HBO To Netflix: Bring It On
How HBO's quest to win the streaming wars became a binge-worthy drama as juicy as Game of Thrones .
On a frigid winter Friday in Manhattan’s MediaGulch, HBO CEO Richard Plepler glides through the doors of a power-lunch spot called the Lambs Club. Plepler, the kind of natty dresser who believes that real men would never be caught dead without a pocket square, sports a tweed blazer over a baby blue cashmere sweater that perfectly accents his eyes. He floats across the marble floor, slips into his regular booth in the corner—a spacious, red leather cove—and slings one arm across the top of the banquette.
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"Ray, anything for us to know?" Plepler booms cheerfully to a tuxedoed waiter who has materialized at our table. Before the slightly bowed man is done rattling off the specials, Plepler orders what he always orders: chicken paillard. A number of media dignitaries and city elites stop by to pay their respects. One society matron reminds Plepler of a dinner on the books with her Ivy League son to talk to him about "the real world." When our meal is over, there is no check drop; we simply walk out of the restaurant.
Nothing about the Lambs Club resembles the real world in 2015. And Plepler, with the chiseled features of a prizefighter and a ruddy, year-round tan, gives off the air of someone living in a simpler mediascape than the one he actually inhabits, the one where his elegant BMW of a company is being dinged left and right by scrappier, younger media vehicles like Amazon. Hulu. Netflix. and a slew of new online streaming services.
Netflix is the peskiest of these, the only one that could, in the opinion of some pundits, knock HBO off track. Plepler became CEO on January 1, 2013, and later that very month, Netflix’s chief content officer, Ted Sarandos. declared, "The goal is to become HBO faster than HBO can become us." Since then, Netflix has launched original series such as House of Cards and Orange Is the New Black . acquired the right to air five new Marvel series and Chelsea Handler’s next project. grown from 33 million to 57.4 million subscribers, and increased revenue from $3.6 billion to $5.5 billion, while boosting its stock price almost 400%. "Two to three years ago, the average user was watching almost 60 minutes of Netflix a day. Today, it’s nearly two hours," says Liam Boluk, a media strategy consultant at Redef. "Netflix is bigger than every single cable and premium-cable network in the U.S. No matter how well programmed, powerful, or profitable HBO is today, you can’t look at that scale and might and not feel the need to act soon."
HBO has not exactly been standing still over the past two years, adding more subscribers in 2014 than in any of its previous 30 years; its creative hot streak has continued with True Detective . Silicon Valley . Looking . and more; and it’s far more profitable than Netflix ($1.8 billion versus $403 million in 2014). Yet this good fortune hasn’t prevented Plepler from recognizing the potency of the threat that Netflix and its ilk present.
Plepler’s response gets unveiled 17 days after our lunch. Called HBO Now, it is a stand-alone version of HBO Go. an app that gives access to just about every episode of every HBO series, as well as tons of movies, documentaries, and sports. Rather than merely being a bonus for people who subscribe to HBO through an existing cable provider (usually paying something like $15 a month), HBO Now will not require a cable subscription. It will be available at launch to anyone with an Apple device.
Holding court: "Culture eats strategy for breakfast," HBO CEO Richard Plepler likes to say. With the creation of HBO Now, he’s got both. Photo: Jeff Brown
The move seems risky. What if people dump their regular HBO subscriptions? What if the cable providers, who generate virtually all of HBO’s $5.4 billion in revenue, remain displeased by this run around them? What if Now, which may feature content never before seen on HBO, is less consistently excellent than the existing HBO service? And what if this pushes Netflix to become even more aggressive?
Apple thinks about things the way we do.
Plepler believes Now will position HBO for an even bigger slice of the $236 billion people are expected to spend on subscription television by 2018. But this is a massive change for a company accustomed to enjoying life as a high-minded service that has never needed to scramble for ratings or lower its taste to reach a mass market. Plepler started at HBO 22 years ago, managing PR. Gregarious and opinionated, he quickly stood out as more than just a flack. When Jeff Bewkes ran HBO, Plepler became Bewkes’s consigliere, giving advice on everything from marketing to corporate strategy. "When I first met Richard," jokes Bewkes, who’s now CEO of HBO’s parent Time Warner. "he outlined the future of the television industry, forecast the rise of Netflix, predicted the iPhone, and described the coding changes for Microsoft Windows." What Plepler has done is impressive: Besides bringing great talent to the network again and again, he helped HBO fend off an earlier wave of competition, in the mid-2000s, when AMC and Showtime emerged as rivals for premium original content. And he has ascended through the ranks of Time Warner, a place whose corporate infighting has sometimes been as cutthroat as anything you’ve seen on Game of Thrones . "He’s the peacemaker who gets everyone to work well together," says Jay Sures, managing director of United Talent Agency. As Bewkes puts it, Plepler "won’t steal your sandwich if you leave it on a desk. That’s an important trait if you’re going to go around and work in the white spaces, between people who are at odds with each other or have well-established walls between them. You have to make sure everybody knows you’re trustworthy."
