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The Baltimore Sun

HBO's next business model

The Wall Street Journal

Just as it rewrote the rules of television programming with its hit comedies and dramas, HBO is now trying to rewrite its business plan.

One of the biggest performers for its New York-based parent, Time Warner Inc., HBO has increased its revenue 50 percent over the past five years, investing in daring original shows that have kept pulling in new subscribers.

But just as HBO realized almost a decade ago that a steady diet of movies wouldn't cut it in a world of video rentals and pay-per-view, it recognizes that new subscribers alone aren't enough to maintain its torrid growth. (Indeed, the number of HBO subscribers, 27.2 million, is flat compared with a year ago, according to Kagan World Media.)

The new script: DVD sales, syndication, international growth and even investing in theatrical movies.

"The goal here is for HBO to become a multifaceted entertainment and media company," said HBO Chairman Chris Albrecht. "To sustain the double-digit growth, we need to have the HBO brand extend into as many areas as possible."

So far, it is working. Five years ago, only 5 percent of HBO's profit came from outside subscriber fees; now about 20 percent of its profit, which stood at $900 million in 2003, is from nonsubscriber sources.

Finding other ways to grow is also crucial for the channel because one of its hit shows, "Sex and the City," began its final run Jan. 4 and another, "The Sopranos," also is approaching the finish line.

Rich rerun deals

But while HBO certainly will miss Carrie Bradshaw and the gang, from a financial standpoint the show's departure won't hurt the network's bottom line. In fact, "Sex and the City" will continue to generate big bucks for years to come, thanks to DVD sales and rich rerun deals on local television stations and sister cable channel TBS.

Although the broadcast networks and their program suppliers long have reaped millions from syndicating reruns of successful shows, HBO had little success there. There were doubts that its risque content could play on basic cable or broadcast TV.

But standards change, and in June, reruns of "Sex and the City" will begin on TBS. They will be edited so that commercials can be inserted. A less racy version of the show was filmed for sale internationally, so some of the work has been done.

Still, the shows are laden with innuendo that likely will be toned down. Kim Cattrall's randy character, Samantha, no doubt will find much of her oeuvre left on the cutting-room floor. The word "bitch" could easily end up "witch," and the "s" word will probably become "shoot."

HBO executives insist that people who have never seen the show won't realize anything is missing.

DVDs and movies

HBO proved that there is a strong DVD market for TV shows, leading other broadcast and cable networks to follow it.

"The Sopranos," which returns for its fifth season in March, brought in more than $130 million from DVD sales through the first six months of last year, while "Sex and the City" pulled in $66.3 million, according to Adams Media Research. The miniseries "Band of Brothers" is closing in on $100 million.

In fact, the success of the World War II drama on DVD helped lead the History Channel to pay $7.5 million to rerun the show.

Besides DVDs, HBO has branched further into movies that will be released in theaters first, including "Real Women Have Curves," "American Splendor" and "Elephant." It was an investor in the surprise smash "My Big Fat Greek Wedding."

While acknowledging that Time Warner already has two big studios in Warner Bros. and New Line, Albrecht said there is room for HBO to associate itself with small, low-cost movies that will garner critical acclaim and help burnish HBO's brand.

HBO Independent Productions, dormant for several years except for its continuing involvement in the CBS hit "Everybody Loves Raymond," is starting up again. A much ballyhooed deal with Walt Disney Co.'s ABC has yet to produce any new shows, but it's developing a new legal show from the perspective of the jury for News Corp.'s Fox with Tom Fontana, the producer behind HBO's gritty prison drama "Oz" and NBC's "Homicide."

Preventing 'churn'

Even with all these ancillary sources of revenue, HBO must tend to its first priority: holding on to its existing subscribers and preventing what is known as "churn."

Every month, HBO loses 4 percent to 6 percent of its audience. These subscribers drop the service because they have moved, are cutting costs or just signed on for a particular show, and they must be replaced to keep subscriber numbers steady.

To combat the departures, HBO has introduced HBO on Demand, a channel that essentially is a revolving library of HBO fare that viewers can watch whenever they want. Currently in two million homes, the service is performing well. Cable operators say it is both reducing churn and encouraging subscribers to sample other video-on-demand services, which the industry sees as a key to its future.

Since Comcast Corp. added HBO on Demand in October, said Dave Watson, executive vice president of marketing, subscriber use of all of Comcast's video-on-demand offerings has doubled, and churn among digital-cable subscribers has dropped between 15 percent and 20 percent.

Of course, continued success still is dependent on HBO maintaining its reputation for high-quality programs that others can't match. That is getting tougher as basic cable channels such as FX make inroads with hot shows like "The Shield" and "Nip/Tuck."

HBO's latest offerings, the short-lived pseudo political reality show "K Street" and its drama "Carnivale" about a traveling circus during the Depression, didn't resonate the way "Sex and the City," "Six Feet Under" and "The Sopranos" did.

Even "Angels in America," its much hyped two-part production, had only so-so ratings.

Looking forward

But Albrecht is not worried.

"'Angels' was a big event, and in most people's minds it was the best thing on television this season," he said. "That in and of itself takes care of what people expect from HBO."

As for "Carnivale," which has been renewed for a second season, Albrecht said it helped the network this fall and can be a very valuable franchise down the road. " 'Sex' wasn't a big hit its first year either," he noted.

HBO's next big venture is "Deadwood," a western from "NYPD Blue" co-creator David Milch. Although it's a period piece, it won't skimp on sexual content and strong language. Much of the action is set in a brothel, and it includes lots of drugs and crime.

In other words, something for fans of both "The Sopranos" and "Sex and the City."

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