Product lessons from the history of HBO
From disruptor to disrupted in 1000 pages
Reading “Tinderbox: HBO’s Ruthless Pursuit of New Frontiers” by James Andrew Miller [1] over the past few weeks has been a lot of fun. I love entertainment industry history, and Mr. Miller’s ambitious epics are amongst my favorites. Powerhouse, his book about the talent agency CAA, is still my favorite, but I can appreciate the grandeur of Tinderbox’s thousand pages long saga exposing the ins and outs of HBO, from its inception in the early 70s to pretty much mid-2021. My main problem with it is that I rarely watch any TV, so many details escape me. But it’s evident to me that HBO’s legacy transcends the medium, with the influence of what they did being so obviously present in the way we consume entertainment today.
The book is fantastic if you love oral histories, and it does contain the levels of office drama, corporate intrigue, and glitz I always hope to find in this kind of title. It’s like a very long episode of Dynasty, only real. But trying to be serious here, sandwiched between stories about Game of Thrones and The Sopranos, I found some exciting product anecdotes.
I immediately roll my eyes when a book tries to tell me AGAIN how Netflix destroyed Blockbuster with their bloody DVDs. So this is my plea to aspiring authors out there — there are a few strategy lessons you can draw from Tinderbox that will feel less stale than Blockbuster’s downfall. Please use them! I am presenting some of the ones that stuck with me (along with some commentary); I hope you find them as enjoyable as I did.
A problem to solve and a pivot
HBO’s first iteration didn’t come into this world to provide hours of entertainment out of the bat. Instead, the initial problem was poor TV reception in Manhattan because of all those tall buildings. Cable was a solution but required significant infrastructure work since it had to be done underground in this area. A company named Sterling Communications had a license for this kind of work in the mid-1960s, and Time Inc. had invested in it as part of efforts to diversify into media.
But the Sterling operation was facing financial challenges, and its founder, Chuck Dolan, came up with the hypothesis that people would pay for content they couldn’t get elsewhere. At the time, all television was free, so this was a pretty disruptive idea.
Time Inc. further invested in this pivot with Dolan, and together they worked on “The Green Channel,” which eventually was renamed “Home Box Office,” or HBO for short, and launched in 1972. By 1973 Time Inc. wholly owned (and dissolved) Sterling.
Atomic network
As Andrew Chen recently articulated in The Cold Start Problem [2], a good strategy for growth is finding an initial atomic network, ensuring the product delivers on its promise before expanding to other networks, and repeating as needed. Tinder did that. Facebook did that. And because of the constraints in cable coverage, HBO, maybe as a happy accident, also did that.
HBO early subscribers paid $6/month for a service running between 8 and 12 hours a day. The company rented films from the Hollywood studios and broadcasted them uncut and with no commercials. Through qualitative research, they found their potential audience preferred at-home viewing of movies, with males also willing to pay for sports events, and females having a substantial interest in live broadcasts of musicals and plays.
The service had 4000 subscribers by early 1973. Initially operating in Manhattan and lower New York, they wouldn’t start national expansion until 1975. Limited programming meant limited user growth and led to high churn rates; people found the service lacked enough content. This situation, of course, is a familiar challenge we still face today in entertainment services, with products relying too heavily on content having to face the dreaded “content treadmill” issue.
Building a castle in someone else’s kingdom
After a couple of years, the service had 40K subscribers, but financials were thorny. An interesting tidbit here is that HBO only received slightly over 50% of the subscription fee, the rest going to the cable operators that supported the service. In return, HBO didn’t need to establish any direct-to-consumer support channels, which kept the operations leaner (no customer support, etc.). While convenient at the time, this prevented the company from establishing a relationship with its final users, which eventually became an issue during the market shift to streaming — they didn’t have any direct consumer data.
Of course, things have evolved since the 70s, but it’s interesting to compare these dynamics with what we have these days with first parties like Apple, Google, Sony, etc., and platforms like Roblox.