When I ask Plepler if launching HBO into even more direct competition and an even less certain future makes him anxious, he barely blinks. "No, I’m not nervous," he tells me. He’s the cool cat of the cable content wars.
HBO has had Netflix on the brain for years. When it launched HBO Go in February 2010. it touted the app’s 600 hours of programming by imploring users to "Watch something you haven’t watched a million times before." Courteney Monroe. the former SVP of marketing at HBO who’s now CEO of the National Geographic Channel, admits, "There was some implied digging there, that this was a better alternative" to Netflix.
At first, you could only use HBO Go by logging in via a web browser. It was a sleek and simple service—for anyone who had a cable subscription to HBO. This not-so-little caveat allowed HBO to enjoy its newfound digital credibility without tarnishing its critical relationships with its pay-TV partners.
Go whetted consumers’ appetite for more. They wanted it on their tablets, smartphones, and gaming consoles, but HBO, which relied on outside contractors for the technology behind Go, was slow to roll it out. Inside the company, a feeling took hold that HBO should own its own technology. In the summer of 2011, HBO hired Otto Berkes. an 18-year Microsoft vet who was considered a consumer-tech visionary. He cocreated the Xbox and developed tablet-device prototypes years before the iPad debuted.
"I joined HBO to create a world-class streaming platform and to develop the technical talent and capabilities needed to compete directly with Netflix and other major streaming services," says Berkes in an email. According to sources with knowledge of the plans, the streaming service might combine all of Time Warner’s content, including Warner Bros. movies; shows from TBS, TNT, and TCM; a rich archive of cartoons; and, of course, everything from the "It’s Not TV" network. The strategy was simple and bold, explains one source: "With better content than Netflix, what keeps you from taking all of Netflix’s customers and money?" An HBO source denies the plan was that ambitious and disputes that the goal was for the company to construct its own Netflix. Nonetheless, Berkes opened up a Seattle office and began hiring dozens of techies from Amazon, Microsoft, and Zynga.
Publicly, HBO downplayed its interest in a stand-alone app. In November 2011, Alison Moore. then HBO’s SVP of digital products, told an audience at a Fast Company event that "the math" just wasn’t right for a direct-to-consumer service. Even when fans took to the web and social media to plead their case, HBO was unmoved. In June 2012, Jake Caputo, a 27-year-old web developer whose next cable bill would be his first (a "cord never" in industry parlance), decided that he didn’t want to wait anymore for the DVDs to watch his favorite HBO shows. One evening, while eating leftover ribs and waiting for his wife to get home from work, he built a website called Take My Money, HBO! The site begged the company to "offer a stand-alone HBO Go streaming service and take my money!" Within 48 hours, 163,673 people joined Caputo’s campaign. "My phone just started blowing up," he recalls. HBO’s response? "That’s nice," says Moore, who’s now an NBCUniversal executive. "It wasn’t something we acted on immediately." In fact, Berkes’s goal was to deliver his app by late 2016.
HBO was moving slowly, but strategically.
A consummate connector of people, Plepler had known the political pollster Doug Schoen since Plepler’s stint as a 22-year-old staffer for Senator Christopher Dodd. Plepler asked Schoen to gauge public opinion about HBO and its competitors, telling him, "There’s a canard out there that we’re mature, and I don’t believe it. My hunch, to use a campaign metaphor, is that there are a lot of undecided voters. Let’s go see if that’s correct. And if so, why?"
Schoen came back convinced that there were two groups with large numbers of "persuadables." One group consisted of the 10 million or so homes with broadband Internet service but no cable subscription. Schoen believed they could be wooed with marketing that better sold the breadth and depth of HBO’s offerings. "We’re so close to ourselves," says Plepler. "We think everybody knows that we have deals with four Hollywood movie studios for first-run movies. That everybody knows what HBO Go is and how deep the library is." Schoen’s findings confirmed Plepler’s fears. "People actually thought Netflix had more movies than we did because they conflated quantity with first-run!" he says.
