HBO the king of content
The biggest driver of that growth will be HBO. HBO will go direct to the consumer. According to TWX there are 10 million households with broadband who have cut the cable cord that could become potential customers. Information on pricing has not been released but it is rumoured to be priced similar to cable around $15 a month for access to over 2,200 titles. Its a massive change for TWX who has previously relied on cable companies to distribute, market and bill customers. This announcement surprised some of their cable partners including giant Comcast who are concerned it might cannibalize their lucrative pay TV business. It's a great move for HBO but it will compete even more closely with Netflix. HBO have trialed internet streaming services overseas and according to businessweek HBO's standalone streaming service in the Nordics has attracted less than 10% of the audience of Netflix. But when you are the king of content including Game of Thrones you have a good chance against the competition.
Game of Thrones is the biggest show in the history of HBO with 19 million viewers in the US. Australians set off piracy records leading the world for illegal downloads of the show. Daenerys the Dragon Queen played by Emilia Clarke is so popular that 146 baby girls were named Khaleesi in 2013!
The industry trend from physical DVD's to digital has been great for TWX. The growth in digital sales has offset the decline in physical sales with the benefit of 85-95% contribution margins versus 55%-65% physical. HBO is also making money by licensing their older content to Amazon but have kept some of their most iconic series including Thrones and Entourage.
Comic books are back
The success of Marvel and Disney has seen TWX double down on its DC Entertainment unit. TWX is the largest comic book publisher with the some of the best known superheros like Superman, Batman and Wonder women. They are bringing out out a Batman v Superman movie in 2016 (see schedule below).
Source: TWX investor day
TWX also owns Turner with TNT and TBS two of the top-five cable networks in the US. They recently extended their NBA rights for 9 years. Even though costs have increased sports has become the must have content. Advertising is an issue for media companies as with DVR's and streaming ads are either skipped or not watched live. Sports seems to be immune to this trend. TWX have disclosed that sports represents only 4% of their programming but 25% of advertising as advertisers are willing to pay up for the live exposure making it more likely their ad will be watched. Overall TWX's ad exposure is the lowest among their media peers at 17% of total revenue.
TWX upgraded growth targets should be well received by investors. Especially as it will be driven by subscription growth which is more stable recurring income than advertising which could lead to a higher P/E multiple. Importantly TWX's content is king, a slimmed down TWX was attractive enough for Rupert which should be attractive enough for everyone else.