(Bloomberg Businessweek) -- Jeffrey Bewkes scanned his mind, searching for the perfect war metaphor.
It was December 2010. Bewkes, the tall, dry-witted CEO of Time Warner Inc., one of the largest, most powerful media conglomerates on the planet, was speaking with the . The topic: Netflix Inc. On Wall Street and in the media, people were gushing over the disruptive potential of the California upstart. Just recently, Time Warner's top business magazine, , 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?” he said. “I don't think so.”
The shot at Netflix ricocheted through the industry. Back at HBO, some of the younger managers pored over Bewkes's comments with dread.
“As an executive at HBO, I physically cringed when I read that quote,” says Jamyn Edis, a former vice president of HBO's consumer technology group. “The sheer level of pride and arrogance that would allow our company's leadership to gracelessly and ignorantly 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 signaled something bigger: a broad realignment of Hollywood power that was already afoot. The whole industry was on a precipice, and the days that legacy media companies could casually 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. During the days of DVDs, the relationship was a placid collaboration. But the shift to streaming TV quickly fractured the comity, replacing it with a fierce rivalry. In the years to come, Netflix would scramble to master HBO's original programming playbook faster than HBO could reverse engineer Netflix's expertise in data and technology.
Across the country from Time Warner's East Coast stronghold, Reed Hastings took the Bewkes jab in stride. Hastings gathered his top 70 executives for a regularly scheduled business meeting at the Rosewood Sand Hill, a sumptuous hotel and retreat, studded with olive trees, in Menlo Park, California, not far from the Santa Cruz Mountains.
Jonathan Friedland, a former communications executive at Netflix, says that at the meeting, Hastings “kind of made fun” of Bewkes. Like an NFL coach printing out an insulting quote about his team made by a rival player and then hanging it in the locker room during the runup to a big game, Hastings used Bewkes's insult as bulletin board material for the Netflix pep rally. It was part inspiration, part rallying cry.
With the quote from Bewkes displayed behind him in a PowerPoint slide, Hastings read off fun facts about the military history of Albania to further fire up the members of his squad. “That's the kind of thing that was super motivating to people,” recalls Cindy Holland, a former Netflix programming executive.
As the meeting wrapped up, Hastings handed out a gift to each of his colleagues: army 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, 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 serialized content, and there was no bigger player than HBO. Netflix subscribers would often request the discs for a season of an HBO show, say, or , consume them quickly, then request more, finishing every episode of the series before shifting to something else. The serialized 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. “And to take that IP and allow Netflix to have, essentially, a rival service didn't make financial sense to our company.”
Not easily dissuaded, the Netflix execs kept trying. Sarandos, a huge comedy nerd, was a big fan of , a sketch comedy series that ran on HBO for three years in the 1990s, hosted by Bob Odenkirk and David Cross, which had grown into a cult classic. It seemed like an easy target. Since going off the air in 1998, the series had been languishing in HBO's vault. Sarandos approached the network's executives. Again, HBO rebuffed the offer.
The Netflix team tried one more time. Sarandos approached HBO with an incredibly rich offer for the streaming rights to every season of and . 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 wouldn't do it at this high price, they were never going to license anything to Netflix, ever.
Again, Bill Nelson, HBO's disciplined chief executive officer, 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,” he says.
Sarandos concluded that HBO wasn't 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 figured it probably had about five years, says Holland, before it'd have to make up for the resulting gap with its own original shows.
In February 2011 an idea for a DC-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 (, ), and the actor Kevin Spacey were pitching a political thriller based on an adaptation of a BBC Series called . It would be a tale of pork-trading and bed-hopping set in the nation's capital, starring Spacey as Frank Underwood, a canny, venomous congressman from South Carolina, and Robin Wright as his maleficent, calculating wife, Claire.
Screenwriter Beau Willimon, a former Democratic campaign worker for Charles Schumer and Howard Dean, was lined up to be showrunner. The idea, with its blend of DC politics, Democratic Party bloodlines and prestigious Hollywood pedigree, was like something engineered in a lab by scientists to appeal perfectly to HBO's then-overseer of programming, Richard Plepler.
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.
That February, Sarandos happened to be sitting down with executives at Media Rights Capital to talk about the rights for , a comedy starring Sacha Baron Cohen. At the end of the meeting, MRC executives let Sarandos know that they had a big project they were shopping around. “Would you guys like to look at it?” an MRC executive asked.
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. “If we're going to do original content, this is it,” Holland said to Sarandos.
