6.8 Million People Say They're Ready to Cut the Cord After HBO Go Launches -- Are You One of Them?

By Markets Fool.com


Millions may be ready to abandon their pay-TV subscriptions. Source: Flickr/Santi Villamarin.

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Cable companies may be in for a rude awakening in the near future.

If a Parks Associates survey is even close to accurate, droves of cable subscribers will cut the cord this spring after HBO rolls out its over-the-top HBO Go service.

Specifically, the survey found "17% of U.S. broadband households are likely to subscribe to an over-the-top (OTT) video service from HBO. Among these likely subscribers, 91% are currently pay-TV subscribers, and roughly one-half would cancel their pay-TV service after subscribing to this HBO OTT service."

Let's break down those numbers and see what they mean for HBO's parent company Time Warner .

6.8 million subscribers plan to leave
Peter Kafka at Re/Code did an excellent job breaking down the numbers.

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He notes the most recent data from the National Telecommunications & Information Administration pegged U.S. households with broadband Internet access at 88 million. That number has undoubtedly increased since then, but we'll use that as a conservative estimate. 17% of 88 million is 15 million.

15 million people could subscribe to over-the-top HBO Go.

91% of those 15 million are currently pay-TV subscribers, according to the Parks survey. That's 13.6 million households with a cable subscription that plan to subscribe. Half of those households plan to cancel their pay-TV service after subscribing to HBO Go.

That's 6.8 million households ready to cut the cord once they can get HBO without cable.

That number seems awfully high. Kafka is quick to point out that it's one thing to say you're going to cancel your subscription, and it's another to actually do it. He also notes the Parks survey takers might not know exactly what they're saying. After all, why wouldn't you just get HBO delivered via your cable subscription if you don't plan to cut the cord?

15 million subscribers would almost certainly surpass HBO's internal projections based on its own market research. If it signed up that many customers, it could end up hurting its business and its parent company more than incremental subscriptions benefit it.

Doing more harm than good
Time Warner makes a lot of money off of cable subscribers, and over-the-top HBO Go is a threat to its other television business -- Turner Broadcasting. That segment runs the networks TNT, TBS, CNN, HLN, Cartoon Network, and more. These popular networks are found in nearly every cable subscription, and Time Warner gets a fee for every pay-TV subscriber with one of its networks in their bundle.

Just TNT, TBS, and CNN combined to generate an estimated $2.83 per month for each subscriber last year.That amount (actually more if you include its other networks) needs to be accounted for in the cost of offering over-the-top HBO Go.

If the Parks survey got it right, and we assume that about 45% of people who sign up for over-the-top HBO Go plan to cut the cord, Time Warner needs to expect at least $1.27 in cannibalization costs. Add in the potential for current HBO subscribers to switch to stand-alone HBO, and those costs rise even higher.

Additionally, HBO will bear the marketing and customer service costs as well as delivery costs for its over-the-top service. And if it starts taking significant subscribers away from pay-TV operators, the marketing and customer service support it receives from cable companies could decline as well, hurting sales through its traditional outlet.

Overall, the incremental profits from HBO over-the-top are going to be limited regardless of how popular it is.

It's not supposed to be that popular
HBO sees an incremental opportunity to attract the 10 million to 15 million broadband-only households in the U.S. to its network. Certainly, there are people subscribing to pay-TV just for HBO, and they will jump at the opportunity to cut the cord. But HBO's and Time Warner's interests are strongly aligned with cable operators, so it's unlikely it sees itself causing too much damage to the industry.

When evaluating the opportunity for HBO and Time Warner, remember stand-alone HBO is a relatively niche product for Time Warner's standards. The revenue opportunity is likely much less than $1 billion (and even lower in the near term) when cannibalization costs are factored in. But after the company saw a decline in revenue during 2014, it could be the factor that returns the company to growth.

The article 6.8 Million People Say They're Ready to Cut the Cord After HBO Go Launches -- Are You One of Them? originally appeared on Fool.com.

Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Netflix. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.