Today, a deviation from my typical VideoNuze post. Peering into my crystal ball, I foresee a slew of mainstream media articles about HBO Now coming as early as May, just a month following its launch. These articles in the NY Times, USA Today, WSJ, etc. will highlight individuals who have subscribed to HBO Now and how the service is impacting the pay-TV ecosystem.

Importantly, these articles will underscore how, despite HBO's assertion that HBO Now is targeted solely to broadband-only households and is supposed to be beneficial for pay-TV/broadband ISP partners, in reality the service has much broader consumer appeal and hurts HBO's traditional partners.

Below I'm sharing an example of such an article. In it you'll read about Kristin Holter, the Gehls and Bill Aiken. They are fictitious people, but are meant to be very representative of the kinds of people who will subscribe to HBO Now and how their decisions will affect the pay-TV industry.

Using the framework for assessing the potential of new OTT services that I shared last week, HBO Now scores by far the highest for me. Assuming it works as I expect it will, I continue to be very bullish on HBO Now, which I see as having far-ranging ripple effects, especially for non-sports fans. I recognize I'm going a little out on a limb with the below article, but I'm pretty convinced that directionally it's a great example of the type of media coverage HBO Now will be receiving very soon.

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Just A Month Old, HBO Now is Already Roiling the Pay-TV Industry

May 3, 2015

It wasn't supposed to be like this.

When Richard Plepler, Chairman and CEO of HBO, the cable TV network powerhouse, announced plans for a new standalone TV service last October, he emphasized that it was targeted solely to the 10-15 million "broadband-only" homes in the U.S. - those who subscribe to a broadband Internet service, but don't take pay-TV. Ever since then Mr. Plepler has continued to assert that HBO's online initiative would expand the market for HBO and be a boon for its traditional pay-TV operator partners, helping them upsell their broadband services.

But just weeks into the commercial launch of the $15 per month "HBO Now" service, evidence is already emerging that its appeal could, in fact, be much broader than HBO and Mr. Plepler envisioned. That's raising alarm bells throughout the pay-TV industry that is besieged on all fronts by new services looking to undercut its "multichannel bundle." For MBA types, HBO Now could become a textbook case of the unintended consequences that can ensue when consumers are given compelling new choices.

Catering manager Kristin Holter of Glendale, CA, is one of those broadband-only subscribers HBO had in mind, and sure enough, she signed up for HBO Now right after stumbling on a big ad for it while surfing Yahoo one day. Ms. Holter, 26, thinks the $15 per month fee, which she splits with her two roommates, is "one of the best bargains around" and they've quickly "fallen in love" with popular HBO series like "Veep" and "Girls," while catching up on movies like "Divergent" and "We're The Millers" that they missed in their theatrical runs.

Ms. Holter's boyfriend gave her his old Apple TV device, so she and her roommates can watch on their 42-inch LG TV as well as their iPads and Macs. Ms. Holter notes that with all the time she spends on Facebook and YouTube, the low-cost HBO Now service, together with Hulu Plus, which one of her roommates subscribes to, offers plenty of great entertainment choices.

While HBO has picked up a new subscriber in Ms. Holter, it turns out that rather than this being a positive for Charter Cable, Ms. Holter's broadband provider, as HBO forecast, it's actually a negative. That's because Ms. Holter's broadband service appears plenty roomy for her to stream HBO Now, even when another roommate is watching something on Hulu Plus or YouTube. Ms. Holter, who confesses to "knowing next to nothing" about technology, says whenever she fires up HBO Now, "it just works." She and her roommates also split the $40 per month broadband fee Charter offered them when they moved into their apartment 8 months ago and foresees no reason to upgrade.

