A cable-free HBO could be Netflix’s worst nightmare

HBO made big news this morning when it announced that it will begin offering an HBO Go subscription that doesn’t require the customer to also have cable. Netflix stock dropped 3 percent after HBO’s announcement, and that makes a lot of sense after hearing Time Warner and HBO executives lay out their plans for streaming-only programming and talk about their stance on net neutrality. In both areas, the news for Netflix was not good.

In its presentation to investors and analysts today, Time Warner made clear that it has no intention of joining Netflix in its fight to expand the definition of net neutrality. Executives said they see content companies paying to support the increasing strain on broadband networks as a “natural evolution” of net neutrality — the complete opposite of the position Netflix is pushing. It also goes against the fundamental tenets of net neutrality as we know it: having content companies foot the ISP’s bills is quite literally pay-for-play. That’s not surprising, of course, since the majority of Time Warner’s revenue and the lion’s share of its profit still come from cable TV. It’s not going to sever those relationships anytime soon.

So why move forward with a cable-free HBO Go? Time Warner recognized that its best path for major growth going forward was not increasing its cable customers, but feeding the enormous hunger from broadband only consumers. It couldn’t afford to keep waiting for the cable companies to figure out “TV Anywhere” or some other solution while Netflix established a dominant position on the way we’ll watch in the future.

So HBO is trying to have the best of both worlds. It sees a big upside in pursuing consumers outside the cable bundle and monetizing the 5 million people it says are already using HBO Go with someone else’s password. The company said today that it anticipates the web-only HBO Go service could translate into hundreds of millions of dollars in new revenue. It believes there are currently around 10 million broadband-only homes in America. “That is a large and growing opportunity that should no longer be left untapped. It is time to remove all barriers to those who want HBO,” said Richard Plepler, HBO’s chairman and CEO. “All in, there are 80 million homes that do not have HBO and we will use all means at our disposal to go after them.”

But Plepler also said, “We will work with our current partners. And, we will explore models with new partners.” How would that look from a business perspective? Depending on how the FCC proceeds, we could soon be living in a world without any meaningful net neutrality. It wouldn’t be surprising to see HBO arbitrage its relationships with the cable companies to exempt its streaming service from their data caps — or to offer a bundle where signing up for Comcast or Verizon as your ISP means you get a free year of HBO Go.

It’s not all bad news for Netflix. A cable-free HBO Go makes cutting the cord way easier for many consumers, which could help Netflix to nab new subscribers. In the very long term, the move by HBO should be most frightening to the traditional cable companies that aren’t competitive broadband internet providers, as it will accelerate the transition to a world of over-the-top cord cutters that Netflix is already poised to capitalize on. With their powers combined, the pay TV landscape in the United States seems ready to shift radically, and much sooner than anyone had predicted.

But in the short term, this news could hurt Netflix badly. A standalone HBO Go, potentially with hundreds of million in new revenue, would ramp up its bidding on syndicated series and films, pushing Netflix’s already ballooning content costs even higher. And the ISPs just gained an invaluable ally: a major content company signaling its comfortable doing deals around net neutrality. Consumers may be cutting the cord with cable, but HBO isn’t.