Netflix, Inc. (NASDAQ:NFLX) and HBO are not direct rivals, at least not yet. But the two businesses have drawn comparisons since Reed Hastings, chief executive of the Los Gatos-based company, said that he aims to make Netflix the next HBO. The emergence of online subscription TV service has posed a serious threat to the traditional cable and satellite TV networks.
Netflix’s growing rivalry with HBO
Time Warner Inc (NYSE:TWX), the parent of HBO, added fuel to the comparison by separately disclosing HBO’s results for the first time. It showed that the premium cable channel’s 2013 revenues grew at just 4%, much lower than Netflix, Inc. (NASDAQ:NFLX)’s 21% growth rate in the same period. But HBO is earnings much bigger profits than Netflix. In 2013, HBO earned $1.8 billion on $4.9 billion of revenues. On the other hand, the Reed Hastings-led company earned just $228 million in profits with $4.37 billion in revenues. Of course, Netflix’s profits were affected by the company’s continued investments in new content, which can help it win the long-term battle.
Time Warner Inc (NYSE:TWX) has revealed more operating metrics of HBO in its latest 10-K filing. According to the filing, HBO’s costs related to “originals & sports” and “acquired films & syndicated series” each account for 18% of its revenues. Including other direct operating costs, its total cost of goods sold (COGS) made up 48% of HBO’s revenue. On the other hand, Netflix, Inc. (NASDAQ:NFLX)’s COGS stood at 70% of its revenue in 2013, and just 10% of that was spent on original programming.
Will Netflix model HBO?
Netflix, Inc. (NASDAQ:NFLX) has clearly stated that it aims to become HBO. Goldman Sachs analyst Heath P. Terry says that Netflix can generate $4.7 billion in profits and $11.09 billion in revenue by FY2018. But how? That’s possible only if Netflix really makes its operating model like HBO. In 2013, Netflix’s costs associated with “acquired films & syndicated series” made up 57% of its total revenue, compared to just 18% for HBO. Assuming Netflix can bring down its costs related to “acquired films & syndicated series” and “originals & sports” in line with HBO, it will be generating 43% operating profit margin or $4.7 billion operating profit in 2018.
Otherwise, Goldman Sachs estimates Netflix, Inc. (NASDAQ:NFLX)’s 2018 operating profits to be around $2.2 billion at 20% operating margin.
Netflix, Inc. (NASDAQ:NFLX) shares were up 0.69% to $451.75 at 10:19 AM EST.