How rivalry between HBO and Netflix created a new era
• The defining race for the laurels of streaming technology began with an insult and a sneak attack
‘WE MADE THE RICHEST OFFER THAT HAD BEEN SEEN FOR SOMETHING THAT HADN ’ T BEEN MADE YET’
Jeffrey Bewkes scanned his mind, searching for the perfect war metaphor.
It was December 2010. Bewkes, the tall, dry-witted CEO of Time Warner, one of the largest, most powerful media conglomerates on the planet, was speaking to the New York Times. The topic: Netflix.
On Wall Street and in the media, people were gushing over the disruptive potential of the Californian upstart. Just recently, Time Warner’s top business magazine, Fortune, had named Reed Hastings, the CEO of Netflix, as its businessperson of the year.
Bewkes, who had spent the formative years of his career working as an executive at HBO-Time Warner’s prized, premium cable network, was less taken by the Netflix hype. “It’s a little bit like, is the Albanian army going to take over the world? I don’t think so.”
The shot at Netflix ricocheted through the industry. Back at HBO, some of the younger managers pored over Bewkes’ comments with dread.
“I cringed when I read that quote,” says Jamyn Edis, a former vice-president of HBO’s consumer technology group.
“The arrogance that would allow our company’s leadership to gracelessly dismiss a competitor out of hand, I knew then that our transformation to a digital company was going to be a bloody campaign.”
The Albanian rimshot also signalled something bigger: a realignment of Hollywood power that was already afoot. The industry was on a precipice, and the days that legacy media companies could dismiss Netflix were about to give way to a new era where they scrambled to mimic its strengths.
The defining conflict of this era would pit HBO against Netflix. In the days of DVDs, the relationship was a placid collaboration. But the shift to streaming TV replaced it with a fierce rivalry. In the years to come, Netflix would scramble to master HBO’s programming playbook faster than HBO could reverse engineer Netflix data and technology expertise.
Hastings took the Bewkes jab in stride. He gathered his top 70 executives for a meeting where, according to Jonathan Friedland, a former communications executive at Netflix, he “kind of made fun” of Bewkes. He used the insult as bulletin board material for the Netflix pep rally.
With the quote displayed behind him in a PowerPoint slide, Hastings read off fun facts about the military history of Albania to fire up his squad. He handed out a gift to his colleagues: berets, in camouflage green, stitched with an image of a double-headed eagle from the Albanian national flag.
Around the same time that Bewkes was needling Netflix in public, HBO executives were busy behind the scenes warding off the company’s growing incursions. In 2010, former Netflix programming executive Cindy Holland and her boss, Netflix chief content officer Ted Sarandos, were on the hunt for more TV shows to license for the company’s three-year-old streaming service.
They were especially interested in premium serialised content, and there was no bigger player than HBO. Netflix subscribers would often request the discs for a season of an HBO show, say, The Sopranos or The Wire, consume them, then request more, finishing every episode of the series before shifting to something else. The serialised storytelling seemed tailor-made for Netflix bingeing.
For years, HBO had been selling lots of DVDs of its famous shows to Netflix and considered it a valued customer. But whenever Netflix executives broached the topic of licensing programming for its streaming service, HBO shot them down. “We felt that we had spent a lot of time and money carefully nurturing the HBO brand,” recalls Henry McGee, a former executive at the cable network.
“To take that intellectual property and allow Netflix to have, essentially, a rival service didn’t make financial sense.”
Not easily dissuaded, the Netflix execs kept trying.
Sarandos approached HBO with a rich offer for the streaming rights to every season of Six Feet Under and Deadwood. It was meant to be an eye-opening amount that would tempt executives while provoking the agents for the shows’ creators, Alan Ball and David Milch, to put pressure on HBO to accept the offer. It was also a test: Sarandos figured that if HBO would not do it at this high price, it was never going to license anything to Netflix.
Again, Bill Nelson, HBO’s CEO, was unyielding. “Me and my team were not giving one of our up-and-coming competitors, and existing competitors, anything that has an HBO name on it.”
Sarandos concluded that HBO was not going to budge, and it was just a matter of time before other networks followed HBO’s example and started withholding the streaming rights to their programming. Netflix thought it probably had about five years, says Holland, before it would have to make up for the resulting gap with its own original shows.
In February 2011 an idea for a Washington-based drama series was making the rounds. Media Rights Capital, an independent production studio, along with David Fincher, one of the top directors in Hollywood (Fight Club, The Social Network), and the actor Kevin Spacey were pitching a political thriller based on an adaptation of a BBC series called House of Cards.
HBO had decided to scoop up the series and offer to buy it at a pilot level, meaning the producers would shoot an initial episode that HBO would assess to decide whether to move ahead with an entire season. But before that could happen, the Albanian army landed a devastating sneak attack.
