HBO Deals a Major Blow to Amazon Prime

By Daniel B. Kline Markets Fool.com

The relationship between Time Warner's (NYSE: TWX) HBO and Amazon (NASDAQ: AMZN) always seemed like one designed to blow up at some point.

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The subscription-based cable network licenses the online retailer rights to many of its older shows for use on its Prime video service. That includes series like The Sopranos, Sex and the City,The Wire, and many others. The deal always seemed a bit strange, and it was made before HBO launched its own stand-alone streaming service, however, after it launched its own service the eventuality of the two now coming to blows seemed inevitable.

HBO and Amazon made their licensing deal in 2014 giving the online retailer a healthy library of content that previously was only available to subscribers of the premium cable channel. In April 2015, however, when Time Warner launched HBO Now, the new stand-alone over-the-top (OTT) streaming service, which did not require a cable subscription, it also had the channels' complete archive.

Essentially that made Amazon Prime a competitor to HBO Now and by licensing its content, Time Warner was propping up its rival. That may have been a penny wise, pound foolish strategy since Prime already had tens of millions of subscribers when HBO Now launched.

By sharing its content with its rival Time Warner took away a reason for consumers to subscribe to HBO Now. The company sees that now and is making a change.

Consumers have an increasing amount of choices when it comes to streaming services. Image source: Getty Images.

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What is HBO doing?

The company said during its Q1 earnings callthat it did not plan to renew its deal with Amazon when it expires at the end of 2018.

"I don't think you're going to see us extend or expand our relationship with our library of programming on Amazon," saidHBO CEO Richard Plepler. "And we have no plans to do that beyond the end of the date, which is the end of next year."

HBO can make this move because despite the continued losses impacting the overall cable industry, the pay channel increased its revenue by 5% in Q1. That was driven by a mid-single digit domestic increase in subscription revenue and a double digit increase internationally. Time Warner CFO Howard M. Averill specifically noted "healthy demand for our OTT products in Europe," as being a driver of subscription revenue.

What does this mean for Amazon?

When Amazon first licensed the HBO content Prime was mostly a service full of reruns and old movies. That has changed however and now a service that was once meant as a nice add-on for people paying $99 a year for free two-day shipping has become much more of a stand-alone player. No longer an afterthought, Prime is now designed to serve not only the free shipping crowd, but also those who might choose it over Netflix (NASDAQ: NFLX) or Hulu.

In fact, in 2017 Amazon expects to spend $4.5 billion on streaming video content, according to GeekWire. That's not far off the $6 billion Netflix will spend and it includes everything from originals to licensing National Football League games.

Losing HBO shows is a blow for Amazon, partly because it has not scored as many of its own hits as Netflix has. By the end of 2018 Prime Video will have an even stronger lineup of originals to offset the loss.

Time Warner had to do this in order to support HBO Now, but it's possible that both companies may emerge from this unscathed, or even in better shape. Amazon got HBO's help when it was establishing its service and may not need it as much, or at all, when the deal ends. HBO got some added revenue when it was not in the stand-alone streaming space, and now that it is, having exclusivity on its own shows could win it some new subscribers when the time comes.

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Daniel Kline has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.