Ms. Holter's experience reveals a fundamental fallacy in HBO's logic says Julia Hilson, an industry analyst at Hilson Research Associates. "With over 87 million American homes already connected to broadband, there's little opportunity for an HBO Now or any other upstart video service to drive new broadband subscriptions - it's close to being a fully saturated market already. And because most broadband ISPs, like Charter, have aggressively increased their speeds in recent years, to better compete and support the growth of Netflix and other online video providers, there's also little current need for consumers to upgrade to even faster speeds." Ms. Hilson says these are the key reasons HBO has only been able to forge a deal with a few pay-TV operators/broadband ISPs for HBO Now to date.

In fact, because the new HBO Now traffic is expected to put an additional load on local broadband networks, providers like Charter might now be facing accelerated capital expenditures to further boost the capacity of their networks. Absent any new incremental revenues, that will pinch ISPs' margins in the long-term.

Far more significant pay-TV operator concerns about HBO Now's consequences are exemplified by James Gehl, 37, a software engineer in Waltham, Mass., and his wife Cathy, a graphic designer. Just over two years ago Mr. Gehl took Verizon up on its special offer of $79.99 per month for a "triple play" bundle of FiOS voice, video and broadband. Since Christmas however, when Mr. Gehl hooked up a $70 Roku player, he and his wife have found themselves watching TV shows on Netflix more frequently during the little free time they have after a full work day and keeping up with their 5 year-old son Cole and his 6-month old sister Sophia. That means Mr. Gehl, who says he and his wife "could care less about sports" and never watch them, have been tuning into FiOS TV much less frequently.

Meanwhile, Mr. Gehl says he's noticed something peculiar about Cole's own viewing behavior - he has gravitated to watching kids programs on-demand on Netflix using his mom's iPad -  even when sitting right in front of the family's 55-inch Samsung TV. For her part, Ms. Gehl likes the fact that kids shows on Netflix don't include a barrage of ads for sugar-sweetened cereals and that Cole is getting comfortable with technology from any early age.

So when the Gehls' 2-year Verizon promotional deal recently expired, sending their bill to over $150 per month, including equipment rental and fees, they decided to reassess. Eager to buy a house and get settled before Cole starts elementary school, but frustrated by the sky-high prices in the Boston area's white-hot real estate market, the Gehls are meticulous about household budgeting.  As a result, the couple began contemplating dropping Verizon's FiOS TV and voice service entirely.

Two of Mr. Gehl colleagues tipped him off to HBO Now, lauding the service's rich catalog of TV shows, movies and documentaries. The Gehls had thought about subscribing to HBO in the past, but springing for the extra $20 per month, on top of FiOS, was a budget-buster. Mr. Gehl's colleagues also clued him into how a surprisingly big part of the monthly fee he paid to Verizon actually went to pay for expensive sports TV networks that the Gehls never watched.

So two weeks ago the Gehls pulled the trigger, becoming "cord-cutters." They culled their Verizon bill to $55 per month, by only hanging on to their 25 megabit per second broadband service. And they signed up for HBO Now online, which Mr. Gehl called "a snap" to do. Mr. Gehl immediately noticed the user-friendly no commitment feature and 30-day free trial period. Two weeks in, Mr. Gehl says he couldn't be happier, though he concedes he's considering buying an HD antenna to get back the broadcast networks he and Ms. Gehl miss. Meanwhile, Mr. Gehl admits that doing Sophia's 2 am feedings have become "almost pleasurable" as he's taken to binge-watching season 1 episodes of "Game of Thrones" and the fascinating HBO documentary, "The Jinx" about accused murderer Robert Durst.

The Gehls' cord-cutting decision illustrates the nightmare scenario pay-TV operators have about how HBO Now could scramble the norms of the pay-TV industry, says Ms. Hilson. "For 40 years, HBO's iconic programming has been locked in a 'gilded cage,' unable to be accessed unless a pay-TV subscriber first paid $40, $60 or $80 per month for a slew of ad-supported cable channels, many of which they didn't watch." That model has essentially capped HBO's subscriber base at around 30 million in the U.S. But, with HBO Now, Ms. Hilson says HBO's programs have been "liberated," and millions of Americans are going to quickly realize this.  As a result, pay-TV's entire economic model of "bundling" disparate channels, is going to come under increasing pressure.

