When HBO Now launched in April, 2015, its $14.99/month price was well above competing SVOD services such as Netflix ($11.99/month), Hulu (ad-free $11.99/month) and Amazon ($8.99/month or included with Prime for $99/year). On the one hand, an argument could be made that an HBO subscription is more valuable due to HBO’s rich library and therefore should be priced higher than newer competitors. But HBO’s market-skimming high price strategy means its more aggressively priced competitors are growing far faster than HBO, enabling them to have greater scale, which will be the key to future success.

In fact, as Colin and I observed on last Friday’s podcast, perhaps the most noteworthy aspect of DirecTV Now’s unveiling last week was its offer of HBO for just an extra $5/month. That is by far the lowest pricing for HBO, and nostalgically harkened back to the early days of cable when HBO was used to help sell new subscriptions.  

But it’s hard to believe AT&T is getting a sweetheart deal from HBO (though down the road as AT&T and Time Warner merge that may become possible). Much more likely is that AT&T is absorbing a loss on each new HBO subscriber added, with HBO still getting its target guaranteed minimum per subscriber consistent with its other distribution deals.

HBO's high relative monthly price for online access reflects its strategy of maintaining profit margins and harmony with pay-TV operators’ HBO pricing. The downside is far slower growth. Earlier this year, HBO said HBO Now ended 2015 with just 800K subscribers, the equivalent of adding around 90K/month last year in its inaugural 9 months.

Even if HBO Now maintained that pace through end of Q3 ’16 (which it may not have, given my sense that marketing has slowed considerably this year), HBO Now would now have just 1.6 million subscribers (note a NY Post article on Sunday suggested HBO Now really only has a little more than a million subscribers currently). Contrast that with Netflix, which in the same period (Q2 ’15 to Q3 ’16) added 6.1 million domestic subscribers, or nearly 340K/month on average (or nearly 4x HBO Now’s monthly growth).

And that’s just domestic. In these same 6 quarters, Netflix also added a total of 18.4 million international subscribers, meaning the company has grown overall subscribers by almost 40% over these 6 quarters (from 62.3 million at end of Q1 ’15 to 86.7 million at end of Q3 ’16). HBO’s global growth is no doubt just a tiny fraction of that. And as Netflix doubles its original programming in 2017, it will broaden its appeal, while the value of its library continues to grow.

Meanwhile, since Q2 ’15 Amazon has put the pedal to the metal in video. Between its ramp up of originals (which will see a doubling of spending in 2H ’16), rolling out the Amazon Channels program, enabling a slew of new features such as better recommendations, downloading and expanded device access, along with soon launching a global rollout, Amazon is demonstrating that video is now a top priority. The results already reflect this, with 75% of Prime subscribers saying a few months ago they’re now also watching Amazon video. As Amazon continues strengthening the broader Prime program with non-video features, its unique hybrid model becomes even more compelling.

Clearly, both Netflix and Amazon are becoming massive global players, with both willing to sacrifice margins in order to build scale. Why is this so threatening to HBO? Primarily because more than ever, video is becoming a scale business, where massive subscriber bases can support ever-larger investments in content that draws and retains subscribers in the first place. The explosion of content choices and escalating salaries of top talent seen in “Peak TV” are in fact being driven by Netflix and Amazon, forcing everyone else to compete, but without the scale to match.

By maintaining its focus on margins and high relative prices, HBO seems oblivious to the fast-changing landscape and what this will mean for the company down the road. Interestingly, AT&T seems obsessed with trying to reduce the monthly cost of ad-supported, bundled pay-TV with DirecTV Now. Its aggressive offer of HBO for $5/month is consistent with that ethos.

So, assuming the merger is approved, a big question is whether AT&T will force HBO to come to grips with reality and reduce its prices everywhere, in turn sacrificing margins, but gaining competitively relative to others OR whether AT&T will be OK doing nothing as it watches HBO continue losing ground to Netflix and Amazon.

HBO has long been the king of premium TV, but the dynamics of competition are changing. HBO needs to realize this and figure out how to keep pace with the industry’s new leaders.