Exclusive Interview: Time Warner’s Jeffrey Bewkes

PREMIUM: Ten years after AOL’s ill-fated takeover of Time Warner, chairman and CEO Jeffrey Bewkes talks to World Screen Newsflash about the health of linear channels, the success of on-demand offerings, the logic of authentication and why the issue of “cord cutting” has been blown way out of proportion.

Jeffrey Bewkes worked for many years at HBO before joining the corporate ranks of Time Warner. He witnessed firsthand the development of HBO’s services from one channel to multiplex channels to on-demand. He also has extensive knowledge of the cable industry because, up to last year, Time Warner owned Time Warner Cable. From this vantage point, he is extremely confident of the long-term health of both basic and premium cable offerings.

WS: There has been so much talk lately about viewers canceling their subscriptions to cable or satellite providers. What’s your view on the issue of cutting the cord?
BEWKES: It’s like a story in search of facts that aren’t there. There hasn’t been cutting of the cord. We are in the midst of a tough economic period in the U.S., and there are flat growth rates to subscription television delivered either by a satellite, a telco or a cable operator. Approximately 95 percent of American homes subscribe to some package of tele­vision channels. That hasn’t really changed. Normally that has been creeping along at 1- or 2-percent growth as the economy adds households, but over the last year or two it’s been pretty flat. The huge noise was made when it went down a tenth of a percent.

WS: What is really causing the slower cable-subscription rates?
BEWKES: What is going on is much more about the competition among the distribution companies—cable, telephone and satellite companies. They compete for double- and triple-play offerings. And then on top of all of that there’s the recession.

WS: Do you see cord-cutting happening anytime soon, as so many in the press have been suggesting?
BEWKES: Usually there are two reasons given for why people would want to cut the cord. One, they see the rise in Internet-delivered video services like Netflix, and theorize that young people are not going to pay for cable-TV packages. We’ve seen no evidence to support that, particularly as young people graduate and get jobs and get their own homes. What we’re seeing is that new services that make it easier to enjoy TV programming are expanding the entire market for TV viewing.

The second reason everybody says there could be cord-cutting is because they think the cost of TV subscriptions is too high. [It is assumed] people will want to pay $10 for Netflix instead of $50 for 80 or more channels of TV. That whole thought process is also unsupported—in fact, more people are watching more TV than at any other time in the industry’s history and they are receiving greater value from it.

If you are paying for a TV subscription today, you are paying about $2 a day. That’s what it costs to get hundreds of channels of news and sports and movies and TV channels. [And the fact is] ratings are going up, viewership is going up, program budgets are going up, retransmission fees are going up, profits are going up, everything is going up in the TV business. Everybody is watching; you are getting more choice, and you are about to get all of that on demand, whenever you want, on whatever device you want, with no change in price. It’s still only $2 a day—you can have every TV in your house lit up with all this programming, 24 hours a day, for your entire family, or you can buy half a cup of a grande latte down at Starbucks. The press tends to be off on this story, and the real story is that the appeal and value of multichannel subscriptions is improving as we move to a mobile, on-demand environment.

WS: Netflix recently raised its rates from $9.99 to $15.98 per month for online streaming and DVDs. Many subscribers were pretty upset, and I read in an article that one consumer said Netflix was no longer worth the money. For the same amount she could get HBO on Demand.
BEWKES: That’s true. That’s a 60-percent price increase. Nobody has ever put through a 60-percent increase—nobody is even putting through a 5-percent increase—in the cable industry.

WS: Tell us about HBO GO, HBO’s online authenticated on-demand service.
BEWKES: It’s very successful. The HBO GO app has been downloaded almost 5 million times, and 85 percent of the subscribers who are using HBO GO are watching dramatically more HBO programming. HBO has all these programs on demand, which no other network does. Remember, it’s going to be on every device, and it doesn’t cost anything to get it if you are an HBO subscriber. It’s a great example of where television is headed.

WS: With viewers increasingly watching programming on demand, what do linear channels have to do to maintain their relevance?
BEWKES: Linear channels have already become branded environments, so when you go to HBO or TNT or MTV you know what kind of programming you will get. What branded linear channels have to do is take the programming that makes them a branded environment—a clear voice—and offer it on demand. There is one channel that has already done that, and that is HBO. It’s been on demand in the U.S. now for ten years and has very high usage of on-demand viewing. Depending on the show, upwards of 30 to 50 percent of the viewing on HBO is on demand. There is no reason that the same thing could not happen to CNN or MTV or NBC or any other channel. If you like the channel and like the shows, and you have the shows on demand, you’ll tend to watch them when you want to watch them. And if you ask, well, what are Apple or Netflix or YouTube? They are distinguished by being on demand, not by what content they have. There is no content on Hulu or Netflix or Amazon or Apple that isn’t already available on an NBC, an HBO, etcetera. They don’t have new or exclusive content. It’s usually older and it’s available somewhere else on a network with higher viewership, with a more engaged audience. The reason that some of the new services are getting traction is that they are offering on-demand and the existing branded linear channels have not been fast to do so, with the exception of HBO and CNN. You can now watch the broadband-delivered CNN; increasingly you are going to be able to watch CNN video feeds for free if you have CNN in your house, which about 95 percent of Americans do.