Yet another example of how HBO Now is unexpectedly impacting the market is revealed by 43-year old Bill Aiken, a bachelor architect and outdoors enthusiast in Littleton, CO. Mr. Aiken has been a pay-TV operator's dream customer, paying over $180 per month to DirecTV for a fully loaded combination of sports networks, broadband service, HBO and Showtime. But warm weather months find Mr. Aiken cycling most days after work and heading up to the mountains to hike on weekends, leaving far less time to watch TV. His experience with his Nest thermostat, which he uses to remotely adjust the heat in his house when he's away, had gotten him to thinking, why can't he dynamically adjust his pay-TV services as well?

A self-professed Apple "fan-boy," the tech-savvy Mr. Aiken live-streamed the Apple Watch event in March, and saw Mr. Plepler, HBO's Chairman and CEO, announce the HBO Now service. Apple's involvement as HBO Now's launch partner impressed Mr. Aiken and when he dug into the details, a light bulb went off as he realized his quest for flexibility had finally appeared. By cutting his DirecTV HBO/Showtime subscription and switching to HBO Now, he'd be in a position to easily drop it during the summer months and add it back when he wanted to.  Mr. Aiken says he'll do the same thing with Showtime when it launches its own standalone online service.

Ms. Hilson says Mr. Aiken is a "cord-shaver" in industry parlance - a dedicated pay-TV subscriber who nonetheless seeks more control over his services. HBO Now's direct, web-based approach "will really resonate" for millions of people who have grown accustomed to the flexibility and control myriad web services have been offering for years. Ms. Hilson  believes this benefit alone signifies a big leap forward in the pay-TV industry, which has long been dogged by a reputation for poor customer service and rigid subscription commitments.
 
Taken together, the early experiences of Ms. Holter, the Gehls and Mr. Aiken underscore the enormous potential influence HBO Now could have on the pay-TV industry, and the wildly profitable sports industry in particular, according to Bart Hessner, an analyst with Woods Gardner. "It's a little understood secret that the immense salaries and franchise values we've seen in pro sports have been fueled by pay-TV subscribers who rarely or never watch sports. They've all still paid for increasingly expensive sports TV networks, giving the networks the means to spend tens of billions of dollars acquiring the leagues' broadcast rights." Mr. Hessner sees the beginning of the end for that era, as entertainment-focused and budget-minded Americans mix and match online alternatives like HBO Now.

As a result of HBO Now's early traction, Mr. Hessner has upped his forecasts for the service. He now believes HBO Now could garner 3-3.5 million subscribers by Q2 2016, and 10 million by year-end 2017, translating to around $1.8 billion of anualized revenue for HBO. By then Mr. Hessner also sees Netflix having 50 million subscribers in the U.S. He continues, "For HBO Now to grow to be 20% the size of Netflix in 2 years seems 'like a slam-dunk', given its rich array of programming and strong brand, assuming the service's quality remains solid and HBO continues its aggressive promotion." Mr. Hessner estimates that at least half of HBO Now's subscribers will be drawn from broadband-only's like Ms. Holter, about 40% will be cord-cutters like the Gehls and the balance will be cord-shavers like Mr. Aiken.

If he's right, then a far more challenging landscape lies ahead for pay-TV operators, which have been very resilient, despite the growth of Netflix, Hulu and Amazon, among others, to date. Collectively, the industry has lost just 220K subscribers, a nominal .2% of its base in the past two years.

If HBO Now does take off in a big way - still a big "if" in the chaotic online TV world where new services seem to spring up every week - it would put HBO and Mr. Plepler in the unlikely position of having helped disrupt the pay-TV industry that would still be a key distribution partner for its traditional TV service. It's a fascinating dynamic to consider, as new technologies and services continue colliding with well-established business models.     

HBO did not respond to requests for comment.

(Note: All individuals cited in this article, except Richard Plepler, are fictitious. Any resemblance to actual people is purely coincidental.)