Former Time Warner Chief Jeff Bewkes: How HBO Revolutionized Television

And to the extent people like it, you know, it's the programming. It must be all about the programming. That's how it differentiated itself. That's not how it started. It started as the only pay TV service. It was the only network that anybody had ever tried that got off the ground where it wasn't supported by advertising. And this is in the 70s, which was when the big three networks, CBS, ABC, NBC, they had 95% of the viewing and basically they had all the money, they had all the stars. So HBO comes up and we have this idea we're the other ten on the street are not going to take HBO, how do you distinguish your house? Who's paying from all the other ones? It can't be on broadcast. It can't go over the air. So the origin of HBO in the dim past is you had to have a totally new way to get television to people's homes, which was off a satellite right down to a cable dish that then people wired through the streets to get there. And in the first because HBO started in 72 for the first.

79.

So I came in 79. We had been on the satellite already for, I think, three years by then. But if you go to the late 70 when HBO started... And why did they have cable TV? Because they were either rural in the mountains, because you could not get a television signal. So you needed the antenna to get CBS, ABC and NBC, and then you could buy HBO on top or you're in New York City or San Francisco where the buildings are blocking you. So you had these two audiences. And if you think about the way people view HBO programming today, which is cutting edge, etcetera, that is not what people were looking for back in 1970 in the rural mountains.

No, it's not, actually. So, so, so basically the first thing with HBO was it was a company where a lot of the effort that made it become the leader... sales force that was going around trying to get cable operators to either put it in their systems or to build a cable system. And as that all exploded in the 80s and it exploded with HBO as the first thing on the satellite, TBS, the Superstation, Ted Turner ended up in our company. But it wasn't then. That was the second one. And the third big one was MTV, if we remember that. Yeah. And so these are back in the days, very early days, and the programming that was attracting people to literally go in their pocket and decide, you know, I've got free TV at CBS, NBC, ABC, I'm going to pay money to get television. I remember when I told my friends... Well, here's what it had. It had uncut Hollywood movies and so did Showtime, and so did what became Starz. And they had exactly the same ones. So when people think, well, why did HBO get to the top, which it was, it became, you know, 60 or 70% of the National Pay TV in the 80s. It clearly wasn't the programming because we had the same movies they had. So that's how it started. And then once... and people forget this, to be able to get an uncut Hollywood movie with none of this stuff taken out of it, no commercials, no language editing, all of that, that we only way you...

That's a lot later.

Because that's maybe five, seven.

It so we couldn't afford it. All of which is a violation of antitrust. So they were doing that. We were using all our movies, our money for the movie supply and the cable operators. Now you've got to get to them. They didn't care about our original programming. They didn't think that was going to amount to anything. They were like, Fine, but you know, a little bit of boxing, if you have, you know, Rumble in the Jungle with Ali, which was 74, it's pretty early. That's a big deal. You know, and occasionally some other heavyweight fights we had you had a big concert. So you had boxing right at the beginning.

Yeah, yeah, yeah. And that was Michael and Seth's idea to do that. They did it very well. The concerts was Michael's idea, and we... they couldn't do it because they'd annoy the more conservative tastes in the Midwest or they'd piss off Ford Motor Company or something like that. We didn't have to worry about that. So we were kind of rolling and we but we we had a again, I got to go and I hope I'm conveying Michael's thinking, which I agreed with. We all did in the 70s and 80s, like we don't have enough money to make actual scripted series yet. I mean, the networks each have 30 of them a week. You know, they got big budgets, big stars. We also know that when you're the networks and they would do a pilot season, they would only get one out of five on. So that's a lot of loss.

We don't have money for that. So we didn't go into series as long as we could. We basically avoided it. We didn't really do the first big series until 92. Again, that was under Michael and it was still something that all of us are the proudest of. Maybe one of our best shows we ever did, which is Larry Sanders and Dream On. We called it the Best hour on TV.