The even bigger opportunity, however, was the 70 million U.S. households that pay for cable but do not have HBO. Schoen believed that 15% were gettable—they had steered clear because HBO, sold as a premium "add-on" on top of basic cable bundles, was too expensive. The average pay-TV bill of an HBO subscriber was $130 a month.
Plepler believed there was only one way to lower the perceived cost of HBO: persuade its cable providers to sell it in a new way. "The days of packaging HBO up on top to draw people into the more expensive packages, that’s an old way of thinking about this business," Tom Woodbury. HBO’s head of global distribution, explains. "HBO should actually be used to cement the more fundamental packages." Woodbury and Plepler would like to see pay-TV operators use HBO as a sweetener to entice people to sign up or stick around for a limited set of channels, or to sign up people who buy broadband Internet.
Some pay-TV companies had already started doing this, such as Cox, which offers Flex Watch —basic cable with HBO and Starz. plus broadband—for $69.99 a month. In October 2013, Comcast. the largest U.S. cable operator, marketed a broadband basic-cable bundle that included HBO for $39.99 for the first 12 months. But these were exceptions. Plepler wanted a cudgel to push more cable providers to try these kinds of creative offerings. He hoped that the threat of a great broadband app that might lure subscribers away from the cable companies would do the trick.
As Plepler strategized, Berkes and his tech team worked to upgrade HBO Go. Plepler likened Go to a BMW 5 Series car, adding that HBO wanted "to build the 7 Series." One former HBO engineer was less charitable about the state of HBO’s vehicle, calling Go’s code "god-awful. This is what we would have written in 1987 to solve a problem." Go’s weaknesses, especially a tendency to stream slowly or not at all, had quickly become a major concern, since the app’s popularity was soaring thanks to shows like Game of Thrones .
The work was long and tedious. "With 2 million lines of code, you can’t edit it like a book. It’s math, right?" says another HBO engineer. Worse, while the digital untangling was taking place, HBO was also bringing Go to new platforms, including Google Chromecast and Apple TV, which got the service in June 2013.
The strain on HBO Go became clear at 9 p.m. on Sunday, April 6, 2014. Jake Caputo, the Take My Money, HBO! guy, was sitting in his basement entertainment center revved up for the season 4 premiere of Game of Thrones. He’d been waiting 42 weeks for this moment. He was now a cable customer with HBO, thanks to an Internet package his provider offered. Popcorn and pop were on
But Caputo’s night didn’t go as planned, since HBO Go crashed. Like millions of others, Caputo was left staring at a spinning, buffering circle for an anguishing 45 minutes. "There was a lot of sitting and staring and checking Twitter to see if anybody was able to get in," Caputo recalls. The outage was all the more embarrassing for HBO because the same thing had happened just a month earlier during the True Detective finale. HBO Go was still not a 7 Series BMW.
Thrones was dear to Plepler’s heart. It was a creative, costly gamble that had paid off big. In the aftermath of the outage, Plepler was gracious, but questions were starting to rise in New York about what Berkes’s engineering team was up to.
The stand-alone streaming service, which kept being delayed, was of particular concern. Berkes struggled with HBO’s culture, with communicating his vision, with explaining that software, unlike a TV series, is never done. At Microsoft, engineers are the celebrities. But, as Veep star Julia Louis-Dreyfus tells me, "The culture at HBO is one of utter respect for the artist." One observer explains that "to HBO, creative is the power. Tech is an unwanted incursion."
The unwanted intrusions continued.
Last June, Rupert Murdoch. chairman and CEO of 21st Century Fox. made an $80 billion bid to buy Time Warner. Murdoch wanted HBO in particular, seeing it as an underutilized asset. Within Time Warner, Murdoch’s bid set off a "shit storm," according to one source who met with Time Warner executives shortly after the bid was made. The pressure was on Time Warner—whose shares rose from $71 to $83 after the Murdoch offer was made public in July, and then fell to $74 when he withdrew—to prove to its shareholders that it had its own growth strategy. "There was a massive focus on short-term [earnings per share] growth," says one source, "and for [CEO Jeff] Bewkes to generate the maximum amount of revenue in the shortest time."
According to one source, Bewkes "surveyed the entire company looking for a great story." The one with perhaps the most potential was HBO’s plan to build a streaming service, even though Plepler had said as recently as March 2014 that "for us, it’s just arithmetic," and "right now, there are 4 billion or so reasons to do it the way we’re doing it." Bewkes denies that Murdoch spurred the decision to accelerate the launch of HBO Now. "He had nothing to do with it," he says. "We knew we needed to get moving with a lot of things." That’s certainly true: Turner had been struggling and needed restructuring; Warner Bros. had to reduce its head count via layoffs. "All these things were going on before the Fox thing; we just didn’t tell anyone." Plepler similarly refutes any connection: "People think Rupert affected this. That’s bullshit!"
