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Plans toBecome

How

“Our goal is to become HBO faster than HBO can become us.”

-Netflix Chief Content Officer Ted Sarandos

2013

“The network that we think is likely to be our biggest long-term competitor-for-content is HBO” -Netflix CEO Reed Hastings

2015

Why is Netflix so afraid of HBO?

Because HBO has three things Netflix doesn’t

Massive scale

Massive scaleMassive profits

Massive scaleMassive profits

The best original content

But Netflix can get there

Both HBO and Netflix have similar amounts of domestic

subscribers and revenue

Domestic Subscribers37.7 million

30 million

Domestic Revenue

$3.4 billion

$2.8 billion

But Netflix has a lot of catching up to do on

international subscribers

International Subscribers

16.8 million

65 million

What it lacks in international subscribers, Netflix makes

up for in revenue

International Revenue

$1.3 billion

$600 million

HBO deploys a variety of strategies internationally,

resulting in lower revenue per subscriber1

1HBO’s primary strategy internationally is to license its brand and content. The majority of HBO’s international subscribers are through basic pay-TV subscriptions and some even receive HBO through over-the-air broadcasts.

When it comes to profits, however, HBO has Netflix beat

Total Profits

$260 million

$1.3 billion

Netflix’s profits are dragged down by its

international expansion

U.S. vs Internationalprofit per subscriber per month

USAInternational

$1.17

-$2.10

But even Netflix’s profits in the more mature U.S.

market don’t match HBO’s

Profit Per U.S. Subscriberper month

$1.17

$3.652

2Includes international licensing revenue as well as content licensing revenue

So what’s eating into all of Netflix’s profits?

Disappearing Revenue

Revenue$4.7 billion

Disappearing Revenue

Content Costs$2.7 billion

Revenue Left$2.0 billion

Disappearing Revenue

Content Costs$2.7 billion

Revenue Left$1.3 billion

Delivery, Distribution, Customer Service$0.7 billion

Disappearing Revenue

Content Costs$2.7 billion

Revenue Left$0.7 billion

Delivery, Distribution, Customer Service$0.7 billion

Marketing$0.6 billion

Disappearing Revenue

Content Costs$2.7 billion

Revenue Left $0.2 billion

Delivery, Distribution, Customer Service$0.7 billion

Marketing$0.6 billion

Tech & Development $0.5 billion

Compared to HBO,Netflix spends way more on

content, distribution, customer service,

marketing, and tech

HBO benefits from pay-TV operators picking up its

distribution, customer service and marketing expenses

And instead of providing enough content to be

everything to everyone like Netflix, HBO just has to fill

a TV schedule

As a result, HBO has a lot fewer films than Netflix

Typical Number of Films Available on Demand

5,000

350

And HBO is able to spend a lot more on its originals

Original Programming Budget

$300 million

$1 billion

HBO then sells its originals via home video and

Amazon Prime Instant

Netflix only buys streaming rights, which

means it can’t sell its originals on home video

Last year, content sales accounted for 17% of

HBO’s revenue

Last year, content sales accounted for 17% of

HBO’s revenue

and that’s high-margin revenue

But Netflix uses its originals to keep

subscribers watching

Netflix 2011

Time Spent Watchingminutes per subscriber per day

20.7 minutes

93.2 minutes

Netflix 2014 HBO 2014

49.2 minutes

The increase in average time spent watching Netflix, allowed the

company to increase its price last year

That’s a small step toward becoming more like HBO

That’s a small step toward becoming more like HBO

i.e. extremely profitable

Netflix will triple the amount of original content

it produces in 2015

2014

Hours of New Original Content

105

320

2015

That’s another small step toward becoming more

like HBO

Netflix’s plans to reach the same scale as HBO are a

bit more involved than HBO’s strategy

And a bit more expensive

And a bit more expensive

see content and marketing costs

But Netflix plans to reach 200 countries by 2017

2015

Netflix Expansion

50

200

2017

Its immediate expansion plans include Australia,

New Zealand, and Japan

Netflix Expansion

Netflix will have as many total subscribers as HBO in

the near future

The question is …

The question is …

“How profitable will those subscribers be?”

Netflix at 95 Million SubscribersTotal Profit3

$1.3 billion $1.3 billion

3Assumes all Netflix subscribers reach an average profitability of its U.S. subscribers in 2014

That’s how Netflix plans to become HBO

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