By buying , Netflix would change the market's perception of what internet video businesses did. “Up until the moment we launched ,” 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 like 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.
The most important thing, according to the prevailing market view, was for tech disrupters to crush the incumbents. Wooing new customers with ludicrous prices that made little long-term economic sense beyond undermining competitors was not only tolerated, it was expected and rewarded. Traditional publicly traded media companies, by contrast, enjoyed no such leeway.
“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 MRC executives: Not only would there be no pilot required, but Netflix would commit to a two-season, 26-episode guarantee, which was unheard of. They also promised Fincher that they would not bog him down with any notes. He could make the show any way he saw fit. And then Netflix offered a staggering amount of money: $100 million for the two-season 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. 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 more dire by the day, HBO announced in December 2012 that it was appointing a new chief technology officer, a newcomer named Otto Berkes. He was a Hungarian-born engineer, slight of stature, who had dark hair, a prominent widow's peak and glasses. He had arrived at HBO the previous year from Microsoft Corp.
Berkes's new job was to push HBO's streaming products forward. Since its debut two and a half years earlier, HBO had extended its streaming service HBO GO to a new range of platforms. There was now an HBO GO app for the iPad, one for Roku, and ones for tablets and smartphones using Google's Android software. Across the board, HBO GO was struggling to keep up with the growing demand for streaming video.
At the time, according to internal HBO documents, the peak number of HBO GO users was only about 140,000 concurrent streams, a relatively modest amount. 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 at the time, 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. “We'd be monitoring it, and the stream would drop,” recalls Allan Wai, a former HBO design and products manager. “We were, like, marketing folks and product design people. What is anyone going to do when a server goes down? It was comical how woefully unprepared we were.”
In the face of such struggles, Berkes set out on an ambitious plan to build the technology that could handle the rapidly growing demand from consumers and take on Netflix both in the US and overseas. In a nine-page white paper, marked “confidential” and titled , Berkes noted that the network's streaming service was already “behind the curve” and at an “evolutionary dead end.” HBO GO, he wrote, lacked key features like recommendations, deep personalization, social integration and “watch next episode” buttons. There was no way for users to report issues and no way for HBO to collect, track or triage the problems that did arise. “We are flying blind,” Berkes wrote.
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 like 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 theater 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 happened to companies that struggled 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 . The show, about a mobster who moves to Scandinavia after being put in the witness protection program, featured a lead actor who would be instantly recognizable to HBO viewers: Steven Van Zandt. His character in is remarkably similar to Silvio Dante, the besuited, frowny mafioso he played in .
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 didn't yet know about how to launch a new original series in a range of languages across multiple territories. “ was our sort of test to see, all right, what do we have to do to get ready for ,” Holland says.
A year later, in early 2013, Netflix took its big swing. Rather than parceling out the first season of 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 increasingly preferred.
The momentousness of the occasion was not lost on critics. “Can you hear the people binge?” Mary McNamara wrote in the . “Just as turned HBO into a game-changer and reinvented AMC, makes Netflix an undisputed player in serialized drama.”
Afterward, Sarandos said his final decision to make such a big bet on was heavily supported by data from the service's website, which suggested there was a large audience for “political thrillers,” programming starring Kevin 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 taking home three honors. 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 television series that isn't on television,” Kevin 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 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 Theater in downtown Los Angeles for the 74th Emmy Awards. In the years since snatching out from under HBO, Netflix's original programming budget has soared into the billions of dollars annually, well eclipsing HBO's largesse.
In recent years, much of the intrigue surrounding the annual awards show has coalesced around a single, 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 had racked up more
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 roughly HBO Max, according to the company's most recent updates back in April.
In mid-October, Netflix revealed that it had returned to subscriber growth in the third quarter. In its letter to investors, it included a taunting Google Trends chart that showed that interest in Netflix's was far surpassing HBO's .
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 Inc., 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 Inc. Since its debut in April, the share price of HBO's new parent company, Warner Bros. Discovery Inc., is down nearly 50%.
During its 50-year history, HBO's programming slate has frequently returned to the theme of succession—of rulers (), talk show hosts (), drug dealers (), media scions (). It's always presented as a messy bloodsport. 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 wanting an eloquent summation of the state of the industry in 2022 could do worse than to rewatch . At the start of the second season, the Roy family's media business is under duress. Too many internal squabbles and too much debt has left it vulnerable to a hostile takeover. Logan Roy, the family 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.”
It's Not TV: The Spectacular Rise, Revolution, and Future of HBO
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