Facebook Watch Could Get a Boost From HBO

Facebook (NASDAQ: FB) has been spending hundreds of millions of dollars on content for its Watch video platform, which is now just over a year old. After giving away high-quality content including sports like MLB baseball games and critically acclaimed dramas like Sorry for Your Loss, Facebook may be looking to partner with premium cable networks to distribute their channels to paid customers.

Consumers that subscribe to channels like HBO, Showtime, or Starz on Facebook could watch those networks' content on Facebook Watch (as well as other streaming platforms), according to a report by Recode. Amazon (NASDAQ: AMZN) offers a similar service through Prime Channels, and it already accounts for the majority of online subscribers for AT&T's HBO, CBS' Showtime, and Lionsgate's Starz. Hulu has also partnered with Showtime, and Apple (NASDAQ: AAPL) is reportedly interested in a similar partnership.

Facebook's massive audience and advertising capabilities gives it a unique advantage in attracting subscribers.

Capitalizing on user behavior

Facebook and other tech companies capitalize on their platforms by observing how users use their products, developing a way to make that behavior or desired outcome easier, and charging for that new service. After businesses started connecting with customers on Facebook and Instagram, Facebook developed several tools to make that easier.

One reason Facebook is interested in partnering with networks like HBO is that they already advertise on its platform. Facebook could help networks improve their ad conversions by tapping into everything both Facebook and the networks know about its audience. On top of that, providing the service directly on Facebook could reduce friction when it comes to signing up for a new account and entering payment details online.

Facebook would be sacrificing ad revenue for a share of the recurring subscription revenue. And Facebook would likely have to guarantee advanced payments to networks in exchange for the privilege. Long-term, however, Facebook should be able to generate more money from subscriptions than it would from advertising.

Amazon and Apple have made a big business off selling other people's content. Amazon accounts for over 50% of HBO Now subscribers, 72% of Showtime online subscribers, and 70% of Starz subscribers. Each subscription costs between $9 and $15 per month, and Amazon keeps between 15% and 30%. Apple, likewise, keeps 30% of the first-year revenue for subscriptions bought through apps on its devices. That rate falls to 15% in the second year and thereafter.

With millions of HBO, Showtime, and Starz subscribers, the companies are bringing in hundreds of millions in high-margin revenue just for acting as an intermediary. That could be a big deal for Facebook, which expects its profit margin to shrink considerably over the next year.

A secondary benefit for Facebook

Selling subscriptions to premium networks and driving customers to Facebook Watch could result in a secondary benefit for Facebook: It could get users to view more free stuff on Watch.

Facebook recently announced it has 75 million daily active users around the world spending an average of 20 minutes on Watch. That's a small number compared to the 2.6 billion people that use at least one of its four main apps every day. It's also small compared to the 400 million monthly active Watch users Facebook reported.

Premium networks may only draw a few million subscribers, but they could draw broader attention to the Watch platform and increase engagement across Facebook's entire user base. Unlike Amazon or Apple, Facebook can monetize increased engagement of nonpaying consumers. Facebook has rolled out Ad Breaks -- basically commercials in the middle of content, as on broadcast TV -- to 40 countries so far, and it's developing new ad products as well.

Moving up the ladder when it comes to selling premium network subscriptions could improve the bottom line for Facebook. But bringing greater attention to the Watch platform could really help move the needle, and help Facebook get its money's worth on all the free content it's serving up.

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