By the time of Murdoch’s bid, Plepler says, he had already called up his old friend Jimmy Iovine to help him execute a pivot. Plepler had done PR for Iovine years earlier, at Warner Music. Iovine had sold Beats. the headphone business he owned with Dr. Dre, to Apple in May, for $3 billion. Plepler asked if Iovine thought Apple would be interested in being the lead distributor of HBO Now. Iovine didn’t hesitate: "I think that’s the shit," he said.
Plepler also reached out to Time Warner board member Paul Wachter. who worked on the Apple-Beats deal in his day job as an investment banker. Wachter connected him with Apple’s digital media chief, Eddy Cue. who came to New York for a meeting in Plepler’s office. Plepler explained that he needed a distributor, and that HBO Now would be ready by the spring (when Game of Thrones ’ season 5 would bow). Cue tells me that he wanted to do the deal with HBO "the next day."
It was an opportunistic arrangement that suited both sides. Apple has long been an also-ran in the streaming-TV wars. Teaming up with HBO, the kind of high-end partner Apple likes best, could help jump-start Apple TV. As for HBO, the deal did far more than simply deliver a distribution partner. Teaming up with the world’s most valuable and respected company would shine a bright light on HBO Now’s debut. Also, the deal focused the company’s digital ambitions—building for just one platform was infinitely less time-consuming than building for several—in a way that could ensure an earlier launch than the old deadline of late 2016.
The deal was sealed before Time Warner’s investor conference in mid-October, an event that both Bewkes and Plepler confirm was pushed up in the wake of the hostile Murdoch bid. Announcing its long-awaited streaming service would thrill shareholders and consumers alike. The only group that hated the accelerated timeline were the engineers who had to build the app. When Berkes was told of the new deadline, according to sources, he said that he wouldn’t be able to deliver it that fast. Or that what he could deliver was a much skinnier product—"I can give you a car without doors," is how Berkes’s friend Giorgio Vanzini, a former Microsoft exec who is now SVP of product development and integration at DirecTV, describes it.
Of course, this didn’t go over well with HBO’s leadership. The environment at the normally clubby and collegial company—where business is conducted informally on couches in Plepler’s 10th-floor office—was now "desperate," according to a source. Plepler’s message to Berkes was clear: We have to get this done. Now Berkes said he could deliver by spring, by following a revised plan, dubbed Project Maui. The tech teams in New York and Seattle volunteered to work weekends and nights to pull it off. Meanwhile, HBO executives explored alternatives.
Last September, Shelley Brindle. HBO’s EVP of network distribution, was one of the guests at Google’s ZeitgeistMinds conference in Scottsdale, Arizona. Taking a break from talks delivered by the likes of President Clinton and Snoop Dogg, she started chatting with an executive from MLB Advanced Media. As she listened, she grew impressed. The tech unit of Major League Baseball is best known for its app that live-streams baseball games from all over the country to about 3.5 million subscribers, but it has also established a roster of media clients including Sony. ESPN. and World Wrestling Entertainment. MLB Advanced Media’s experience with WWE. in particular, intrigued Brindle. While the wrestling organization is the cultural opposite of HBO, it, too, has an enormous content library and millions of devoted fans who want to view it. In just five months of work, MLB Advanced Media had designed a system for WWE that could handle visits from millions of people—at the same time. There would be no Game of Thrones –type disasters for fans tuning in to SummerSlam.
"They weren’t conceptual," says Brindle, a brassy blonde with a deep-throated laugh. "They were actually in the market doing it, right?" And unlike other tech companies, MLB Advanced Media is known for completing projects on time. "Opening day is opening day," Joe Inzerillo. its CTO, tells me one afternoon as we walk through the company’s loftlike office space above New York’s Chelsea Market. "The commissioner’s not moving opening day if the bats aren’t ready. So we’re very used to working backward from a hard date."
One former MLB Advanced Media executive put it this way: "It always felt internally like we promised too much, but we’d always get it done. There’s always a sprint the last month before opening day. No one sleeps, but all the features get pushed out." Plepler would have liked to have heard that from his own tech team.
On October 15, Plepler told those attending Time Warner’s investor day, "It is time to remove all barriers to those who want HBO." He added that HBO would "work with our current partners. And we will explore models with new partners. All in, there are 80 million homes that do not have HBO, and we will use all means at our disposal to go after them."