Disruptor
HBO had a genuinely disruptive product. They operated a profitable service that delighted users and was hard to copy [3]. Existing TV networks couldn’t mimic their offering without hurting their existing business — uncut versions of movies, boxing, uncensored stand-up comedy, other risky content, and, of course, no commercials.
Missionaries over Mercenaries
In the early 80s, HBO started developing their own movies. I had a lot of fun reading about their strategy to attract recognizable talent to work on these productions — they targeted aging stars like Bette Davis, getting higher quality opportunities for them than the ones Hollywood was offering. They also started to provide these stars with their first directing job, which was hard for them to get elsewhere. Creative talent appreciated the trust, quality, space, and focused attention they got at HBO, and they usually wanted to work with HBO repeatedly, which was an asset for the company. Now, how is this for employer branding? Please, let’s all agree that the best way to attract the right talent is not a fancy office, perks, or the look of your careers page, but having the opportunities and challenges that such talent will want to invest themselves on, and providing the trust and space for them to solve them.
Power in the Market
It was also amusing for me to connect the dots on how this earlier iteration of HBO (before the mergers and internal dysfunctions) tapped into virtually all of the “statics” described in the 7 Powers strategic framework [4]. If you are not familiar with the framework, think of these powers as the elements you would need to tap into for your product to gain significant traction in the market. Of course, it doesn’t tell you how to get there (the “dynamics”), but I usually find they provide a good starting point for a strategy discussion.
Let’s go through them together:
- Scale Economies: the ratio of production cost per subscriber decreases as subscriptions increase. More subscribers meant they could afford better budgets, but that was a choice. Adding more subscribers didn’t add to the production costs.
- Network Economies: more subscribers increased the ability of HBO to invest in the content its members valued. The value for creators also increased as a larger network would expose their work to more viewers. All of this with early HBO not caring about ratings and producing content that was not necessarily following the trends set by the rest of the media landscape.
- Counter Positioning: as we have covered already, traditional network TV couldn’t compete, and even as new players emerged (Showtime, The Movie Channel, Bravo, and other services launched as a result of HBO’s growth), it was hard for these services to match HBO in terms of quality. Note: Using quality as a means to defend your network is also covered in Andrew Chen’s book; you can read more examples there.
- Switching Costs: early HBO didn’t have a lot of content; it was mostly about one-off events and movies, it was not such a big deal to quit, but this improved over time. By the mid-80s, they were investing in serialized scripted programming that strengthened the desire for subscribers to stay around. Additionally, they enjoyed the benefit of being part of cable companies’ bundled channels, which creates an additional deterrent, as these providers were good at preventing users from leaving.
- Branding: as an upscale, premium option for TV viewers, and on the back of their solid programming, HBO developed a brand associated with quality, something that endures to this day. The book relates the origins of the “It’s not TV. It’s HBO.” tag, which was genius. Positioning HBO as the thing you would talk to your colleagues by the water-cooler was probably as viral as you would get before any social network even existed.
- Cornered Resource: HBO had a grip on several assets you couldn’t access elsewhere. They paid millions for exclusive access to Mike Tyson’s boxing matches, all the stand-up comedian specials, etc. Their ways of working with creatives also made it so that they would keep coming back to HBO as a first option, which didn’t change until the Netflix era.
- Process Power: Despite some early power struggles and what sounds like a very top-down hierarchy in place, the book depicts an aligned, focused organization on top of their game and employing some special secret sauce in the way they did things that led to a superior product.
A Game of Thrones
HBO was successful, admired, and enjoyed a privileged position within the Time Inc. corporation. And they also proved to be resilient. They went through a merger with Warner in 1990, coming out relatively unscathed, despite some internal tensions and leadership changes. They also survived what is known as “the worst merger in history” when AOL and Time Warner merged in 2000.
All the changes and increased internal dysfunction didn’t detract from HBO content’s quality and uniqueness, which made them “the” premium subscription TV company, but that was not enough for what was coming.
Colin Callender, former head of HBO Films, has a quote in the book that pretty much summarizes the state of things:
The company turned from being an insurgent to the incumbent, and there were other people nipping at our heels taking the risks that we were no longer taking.
