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Time Warner Would Be Insane to Sell HBO

By: Rocco Pendola | 07/21/14 - 12:34 PM EDT

NEW YORK (TheStreet) -- If I sat on the Time Warner (TWX) Board of Directors I would have happily voted to sell out to Rupert Murdoch's Twenty-First Century Fox (FOXA) for $85 a share provided the deal did not include Turner Sports or HBO.

If Murdoch insisted on Turner Sports I would have forced him to up his bid by an amount he would not have, of sane mind and body, agreed to. If Murdoch insisted on HBO, I would have told him flat out -- at this stage and, for the foreseeable future, there's absolutely no way we're letting go of HBO. Not under any circumstances. We would give you CNN for free before we would sell you HBO at any price.

That's because, according to sources who asked to be off the record, HBO is growing faster in 2014 than it has in a while (if not ever). And there's a chance I'm willing to bet on that that growth picks up steam later this year as HBO markets itself more aggressively. (I've been wondering for a while -- what are they waiting for!?) Expect 2014 to be a monster year for HBO as it continues to deliver meaningful operating income to Jeff Bewkes at Time Warner HQ. To sell out at this point, even at something more than $85, could leave unknown upside on the table for TWX shareholders. 

In 2013, Netflix (NFLX) CEO Reed Hastings somehow managed to manipulate public perception into the falsity that his second-rate streamer operates on par with HBO. That has changed in 2014; we're hearing a lot less from Hastings (except when he speaks out on net neutrality), not as much hype about Netflix generally and more about HBO original series breaking critical and quantitative records. Simply put, programming such as House of Cards and Orange is the New Black doesn't have the same allure as ratings smashes such as Game of Thrones and social media/water cooler sensations like True Detective. When it comes to quality and sustainable, week-over-week buzz, HBO leads the pack with Netflix a distant second (if not third or fourth to AMC Networks (AMCX) and appointment viewing such as the NBA Playoffs).

Now it's time -- and long overdue -- for HBO to tell this story (this reality) to consumers, many of whom do not subscribe to HBO, but quite possibly would if they only new exactly what it offered, particularly when held side-by-side with Netflix. While I don't expect HBO to mention Netflix by name, make no mistake it wants to squash the absurd notion some analysts floated last week -- that Fox wants HBO to fend off Netflix. When you look at global impact, scale and opportunity, there's nothing to fend off. HBO was, is and remains the undisputed leader.

It's also important to note that the options you have for accessing HBO today will continue to grow, evolve and maybe even multiply over the next several months and, most definitely, couple of years. The company is prepared technically and strategically to move in any direction it needs (or wants) to. It has already seen cable companies get smart and market it as part of lower-cost, fewer-channel packages. Don't be surprised if broadband-only, direct-to-consumer and other options come available for HBO subscriptions in the U.S. as well as international markets where the company's opportunity is equally as, if not more massive.

--Written by Rocco Pendola in Santa Monica, Calif.

Rocco Pendola writes for TheStreet. He lives in Santa Monica. Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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