Why a standalone HBO option might not be a great deal for consumers

hbo go

In June 2012, a web designer named Jake Caputo launched a website called TakeMyMoneyHBO.com. The concept was simple: Visitors could enter the amount of money they’d be willing to pay for a standalone HBO Go account and the website would tweet out that amount with the hashtag #takemymoneyHBO. I don’t have access to any data for what amount users tweeted out on average, but I’d be willing to bet a fair number of them named a price somewhere between $8 and $9 a month. Why that range? Because that’s about what users pay per month for Amazon Prime ($8.25), Netflix ($8.99), and Hulu Plus ($7.99).

But when HBO finally launches a standalone HBO Go subscription next year, as its CEO Richard Plepler recently promised it would, it’s likely to set its subscription price 75 to 100 percent above that $9 threshold.

Even if it wanted to compete with these other streaming services on price, HBO likely doesn’t have a choice in the matter. Currently, nearly 30 million households purchase HBO add-on subscriptions to their cable packages, resulting in $5 billion in revenue and $2 billion in profit for the channel. And what do these add-on cable packages cost? An average $15 a month, according to the Wall Street Journal. With cable companies responsible for the majority of revenue going into HBO’s coffers, they’re unlikely to sit idly by and allow HBO to undercut its own cable package, thereby giving more encouragement for consumers to ditch their expensive cable subscriptions. In fact, as noted by that same WSJ article:

The average monthly cost for an HBO subscription is about $15, and the fee for the new service isn’t expected to be any cheaper than that, according to a person familiar with the matter.

I wouldn’t be surprised if the standalone HBO Go subscription is north of that $15 subscription, since cable companies will argue that it’s an “unbundling” and that cord cutters shouldn’t get access to the bundling price.

The problem for HBO is that consumers have been trained for years to think a streaming subscription service should cost between $8 and $9. How sensitive is that price point? Well, look at the bellyaching that erupted when Amazon Prime raised its prices from $6.50 a month to $8.25.

According to a survey conducted by Brand Keys, which measures brand engagement and customer loyalty, Amazon’s rating fell from 93 percent to 83 percent in the two days following the price hike.

Netflix faced even bigger problems when it hiked its monthly price by a dollar. On Wednesday, its stock tanked when it announced that its subscriber growth in the last quarter had slowed.

The company is blaming its $1 price hike in May, which raised the cost of a subscription to $8.99 per month. “As best we can tell, the primary cause is the slightly higher prices we now have compared to a year ago,” management said in its letter to shareholders. “Slightly higher prices result in slightly less growth, other things being equal, and this is manifested more clearly in higher adoption markets such as the US.”

What’s more, HBO has already cannibalized its own fanbase by handing over many of its old shows to Amazon Prime for a reported $300 million (I’ve been enjoying rewatching The Wire on my Prime account). One of the draws of HBO Go is that you’re allowed access to the entire back catalog of old HBO shows. How many consumers will pay $15 to $20 for an HBO Go account when they’re already paying $8 for a Prime account that gives them access to most of HBO’s back catalog, a bevy of non-HBO shows and movies, and two-day free shipping of all Amazon orders?

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Ironically, this move may be a boon to Netflix, due to what economists call agglomeration. Why do so many New York jewelers congregate in close proximity to each other when it would seem smarter to branch out into geographic locations with less competition? Because by setting up close to each other, the Diamond District becomes a destination spot for shoppers, attracting many more buyers that more than make up for the increased competition.

So while HBO Go might be now competing with Netflix, it is also incentivizing millions of cable subscribers who were thinking about cutting the cord but unwilling to part with their Game of Thrones watching to finally make the leap. With many of those cable subscribers paying upwards of $100 a month, paying $20 for HBO and an extra $9 for Netflix still saves them $70 a month. And those users are more likely to subscribe to Netflix instead of Amazon Prime since they won’t need access to Prime’s HBO shows.

Don’t get me wrong; there are probably plenty of hardcore HBO fans who are more than willing to pay $20 or higher for HBO Go. But for the rest of us, the people who may like Veep or want to rewatch old episodes of The Sopranos? Well, many of us are already “borrowing” HBO Go passwords from our parents, neighbors, and friends. And looking at a price tag that’s twice the cost of Netflix, it might be too tempting to continue mooching off Mom and Dad a little longer.

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Simon Owens is a tech and media journalist living in Washington, DC. Follow him on TwitterFacebook, or LinkedIn. Email him at simonowens@gmail.com. For a full bio, go here.