WS: You have said the press has misreported the cord-cutting issue. Have they done the same with authentication? Somewhere along the line it got a negative connotation, but as a user to me it seems pretty logical.
BEWKES: The negative connotation you refer to is perhaps the idea from some quarters that we should throw out our business model in pursuit of something different online, but that kind of thinking has been largely disproven.

Let’s take as an example HBO because it’s so simple. HBO went to multiplex 15 years ago and offered subscribers ten channels. Then HBO put its whole schedule on demand. We’re here talking about it for other networks, but HBO did that ten years ago. As a consequence, viewership went up, subscriptions went up, engagement and the ability for you as a viewer to follow your favorite shows on HBO went up. But we did not charge extra for any of it. Was that good for consumers? Undoubtedly. Was that economically good for HBO? Of course, it means the subscription is more valuable. And if more people pay as subscribers, HBO can raise its prices gradually over time because now HBO is not one channel, it’s ten channels, and all of their programming is on demand. It makes itself very strong by doing that, so you know the economics there are great.

If you then say, should HBO On Demand be available over the Internet, on my iPad, on my laptop, whatever, we say, of course, you’ve subscribed to it, you’ve paid for the programming, we’re going to give it to you on the Internet the same way it’s on TV, it will be on demand—it’s obvious. Why should our viewers have to pay again for programming that they are already paying for? That will strengthen the economic base for HBO. If you then say, well all right, since it’s a good idea for HBO, why isn’t it a good idea for TNT, MTV, CNN and all the other channels? By the way, in their case, putting all those channels online is even more obvious because some 90 percent of American homes have already paid for all of those channels. They pay for them, they like them, they watch them. Let’s take all of them and offer them on demand. And increasingly on-demand will include all television channels. In the U.S., we’ve seen some of the big broadcast networks now moving to an authentication model, too. If you look at the U.K., there are on-demand offerings from the BBC and BSkyB, which work pretty much the same way authentication works in the U.S.

WS: Warner Bros. recently launched YOU On Demand in China. What appetite is there for on-demand services, and how important is this in international markets?
BEWKES: We launched YOU On Demand in China with content from Warner Bros., because we wanted to make sure that if you want to watch a film that is not in the theaters, or has been made available on pirated DVDs or file-sharing sites, there ought to be a legitimate way you can buy it. If we can offer an on-demand service on either VOD platforms or Inter­net pay-per-view platforms—that’s good for consumers who generally don’t want to steal content.

WS: What opportunities do you see for channels internationally? The Turner Broadcasting channels are doing quite well. Is there more growth out there?
BEWKES: Oh sure. HBO is the number one pay-TV channel in all of Eastern Europe, all of Latin America and all of Southeast Asia. Turner’s CNN is the number one English-language news channel all around the world, and is a leader in online and mobile. Cartoon Network is number one or number two in a number of countries, like Brazil and China. It has more vibrant competition in Western Europe, but it’s very strong in Eastern Europe. TNT is gaining market share in South America. If you look at Latin America, from Mexico through Argentina, the Time Warner channels—which include HBO, Warner Channel, TNT, Turner Classic Movies, CNN, Cartoon Network and a bouquet of Latin American channels that originated from Claxson—are the leading channel package in all of Latin America. As we have said publicly, we currently have earnings of $500 million a year from our international networks business, which we think will double in the next three to four years.

WS: Is Time Warner interested in making acquisitions overseas?
BEWKES: Overseas we’ve got the leading ownership position—it’s a plurality, not a majority—in Central and Eastern Europe’s number one TV broadcasting group, CME. We also bought Shed Media in the U.K., which produces non-scripted reality shows. We have made a number of acquisitions in India, including NDTV Imagine, a branded general-entertainment channel. I mentioned the Claxson channels in South America, which are quite strong, partic­ularly in Argentina. We bought the leading broadcaster in Chile, Chilevisión, which is branching into branded channels and pay-TV channels. We’ve looked at all of the European commercial broadcasters that perennially come up for sale: ITV and Channel 5 in the U.K. and Premiere in Germany. We just haven’t found that they would work for us.

WS: Time Warner recently spun off Time Warner Cable, while Comcast merged its operations with NBC­Universal. Why was having both businesses not a good thing for Time Warner but it’s a good idea for Comcast?
BEWKES: It’s actually the same reason for both even though it sounds like the opposite. We thought the content business was where we would best be able to add growth to the company. We also thought that having a cable company that was as large as our entire Warner Bros.-HBO-Turner Broadcasting business was challenging, because the business of cable companies like Time Warner Cable, Comcast, or Cox Communications require that they carry a lot of debt. They are basically like real estate, they are very thick assets, highly leveraged companies, that eventually will all need to consolidate and get bigger. So if we had kept Time Warner Cable we would have ended up having to merge it with a larger cable company or telephone company, and that would have been 80 percent of Time Warner. But we wanted to have our exposure on the content side, not the cable side. What Comcast has done is actually the same. The Roberts family [the majority shareholders of Comcast] had close to 100 percent exposure to the cable business, but they wanted to get into the content business. They are trying to move over in the same direction as we are, which is the creation and packaging of great content.