Sarandos and Holland looked at all the names attached and came to a swift conclusion: this had to be Netflix’s first big splash. Their five-year timeline for jumping into original programming turned out to be more like five weeks.
By buying House of Cards, Netflix would change the market’s perception of what internet video businesses did.
“Up until the moment we launched House of Cards,” Holland recalls, “everything that was made for the internet was webisodes — Funny or Die, people falling off horses or getting kicked in the nuts”. Other streamers such as Hulu, says Holland, were making early investments in original programming, but it was what she considered “the Comedy Central space ”— in other words, low rent. Netflix, they agreed, ought to begin by aiming high.
Because HBO was in hot pursuit, the only way Netflix was going to win was to make an astounding offer. At the time, in keeping with the new paradigm of tech investing, Netflix was selling its story to Wall Street based on rapid customer growth, not bottom-line performance.
“There’s a thousand reasons not to do this at Netflix,” Sarandos told Fincher. “I want to give you one reason to say yes.” Sarandos and Holland outlined their plan to Fincher and Media Rights Capital executives: not only would there be no pilot required, but Netflix would commit to a two-season, 26episode guarantee, which was unheard of. It also promised Fincher that it would not bog him down with any notes. He could make the show any way he saw fit. Then Netflix offered a staggering $100m for the twoseason commitment.
“We made the richest offer that had been seen for something that hadn’t been made yet,” Holland says.
Their sales pitch worked. Fincher’s team chose to go with the streaming newcomer over HBO, the reigning king of home entertainment. HBO’s overseer of programming at the time, Richard Plepler, and the programming team were stunned at Netflix’s two-year commitment. “We couldn’t do that,” Plepler says. “We didn’t have the financial flexibility to make that commitment.”
With the threat from Netflix growing direr by the day, HBO announced in December 2012 that it was appointing a new chief technology officer, a newcomer named Otto Berkes. His job was to push HBO’s streaming products forwards. Since its debut two-and-a-half years earlier, HBO had extended its streaming service, HBO GO, to a new range of platforms.
At the time, according to internal HBO documents, the peak number of HBO GO users was a modest 140,000 concurrent streams. Even so, during prime viewing hours, the service kept breaking down. “It was a toy app,” Berkes recalls. “It fell over when you sneezed.”
Every Sunday night, a makeshift team of about 20 HBO employees would hop on a group conference call, set up to monitor the fragile state of the service during HBO’s big night. Again and again, with the team looking on anxiously, HBO’s servers crashed, sending everyone into a tizzy.
What HBO needed to do, according to Berkes’s assessment, was to transition to an integrated software-based approach. He recommended that instead of continuing to buy and maintain its own growing number of servers, HBO should lease them from a sophisticated cloud computing service such as Amazon Web Services. As an example of how HBO should proceed, he invoked one company: Netflix.
To build such a streaming platform from scratch, his team would need hundreds of millions of dollars in new investment. Inside a theatre on the 15th floor of HBO’s Bryant Park headquarters in New York City, Berkes began hosting a series of presentations designed to win over various factions at the company. Everyone from Time Warner board members to folks in HBO affiliate relations eventually showed up to listen to his pitch.
One of the featured slides reminded everyone what happens to companies that struggle to keep pace with the changes in technology. The image featured a jumbo headline, “Failure to Evolve,” hanging over a sad gaggle of gravestones, each carved with a company name: Tower Records. IBM. Palm. MySpace. Kodak. BlackBerry. Blockbuster. And, most poignantly, AOL, the former failed owner of Time Warner. There was no sugarcoating the message. If HBO failed to keep pace with streaming technology, it would soon be rendered obsolete.
Everywhere HBO looked, the Albanian army was on the march.
In January 2012, Netflix premiered its first original series, a show from Norway named Lilyhammer. The show, about a mobster who moves to Scandinavia after being put in a witness protection programme, featured a lead actor who would be recognisable to HBO viewers: Steven van Zandt. His character in Lilyhammer is similar to Silvio Dante, the besuited, frowny mafioso he played in The Sopranos.
Netflix acquired the show after Sarandos received a phone call directly from Van Zandt.
From there, the company quickly shifted into yet another one of its closely watched experiments, designed to figure out all the things Netflix did not yet know about how to launch a new original series in a range of languages across multiple territories. “Lilyhammer was our sort of test to see what do we have to do to get ready for House of Cards,” Holland says.
Ayear later, in early 2013, Netflix took its big swing. Rather than parcelling out the first season of House of Cards in chapters, one per week, like HBO did every Sunday night, it posted all 13 episodes of the first season at once. All the better, Netflix explained, for the kind of marathon viewing that, according to the company’s data, TV consumers preferred.
