Analyze and explain at least five important reasons for why HBO decided to offer its new service HBO Now. Note: Question 2 and Question 3 below are based on the idea of HBO Now cannibalizing its existing business with Comcast. Cannibalization is the phenomenon when a company’s new business does not generate new customers, but only acquires its existing customers from another source.

Questions

1. (10 points). Analyze and explain at least five important reasons for why HBO decided to offer its new service HBO Now.

Note: Question 2 and Question 3 below are based on the idea of HBO Now cannibalizing its existing business with Comcast. Cannibalization is the phenomenon when a company’s new business does not generate new customers, but only acquires its existing customers from another source. In this case, cannibalization happens when a customer gives up an existing HBO subscription through Comcast in order to subscribe to HBO Now. Alternatively, a potential customer who would have anyway joined HBO through Comcast now decides to join HBO Now directly. In both cases, HBO Now will not generate additional customers or revenue for HBO.

2) (10 points). Analyze the economic and strategic impact of cannibalization on HBO. Some helpful numbers from the case are given below. Make any additional assumptions as needed (either supported by information/numbers given in the case, or otherwise supported by clear logical arguments).

a) Under the current model, HBO gets $7.77 per subscriber per month from Comcast (p.6).

b) HBO Now is priced at $15 per month, the same price a consumer pays to subscribe to HBO as part of his cable service.

3) (10 points). Analyze the economic and strategic impact of cannibalization on Comcast.

How should Comcast respond to HBO Now? Some helpful numbers from the case are given below. Make any additional assumptions as needed (either supported by information/numbers given in the case, or otherwise supported by clear logical arguments).

a) HBO’s penetration among cable subscribers ranged from 14% to 42% (p. 6), with an average of say 30%.

b) Comcast’s subscribers in the U.S. = 20 million (p.1)

4) (10 points). Analyze, from CBS’s viewpoint (both economic and strategic), the pros and cons of its OTT service “CBS All-Access.” Does it make sense for CBS to offer this service (analyze this question both from the viewpoint of CBS, the broadcast network, and its local station affiliates)?

5) (10 points). Bundling is the phenomenon when a business sells two or more products together with a combined sale price. Cable providers currently sell a bundle of channels in their subscription service. We have witnessed the unbundling of several industries, with music being a prominent example (e.g., instead of buying an entire album, we can now buy an individual song on iTunes). Analyze the pros and cons for Comcast to move to an unbundled business model. What would be your recommendation to Comcast on this matter?

ANSWER

The Strategic Reasons Behind HBO’s Decision to Offer HBO Now

Introduction

HBO, a renowned cable network, made a strategic move by introducing HBO Now, a standalone streaming service. This essay analyzes the important reasons HBO decided to offer HBO Now and explores the economic and strategic impact of cannibalization on both HBO and Comcast. Furthermore, it examines the pros and cons of CBS’s OTT service “CBS All-Access” and discusses the potential benefits and drawbacks of Comcast transitioning to an unbundled business model.

 Meeting Consumer Demand and Preferences

HBO recognized the shifting consumer behavior towards digital streaming and the increasing popularity of OTT services. By launching HBO Now, HBO aimed to cater to the growing demand for flexible, on-demand content consumption. This decision allowed HBO to tap into a wider customer base, including cord-cutters and cord-nevers who were not subscribing to traditional cable services.

Direct-to-Consumer Business Model

HBO Now enabled HBO to establish a direct relationship with its customers, eliminating the need for intermediaries such as cable providers. By bypassing cable companies, HBO gained more control over its distribution and revenue streams. This move also provided HBO with valuable consumer data, allowing for personalized marketing and content recommendations.

Expanding Market Reach

HBO Now allowed HBO to reach potential customers who were not subscribing to cable services, either due to cost concerns or a lack of interest in traditional TV programming. By offering a standalone streaming service, HBO expanded its market reach beyond cable subscribers, potentially attracting a new segment of consumers and increasing its overall subscriber base.

Enhancing Brand Image and Differentiation

The introduction of HBO Now showcased HBO’s commitment to innovation and staying ahead in the rapidly evolving media landscape. By offering an attractive streaming service with exclusive content, HBO differentiated itself from other streaming platforms and enhanced its brand image as a provider of high-quality, premium content. This move positioned HBO as a leader in the streaming industry and helped to retain its existing customer base.

 Generating Additional Revenue Streams

While cannibalization may occur as existing HBO subscribers switch to HBO Now, the service’s higher price point of $15 per month (the same as the cable subscription) means HBO can potentially generate more revenue per subscriber. Additionally, attracting new subscribers who were not previously part of the cable ecosystem can contribute to revenue growth for HBO. The availability of HBO Now as a separate service also opens up opportunities for partnerships and distribution deals with other streaming platforms and device manufacturers.

Conclusion

HBO’s decision to offer HBO Now was driven by the need to adapt to changing consumer preferences and capitalize on the growing popularity of streaming services. By embracing a direct-to-consumer model, HBO aimed to reach a broader audience, enhance its brand image, and generate additional revenue streams. While cannibalization may impact both HBO and Comcast, the strategic benefits of HBO Now outweigh the risks. Moving forward, HBO must continue to invest in quality content and customer experience to maintain its competitive edge. As the media landscape evolves, it is crucial for companies like HBO and Comcast to remain agile and adapt their business models to meet the evolving demands of consumers.