HBO's Origins: The Netflix of Atoms

January 2020

Inside The Rise of HBO covers the origins of HBO. The parallels between the modern day media goliath and a small, fledgling startup are hard to miss. Notes and excerpts are below that will be of interest to any startup aficionado:

• HBO started as "Sterling Information Services" in 1965 by one Charles Dolan, with the goal of providing television to New York tourists in hotels.
• Back then distribution was won in atoms, not bits. How are you going to get media to your users?
  • Microwave towers? Don't work well given Manhattan's tall buildings.
  • Telephone poles? Illegal due to regulation that required all new telecommunication wires to be buried below ground to prevent service disruption during the winter. (This ordinance kicked in after the Great Blizzard of 1888. The storm that created HBO, in a sense.)
  • Only one option left: Sterling decided to lay cable below ground at an inflation-adjusted cost of about $2M per mile.
• Two years after launching, Sterling laid about a dozen blocks and had… 400 subscribers with a burn rate of $3.5M a month.
• Running out of cash, Doland sells 20% of his company to the Time-Life company.
• But Sterling is still growing slowly and hemorrhaging money. Dolan doesn’t know what to do. He decides he needs a break. He boards a cruise to France.
• With the added opiate of vacation, Dolan realizes that pipes aren't enough. (Netflix wouldn't be worth much with just an HTML5 video player.)
  • Dolan realizes what Reid Hastings re-figured out decades later: to endure, he needs exclusive content.
  • He decides to make "The Green Channel". Premium content people would subscribe for. This idea seems obvious now, but very controversial at the time. All TV was free, and funded by ads. Paid TV had been tried in the past and never worked.
  • "Let's test it", they said.
• In yet another amazing episode of data-driven design, Time-Life sent out a direct-mail research brochure to survey for responses.
  • This Google Form performed exactly as you'd expect.
  • 99% said they wouldn't pay for the service.
  • Another survey managed to eek out a modest 4% that described themselves as "almost certain" to pay.
  • The company carried out a test in Pennsylvania where salesmen went door-to-door offering a first-month-free-and-refundable-installation-charge deal. Even this sweetened variant got 50% conversion.
  • This almost kills the project. Dolan pushes it through.
• Right on schedule, we've arrived at the next chapter of every product story:
  • The Name.
  • Time executives didn't like "The Green Channel".
  • They only managed to settle on a name after agreeing they'd change it later.
  • "It's a temporary name."
  • Of course.
  • That name was "Home Box Office".
• Time pushes not to debut HBO on Sterlings' distribution network.
  • Sorry, his Manhattan network just has too few subscribers.
  • They want a more extensive network, and settle on the Allentown network which is owned by the President of Time-Life.
  • The equivalent of Larry Page pushing Netflix to stream to Chrome users.
  • But wait! Crisis #1: NBA games were to be a prime component of HBO's bundle, and the NBA won't let you broadcast in Allentown due to blackout rules (Allentown was too close to the Philadelphia 76ers.)
  • They shift to the neighbouring town of Wilkes-Barre. Crisis averted!
  • Not quite. Shortly before launch, Hurricane Agnes hits, leaving the streets of Wilkes-Barre submerged and half of the city's 10,000 cable subs disconnected.
  • Working out of a storefront which still had water marks half-way up the walls, HBO representatives managed to sell just 365 residents on getting HBO for $6 per month.
  • On November 8, 1972, HBO launches.
  • Nobody cares.
  • Even the city manager of Wilkes-Barre declines to attend the launch party.
• Over the next few years, HBO grows modestly, but Sterling Cable continued to lose money because the company had only a small subscriber base of 20,000 customers in Manhattan.
  • Sterling kind of becomes the Qwikster to the Netflix.
  • Time gains control of Sterling, acquiring an additional 60% equity interest, increasing its stake in the company to 80%.
  • It renames "Sterling" to "Manhattan Cable Television" in March 1973 and cuts costs.
• By April 1975, HBO had around 100,000 subscribers in Pennsylvania and New York state, and had begun to turn a limited profit. But it would be tough to say it was successful.
  • At this point, HBO was akin to a small regional airline, with a minimal footprint, slowly expanding through costly investment in microwave towers.
  • Time realizes it needs broader reach with better CAPEX amortization.
  • It needs streaming.
• Satellites were then what the Internet was in 1995: an underrated new avenue for universal distribution and growth.
  • In 1975, not a single television programmer had trusted their programming to full-time satellite transmission.
  • "What if the satellite conks out?" was the worry. "What if it falls down?" "What if it goes spinning off into space?"
  • You know; Chicken Little stuff.
  • And, the nets already had an established terrestrial system which had been working quite fine for decades, thank you. If it ain't broke etc.
• Besides such paranoias, satellite transmission had some very real earthly problems as well.
  • In those days, the FCC dictated that satellite receiving dishes had to be nine meters in diameter.
  • A dish that big requires a solid base; we're talking pouring concrete. We're talking an expensive installation procedure.
  • And the dishes themselves weren't cheap, either: $75,000. The question was, would cable systems be willing to lay out that kind of money? If they didn't, that would leave HBO knocking on the door with no one home.
  • Gerald M. Levin had come into HBO in its earliest days as vice president in charge of programming. By 1975, he was HBO's top exec.
  • A workaholic always with an eye on the long-term, it was Levin's call to delay much desired and long-awaited profitability by gambling $6.5 million for five years on a satellite hoping cable systems would choose to partake.
• On September 30th at 9PM, HBO subscribers tuned in to watch live coverage of the classic "Thrilla in Manilla" heavyweight bout between Muhammad Ali and Joe Frazier.
  • HBO subscribers in Pennsylvania were joined by 15,000 cable subscribers in Ft. Pierce, Vero Beach, and Jackson, Florida. HBO had gone national.
  • The service ended the year with under 300,000 subs in 16 states. Within two years, HBO hit the million sub mark and was showing its first profit. Growth doubled the year after, and again the year after that.
  • By 1980, HBO had affiliates in every state.
• It was a lesson it didn't take many people long to learn. HBO had left a road map for its competitors. Disney+ saw Netflix's success, and they were coming for it.
• In 1988, HBO's subscriber base expanded greatly as a result of the Writers Guild of America strike that year, as the channel had new programming in its inventory during a period in which the broadcast networks were only able to air reruns of their shows. (Again, luck is an underrated element in success!)

We all know where the story goes. It's remarkable how similar the startup of HBO looks like its modern day variants. Slow launch, nobody caring, shifting business models, the underrated role of luck, and the pursuit of the new distribution frontier.