According to Brindle, the reaction from HBO’s big pay-TV partners, such as Comcast, who had received no heads-up from Plepler, was "muted. Not bad, not good." For all the posturing and bullying in the cable business, cable providers need top content companies just as much as content firms need them. So most of the cable companies held their tongues and waited to see what HBO would deliver.
In early November, Plepler canceled Project Maui and brought in the baseball boys to build the back-end technology for Now. "The distribution world we live in is changing daily," says Bob Bowman, MLB Advanced Media’s chief. "We deliver MLB on 400 different devices. I understand the idea that HBO should manage [its own tech], but it is a big, big investment. And it’s constant."
The company had lost faith in Berkes’s ambitious gambit to build its own Netflix. According to one insider, implementing the full plan would have cost $900 million. Sources close to Berkes insist that that number has no context and that the only way to really take on Netflix, which has a decade’s head start in streaming, is to spend real money. Either way, the grand vision that had first brought Berkes to HBO was now dead. A month after the decision to jettison Project Maui, he resigned. (Berkes declined to participate with this story beyond explaining his hire and expressing pride in what he built.)
Outsourcing the technology to MLB is a strategic pivot back to basics for HBO.
Plepler doesn’t evince any anguish over the decision. Outsourcing the technology to MLB is a strategic pivot back to basics for HBO: It’s a content company, not a tech one (though Plepler, always keeping his options open, has retained almost all of his Seattle-based engineering team). "The main thaaaang is to keep the main thaaaang the main thaaaang," Plepler drawls at one point during our lunch, doing his best impersonation of his favorite "philosopher," Mississippi politician Haley Barbour.
"This is a transformative moment for HBO."
Plepler is speaking on stage at Apple’s "Spring Forward" event on March 9 in San Francisco. officially unveiling HBO Now to the world. The news receives a loud cheer. So what if Plepler is short on details, announcing just the price—$14.99 a month—and a loose launch date (before April 12)? All this audience needs is the declaration that subscribing to HBO will soon involve nothing more than "a broadband connection and an Apple device." The cheers are even louder when Plepler introduces a new Game of Thrones trailer.
But is the debut of HBO Now really a transformative event? By launching with Apple, Plepler introduces a cool service that is, as Cue tells me, just "one tap" of a screen away, with none of that pay-TV preauthorization to slow you down. But even if version 1.0 of Now is error-free and loaded with premium content, it’s still a far cry from what Berkes had imagined. If it’s really good, it puts HBO into the same conversation as Netflix. It doesn’t come close to killing the enemy.
Still, HBO Now is certainly a big step forward for the company. Plepler lights up when he talks about what the service means for talent—his favorite species of human. It gives creatives "all kinds of dexterity. You want to do five specials? Put it on HBO Now," he says he told one producer. He claims that another A-list director has already showed up with a series of three-minute movies that he wants to post daily over the course of several months. Plepler told him: "We’re in."
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Even if going direct doesn’t materially change HBO’s business—industry expert Howard Horowitz predicts perhaps a 5% bump from broadband-only households—the deal has moved HBO, and the TV industry, for that matter, into the future. On March 16. news leaked that Apple is in the process of negotiating with CBS, Disney, and Fox about participating in an Apple streaming service that it would market starting this fall. In addition, Apple reportedly would share viewing data with its partners, something Amazon and Netflix refuse to do. The cable companies are starting to come around, too, with Cablevision signing up to sell HBO Now, a deal also announced on March 16. "Apple scares the industry," Brindle says.
After the Apple event, as the crowds disperse, Plepler mingles on the sidewalk outside the Yerba Buena Center with a posse of HBO and Time Warner executives. They’re easy to spot because they’re the only spiffy suits in this techie scrum of untucked shirts. Plepler peels off to huddle with Apple’s Cue, who is dressed in jeans and blue suede loafers. "We think the TV needs to be reinvented," Cue tells me. Leave it to Plepler, the consummate connector, to build the bridge between old and new media.
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Click to expand Photos: Craig Blankenhorn/HBO (Girls, Sopranos); Netflix (BoJack); Beth Dubber/Amazon Studios/Everett Collection (Transparent); Stocksnapper/Alamy (television); Warner Bros./Everett Collection (Lego); JG Photography/Alamy (football); Jaimie Trueblood/AMC/Everett Collection (Mad Men)
Watch the video below to see the history of HBO since 1972Source: m.fastcompany.com