Callender would leave HBO in 2008.
Disrupted
Now, it is evident that HBO is still around, so the “Netflix streaming tornado” didn’t have as dramatic an effect on them as the annihilation suffered by Blockbuster years prior with the DVD business. But it’s still fascinating to read how changes in media technology affected the company and how they reacted (and not reacted) to them.
Reading Tinderbox, you can see HBO were not clueless, though. They saw the changes coming. And they also realized early on that they were at a disadvantage because of not having access to their users — the cable companies wouldn’t allow it, they wouldn’t even share subscribers’ contact details.
By 2005 HBO had different internal groups looking into direct-to-consumer solutions. One of the groups partnered with IDEO (of Design Thinking fame), which presented a future vision that included subscribers watching HBO on mobile devices. This was 2 years before the iPhone was even announced. Another group presented an aggressive approach to bypass cable providers by developing their own tech. None of these were picked up — there was a fear of harming relationships with operators. On top of that, senior management prioritized short-term stability and considered the ideas were potential career killers. The book presents this inaction as a pivotal “lost opportunity” face-palm kind of moment.
Netflix launched streaming in 2007 and delivered a service that HBO couldn’t counter without disrupting its existing business model. Does it sound familiar?
HBO still had the upper hand in content, but Netflix would also challenge that by shifting to original content starting in 2011 with “House of Cards”, a show HBO had passed on for budgeting reasons. This dynamic would only get worse as Netflix was able to outspend HBO and were willing to make commitments to creatives in ways HBO couldn’t. So here we have a private company, Netflix, executing in ways that a public one couldn’t. TimeWarner (HBO’s parent) had institutional investors that demanded the best earnings possible. Netflix’s investors didn’t care about profit; they wanted them to reach monopolistic growth. By 2014 HBO knew that they would either need to become a tech company or merge with one.
Reed Hastings, Netflix CEO, was out saying:
The challenge for Netflix is whether we can become HBO faster than HBO can become us .
But Time Warner couldn’t make the necessary investment without the risk of lowering their value and opening themselves up to a buyout. And so, a merge became the desired (only?) option.
Succession
Eventually, it was AT&T that acquired Time Warner at the end of 2016, even though the whole thing was not closed until 2018 because the US Department of Justice filed an antitrust lawsuit that dragged things along. Time Warner’s CEO at the time, Jeff Bewkes, discloses in the book how Bobby Kotick from Activision offered to buy the company if AT&T couldn’t close the deal, which I didn’t know and found amusing.
That last merger takes us to present history. We’ve seen how despite AT&T insisting internally that they were not “chasing Netflix,” eventually they launched their WarnerMedia hub, HBO Max, in 2020, and you’d be hard-pressed not to perceive it as a direct Netflix competitor. HBO has ramped up content production, a perceived necessity of the streaming era, but it’s also being “protected” by their parent as not to dilute what makes their content special. In this manner, we could see HBO as a prized cornered resource in the WarnerMedia ecosystem, which, being positive, is a better fate than Blockbuster ever had. Surely there is a lesson here about aggregators and it will be interesting to see how things evolve with all the streaming services, but maybe that’s material for a second edition of the book 10 years from now.
And this is pretty much it for today. If this sounds interesting, I recommend reading the book — if you watch HBO or TV in general, you might enjoy parts I didn’t, so that’s a bonus.
And to Mr. James Andrew Miller, can we have Disney next, pretty please? It’s been over 15 years since James Stewart’s DisneyWar!
References
[1] You can get “Tinderbox: HBO’s Ruthless Pursuit of New Frontiers” by James Andrew Miller (2021) from Amazon and other places
[2] You can get “The Cold Start Problem: How to Start And Scale Network Effects” by Andrew Chen (2021) from Amazon and other places
[3] This is Gibson Biddle’s DHM Model. Read more about it here
[4] You can get “7 Powers: The Foundations of Business Strategy” (2016) by Hamilton Helmer from Amazon and other places
Photo by Oleksandra Bardash on Unsplash
