push
forward with critically acclaimed programing, the
latest being Succession House of the Dragon, The
Last of Us and White Lotus with a lot more in the
pipeline. Its storied culture has
been passed down from one CEO to another. Look, there's a wonderful,
wonderful creative team at HBO. Casey Bloys and. His team endeavor, its a
really impressive creative team. And if left to their
own devices and given enough money they can continue to
do what they've been doing. But as part of cost cutting
measures in 2022, just a few months after the completion
of the merger, there was a wave of cancellations of
shows and HBO Max exclusive movies. The company also
shipped some of its content to free ad supported
streaming TV. And with the merging of two
companies, came another streaming service,
Discovery Plus, which launched in 2021. And in efforts to save
money on running two separate streaming services
and to streamline customers choices as to what to
watch. Hbo Max is rebranding to simply max. Part of the reason to
rebrand the streaming service Max and not just
call it HBO Max and throw in all the discovery content
was the executives at HBO and at Warner Bros. Discovery were very attuned
to trying to save the HBO brand and the fear was, if
you call the service HBO Max and you throw in 90 day
fiancé and all of these other reality shows that
are not HBO quality, that over time
everyone's calling this thing HBO and
the brand will be diluted. Last year, Warner Bros. Discovery posted a net
income loss of $7.3 billion, mostly from paying down its
inherited debt. And its stock performance
dropped from the start of the merger to the end of
2022, selling at over $38 per share. The company has
made major efforts into bolstering the different
media verticals and inherited from Warner
Media. The company announced major investments into
legacy IPs like a new Lord of the Rings franchise, a
Harry Potter series on Max, and relaunching their
superhero studio with DC films. But some believe
these major investments are potentially setting up
another sale for the company, marking the
seventh time, HBO has seen a change of hands. If you have forget the
individual companies, if you have an overall industry
profit pool that's smaller than what all the legacy
vestigial pieces used to live off of, it has to
consolidate. It has to.