Be different. How are they going to be different? And we thought, well, there's two ways. One's tech and one's programming. The tech one is we need to make HBO video on demand. We need to do what NBC, CBS can't do. We need to make the HBO service everything that's on there on demand. So if you're at home and you want to watch The Sopranos, when you want to watch it, you can you know, you're not going to be tethered to 9:00. Yeah. But the second thing is, if we're going to create on demand, CBS can't do it. They can't do it over a broadcast because that signal goes to every house at the same time. We can do it individualized because we... But that means we can make series that are not one offs. We can make series like Band of Brothers, Sopranos, something where you where it's sequential, you know? In other words, no network, the big ones for any big budget show we're making anything that wasn't self-contained. So in other words, if you didn't watch the show last week, Law and Order or pick your show, you could watch it this week. It was a totally new, different episode. It didn't depend on the plot from last week. We're going. All right. We're going to make basically long form. We're going to make movies. We're going to make movies that are a season long, five seasons long. Yeah. And so you you can't watch Sopranos... freedom, we don't have to worry about advertising. We don't care if we get a huge viewership or not. We were never looking for the biggest audience for our shows, even for Sopranos happen to get one kind of surprised us. But you know what we did for Curb Your Enthusiasm or The Wire or Girls or, you know, Oz or, you know, these are all different. Some of them were not aimed at a big audience. Some of them were aimed at this niche. Some of them were into that niche. But when you talk about it that way, it sounds like we were doing it to hit niches. No, that's not what we were doing. We were just trying to get shows that were really good that we could get really good actors, writers, directors for, because... those constraints.

Yeah, that's true. Yeah, well, we wanted both things that would attract new subscribers and we wanted for the... it's not like we were sitting around saying, let's make this show to reduce churn. We never did that. That's not what we did. We basically said, all right, here's the on the original programming side, the motto basically was, we need something for everybody. Some of the time it's like, we don't care if you're watching for the 30 days of the month, you want to watch it twice. Great. We just want you to watch it enough.

Want to have it available to me. And I remember when we got to the point where Sanders was ending and I knew we all knew that I should say not. We all knew that, Jesus, we're screwed. We need we need like a marquee thing. Yeah. So there was a great meeting about the Sex and the City Sopranos year when we had to greenlight that and we. Were about 97. Yeah, we were short about 70 million for that. And basically we had this meeting and it was like the one in The Godfather where Sonny and Michael Corleone are thinking like, Well, who says you can't kill a cop? You know, maybe you... spending on ads? We're short. We need 70. And for Sopranos, Sex and the City. 80 million. I said, okay, but if if we're getting people to want to buy HBO because of the ads, which were never sure if that really does that, they call up the cable guy, say, I want to get HBO, and what is the cable person said? They say, well, you know, take off work two weeks from Thursday, we'll give you a window from 1 to 5. You know, remember, this was terrible. So we're all they're like, we're not sure this advertising works anyway. Why don't we kill the ad buy? Why don't we just take away the ad budget and just make the shows, the ads? How about the we'll do the The Sopranos and the... other networks. We're not promoting the show. We're putting it on the screen. You know, maybe.

Yeah. And thank God those shows. Thank God those things. Yeah. If they didn't hit, I don't know what the hell would have happened. I mean, maybe we would have gone down, but they did. And that really gave us confidence. So after that, we're starting to do, you know, the Y or Curb Your Enthusiasm, Six Feet Under. We really started to roll and everything was just looking great until the parent company sold itself to AOL.

Just just your era. Yeah. Yeah. Because I know that we took the earnings. We had been growing about 9% a year in earnings from 85 to 95. Okay. And for a reasons that are we'll go into if you want we we jacked up the we were able to increase the earnings from 95 to 2003 to about 19% a year. Okay. Which we did with mostly subscriber growth, therefore more sub revenue. I would think that the subscribers probably doubled is probably too much. They probably went up 50% in that time. We also launched overseas.

What we were going to do, which then carried on past 2002, even with AOL. And we even had to increase it to keep our independence from AOL in those turbulent years of 2001 to 2000 and 3 or 4. And that was a rough patch. It took us till 2009 to clear out the AOL problem, which was a $160 Million, what do you call $160 Million Catastrophe. It's a big problem.