The momentousness of the occasion was not lost on critics. “Can you hear the people binge?” Mary McNamara wrote in the Los Angeles Times. “Just as The Sopranos turned HBO into a game-changer and Mad Men reinvented AMC, House of Cards makes Netflix an undisputed player in serialised drama.”
Afterwards, Sarandos said his final decision to make such a big bet on House of Cards was heavily supported by data from the service’s website, which suggested there was a large audience for “political thrillers”, programming starring Spacey and movies directed by Fincher. Sarandos and Hastings had long admired HBO’s acclaimed programming. They also figured they might have a better way to engineer it.
“We weren’t trying to copy HBO,” says Friedland, the former Netflix communications executive. “We were trying to do it better than them. We were trying to do it with a different approach, a data-driven approach, as opposed to pure touch. We aspired to the quality level of execution, but based on a totally different set of tools.”
The analysis would prove to be spot on. In 2013, Netflix became the first streaming service to win a Primetime Emmy Award, with House of Cards taking home three honours. The show would go on to air for six seasons, becoming a defining series for Netflix, proof that it could master the same “It’s Not TV” game played by HBO.
“It’s sort of like we’re the new TV series that isn’t on TV,” Spacey said in 2013. (Netflix cut ties with Spacey in 2017 and made the final season of the show without him, following accusations from the actor Anthony Rapp that Spacey had sexually abused him at a party in 1986. A federal jury found in October that Spacey was not liable for battery.)
In an interview with GQ magazine, Sarandos did little to disguise the state of the streaming network’s overarching strategy. He tossed down the gauntlet that would soon become legend in the entertainment business. “The goal is to become HBO faster than HBO can become us,” he said.
In September 2022, Netflix and HBO executives gathered in the Microsoft Theatre in Los Angeles for the 74th Emmy Awards. In the years since snatching House of Cards out from under HBO, Netflix’s annual programming budget has soared into the billions of dollars, well eclipsing HBO’s largesse. In recent years, much of the intrigue surrounding the annual awards show has coalesced around a recurring question: who would gobble up more trophies, HBO or Netflix?
This year it was HBO that triumphed. All told, HBO and its streaming service, HBO Max, racked up more Emmys, 38, than any other outlet, topping Netflix with 26. Among other honours, HBO won best drama for Succession, the spellbinding series about the Roy family, owners of a dysfunctional media dynasty under mounting pressure from tech giants.
The night’s defeat added to a difficult stretch for Netflix, one that had seen its share price plummet as the company lost subscribers over the first half of the year. Even so, Netflix is still on top of the competition, with 223-million global subscribers, compared with 76-million for HBO and HBO Max, according to company updates in April.
In October, Netflix revealed that it had returned to subscriber growth in the third quarter. In its letter to investors, it included a Google Trends chart that showed that interest in Netflix’s Monster: The Jeffrey Dahmer Story was far surpassing HBO’s House of the Dragon.
As for HBO, it continued to face its own set of challenges. A dozen years after it set out to build a global streaming service capable of beating Netflix, the network was still being tossed about by changes to the entertainment landscape that its rivals in California had helped to usher in. Over the years, Bewkes had sold off HBO’s parent company to AT&T, which after a tumultuous stretch had bowed out under the massive costs of competing in the international streaming wars and spun it off, handing the reins earlier this year to Discovery. Since its debut in April, the share price of HBO’s new parent company, Warner Bros Discovery, is down nearly 50%.
During its 50-year history, HBO’s programming slate has frequently returned to the theme of succession — of rulers (Game of Thrones), talk show hosts (The Larry Sanders Show), drug dealers (The Wire), media scions (Succession). It’s always presented as a messy blood sport. The dominant player in any drama rarely gives up power without a fight, and those looking to ascend are not inclined to play nice. In this, the home entertainment industry is not that different from Baltimore’s drug industry or the shadowy castles of Westeros.
Anyone who wants an eloquent summation of the state of the industry in 2022 could do worse than to rewatch Succession. At the start of the second season, the family business is under duress. Too many squabbles and too much debt have left it vulnerable to a hostile takeover. Logan Roy, the patriarch, presses his lead banker for a candid assessment of the media conglomerate’s standing in the market.
“There’s blood in the water. Your price is edging down. Tech is coming. Tech is here. Tech has its hand around your throat,” the banker tells him. “There’s maybe one, two legacy media operations that will make themselves big enough to survive.”
Adapted from ‘It’s Not TV: The Spectacular Rise, Revolution and Future of HBO’, published by Viking, an imprint of Penguin Random House. © Felix Gillette and John Koblin.