HBO's New Weapon - A Killer-Profit iPad App

NEW YORK (TheStreet) -- Time Warner's ( TWX) HBO is the gold standard for original video and, seemingly, everyone wants to destroy it.

To fortify the profit walls from the charging masses of online content creators and aggregators, HBO is counting on the newly released HBO GO app. Kicking off the "Streaming Media East" conference in New York Tuesday, keynote speaker HBO Co-President Eric Kessler revealed the HBO GO app is No. 1 in Apple's ( AAPL)iTunes store with 1 million downloads in its first week of release. The HBO GO app gives authenticated subscribers to the HBO cable service full, streaming, portable access to the HBO library from the latest movies to Sopranos to Boardwalk Empire.

From online content creators to the investors behind them, they all want to be the HBO of quality and profits and knock over the traditional cable revenue model. For cable companies and over the air networks, they want to keep the online disruptors at bay while making as much web money as they can without hurting their "core" business on cable. This battle; and how it shakes out over the next few years, will be the most important in the digital media space. At stake are billions in ad dollars and syndication revenue. Traditional cable companies make money even when no one is watching thanks to those carriage fees that drive up cable bills and lead to congressional threats to step in and force "a la carte" pricing.

To keep up with the change in viewing habits and options available, Kessler says HBO dropped the "it's not TV" line from its familiar promos to focus just on the brand. He says this matches the focus on extending the life cycle of the subscriber base, which is the goal of the highly interactive and user-friendly HBO GO app for Google-powered ( GOOG)Android phones Apple's iPhones and iPads. HBO cites DVR use as the driver of the screen-agnostic approach to products and marketing. In 2005, 10% of Entourage viewers on HBO watched it on demand or from a DVR. In 2010, it was 50%.

While Kessler focused on the cost of subscriber acquisition and delivering quality, exclusive content, he did not touch on the high cost of being a content creator. That cost for exclusive HBO content is one that will not decrease over time and the app currently does not charge subs for the streaming rights. Kessler's product roadmap showed HBO GO on connected TV in Q3 of 2011 and on game consoles in Q4. While saying "a brand is only as valuable as the demand for its content," the clear question going forward is this: In a world where content creators are expanding, how will HBO control rights costs as Netflix ( NFLX), Google's YouTube and others look to get in the same game.

In a swipe at those elephants in the room, Kessler referred to aggregator sites as full of old TV shows and emphasized HBO GO's access to exclusive content. As the majority of web content creators wrestle with exclusivity versus wide distribution, HBO has a clear advantage in focusing its efforts on the audience that already pays for TV. Citing research that shows the average HBO customer watches 67 hours of TV versus 60 hours for a non-subscriber, the extension of the paying user life cycle could have huge implications for HBO's revenue growth.

--Written by Bill McCandless from the "Streaming Media East" conference in New York.

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