And of course, no cable operator wanted to do it, and neither did the one that was running Time Warner Cable inside the company. So there was a big argument at the board level which caused Jerry Levin to end up sideways with the AOL majority on the board. Jerry was right about this, which was no, no, it's not. Just because we own our own cable system doesn't mean we should confiscate the money that it takes to pay for the physical plant, because if you do that, it's going to mean every other cable system in America will look at AOL like it's an invasion from outer space and the destruction of their entire business. They can't fund their plants, which is exactly... well. They look they like people mag AOL, they like Warner Brothers basically saying, why don't you take all your advertising and put it on AOL? And we were all saying, Well, we need to advertise in other places than just on AOL, and we're happy to advertise on AOL, but it's not the only place. And secondly, they were trying to figure out how to stay. They remember they had a $25 a month subscription fee for hooking up to AOL, and Yahoo! Had a free version of the exact same thing. So their subscribers, which is how they got all their money, $8 Billion of revenue. We're starting to look at Yahoo! And say, Why am I paying for this when I can get roughly the same thing there? And AOL was trying to figure out, well, what if we put some of the Time Warner stuff, People... that's not going to work. But first of all, all of our products, whether it's the magazines, whether it's the Warner movies, whether it's HBO, they're all number one in their field because they're on every newsstand. They're in every distribution channel. If you turn it to an in house thing, all of our talent that brings it here because they wanted to go everywhere is going to go away. It's not sustainable because we don't own Columbia Pictures. Paramount Fox You can't get everybody's thing like that. Yahoo can and they will. So this is this is not basically what we were confronted with is the reality that the walled... give it to people for free, and eventually the Internet would come. And all of the content providers, all the magazine companies, the television networks, the movies were going to end up going that way.

Well, they never tried. They never tried to there. So. You know, I don't recall that coming up.

Yeah. Yeah. All right.

Well, yeah. That they write about this in the Tinderbox book. There were people. But here's the problem with that. I don't think you know Yeah Is that a good question? Even at AOL, by the way, credit to AOL. There were people at AOL, Barry Schuler, Ted Leonsis in 2001, who were thinking, you know, maybe we ought to buy Netflix and maybe we should have back then. Back then, Netflix was selling movies through the mail, right? Which they very Yeah valuation and they kept well below $1 billion. They kept doing that and they didn't start the streaming thing in 2000 until 2010. And the reason they didn't, which is why when... mail order movie thing and they weren't trying to sell. So while there may have been meetings and I've read about them in some of the books about HBO and some of them I ended up in as the Time Warner guy. At that point, Netflix wasn't trying to sell in 2005 or 6, and so I don't think that was realistic. So if somebody's saying, Well, we could have and should have, no, we couldn't have. So that's the first thing. It's it's a moot thing. It's not realistic. The second thing is, if it had been literally on the table, let's say they did want to sell and we certainly could have considered buying it. And it's clear in hindsight that would have... still had AOL, and it was still going like this for another three years. So if the management of Time Warner, which had been replaced, it was the old AOL one had majority was left because of the mass of AOL and zero two, that would not have been something that our shareholders would have tolerated, even if it was a good idea.

No.

Okay. And the reason I say that is you hit a target at that point because you said no, they put a valuation on you and you said, no, we can get there on our own. So.

Of 50% in three years, which we knew perfectly well they weren't going to do. And so it's not like we're going to accept their stock. Let's say we took the deal and then watched their stock collapse because they never were going to read those earnings things, which is exactly what happened in the month or two that we had this fight because everybody finally realized it. Secondly, the cash part, they were going to give us 32 bucks a share was premised on borrowing $10 Billion on our assets. So when I was talking privately to Rupert and Chase was telling them, no, we're not doing this, it first of all, it's not worth $85 a share. It's worth $68 a share. You know it and I know it. And we're trading at 70 now. So we're not selling you the company for, you... you're going to do is give us more of this overvalued stock or you're going to borrow more money. We can do that ourselves. We don't need that. So the problem is, which is actually what I said to Rupert directly, because I of course, I want to restate for the antitrust records that at whatever SEC record, you cannot. And of course, it would be wrong to not welcome anybody offering your shareholders money. Sure. Which I'm always open to doing. I like to convey to the shareholders what money they are actually being offered so you can do. I said. But as you keep doing it, here's your problem. You don't there's no price that you... They say, Hey, this is what we want to do with HBO. No, that's not what they were doing. They were they knew that the scale game needed to come just as we did, and so they just didn't have the money. So they went. We then went back to our cave where we are, our rooms and said board and the management. Well, are we in clear skies now because we just beat. And let me by the way, when News Corp did this, they started at $35 a share that had been their trading value. They they went down to 25 when the spotlights came on, which is a 40% loss of their stock, their company value. They stayed there for 3 to 4 years so that... predator out. It would just cost too much money unless whoever came to us was actually going to solve this problem. And that gets to your next year, which is what was the problem for legacy media? Not just us, but everybody. So what was the problem? And then why did AT&T think that buying your company was the right solution?

Netflix and Amazon streaming pay TV companies, they're doing exactly what HBO is doing, but they're doing it over broadband and that means there's two major things there. One is that they don't pay carriage fees, unlike HBO, Showtime, CNN, and that what that means is when you write a check as a as an HBO household for $15 to get HBO, only about nine of it goes to HBO. The other 6 or 7, half of it 40 or 50% goes to the cable or satellite company. That puts it in your home. Netflix didn't have that. They were using the exact same wire into... year that we were spending out of CNN, TNT, HBO receipts that we had to leave with the cable operator. And Netflix could just take all that straight to their bottom line. Yes. Second problem was they didn't have to make earnings in that period because their investor base understood that they were building a global scale lead monopoly position or hoped for monopoly and that they would eventually raise once they got into a share position that could afford then to buy out all the programming back to the Albanian army, they could then raise the price, which they did. They raised it from $7 then to $15 now, just... hey, we've got a great business. We've been growing 25% a year, earnings per share for 11 years. We make $8 Billion. And the two new competitors are they have a 15, $16 billion head start on us every single year. It will grow and there's nothing we can do about it. Pretty soon it'll be $20 Billion, you know, And if you went to our shareholders, which were, let's say, 40 some odd percent, maybe 40, 50 or institutional shareholders, you know, big companies like Capital Research. Cox Vanguard cetera. If you're the chief executive, you go talk to... networks, Turner's included, and make them like the global Amazon Netflix model, We know how to do it. It just costs a lot of money. We've got to spend more on programming. We have to do a tech stack. We have to take losses for years like they have. And their answer, of course, was, of course we're not doing that. We own Netflix and Amazon already. That's the other half of our portfolio. They don't make money now. They'll make it later. You're the part that makes it now and please keep doing that.

You know, I think it's unattractive for departed executives to to talk about what the. Diplomatic. Answer, what the what the other people did. I think what we did up to there is clear. I sympathized with the all the men, not just actors, but everybody that's got a legacy media company which has a lot of basic formerly basic TV bundle channels, you know, not the HBO Showtime types, but the other one, they have a... world a la carte options. But the bundling of the you know, the idea that we used to have ten years ago where the news channels and the general entertainment channels and the kids channels and the, you know, the cooking and lifestyle channels were all kind of there as an option available in every home supported by advertising and by the subscription aggregate fee. That can't continue in the streaming world because people will want to do a la carte, which they've been asking for for a long time.

Well, it's a bit of a different point. So if you if we try to describe that or attribute that the losers, the loss of out to the merger, that's probably not the main reason for the loss of the main reason is the one that's that's nobody's fault or else let's give the credit to Netflix, Amazon, Apple, Google and Facebook, the disruptors. What's happened is the legacy media industry that was hugely profitable. You look at the profit margins of the basic cable and, you know, the basic cable cable... margins. So one thing you would learn, you know, it's an old saying in economics, if something can't go on forever, it'll probably stop. Well, it did. This is so you know, if you really go to the big picture on our side, we knew we saw all this. We you know, we saw Netflix take the Warner side of it. So Warner's best library in the world, TV shows and movies. How did how does Warner's work? Well, it licenses shows to, you know, either movies or TV shows to networks, whether it's broadcast networks or pay TV one. And eventually those things go back into the library. Right. They're held by Warner. They get to be relicensed all over the... more, Netflix started as the lead pay TV digital distributed company to say, No, we're not going to put your show on our Netflix service. We're the biggest if you want it, you want to get the most of money, the biggest check. You want to have it in the most homes. You want to get it all over the world because we're the biggest global. We can write you the biggest check, but we'll give you all the cost plus a guaranteed profit. I think they started at 20%, but we're going to own it in perpetuity, not you. Well, as soon as we saw that, that's another reason we thought. Now we're in a different subject. The erosion of the Hollywood studio libraries. It's like, well, we're not going to become a studio for hire.

Finance. So what that means, back to your question of why don't the mergers work? It's not that the mergers don't work, it's that the value of both the IP business being sucked out to the streamers and the lower profit that Netflix and Amazon set for the streaming business as the leaders means that there's just not going to be profit available to the companies that survive.

I'm going to leave it to him. I think he knows where to go with it. And if he doesn't, he'll find out. So one thing to remember is that in the current moment, like I forget, the thing closed in April of last year 21, so they can't do anything under the reverse. Morris Trust rules until two years. Is it two years? Correct. So next from then. So that's a hint. That's a hint. That's a hint. So if you don't understand that hint, it means the company will probably have to get bigger and there'll be another merger to come here. Well, because look, look, if you have forget. The individual companies. If you have an overall industry profit pool