By Liana B. Baker
NEW YORK (Reuters) - Time Warner's TWX.N HBO is preparing to sell a standalone service over the Internet for the first time, in one of the most closely watched moves in pay TV history. Yet the road to the launch has been far from an easy one - marked by changes in strategy, deadlines, and the departure of its chief technology officer along with two of his lieutenants.
Otto Berkes, who was previously a Microsoft executive, resigned from the CTO position in December, only a matter of months before HBO is expected to start selling the new product, and two senior vice presidents on the technology team, Mark Thomas and Drew Angeloff, are also leaving, sources familiar with the situation said.
The original plan discussed by the network's top executives was to spend hundreds of millions of dollars to develop a sophisticated streaming platform that would make HBO, one of the best-known premium channels in the United States, capable of challenging streaming video services from Netflix NFLX.O and Amazon AMZN.O head on. Berkes, who was also a cofounder of Xbox, was a key part of that ambitious project - he had been hired by HBO in 2011 to set up a new office in Seattle, initially hiring 80 engineers with plans to grow much bigger.
The idea was that the technology would not only support HBO but potentially other Time Warner offerings, such as Turner Broadcasting and Warner Bros. The platform, which would power a product that doesn’t require a cable subscription, would be used globally and was supposed to be ready in 2016, said the sources, who worked on that effort.
But these sources said that much of the plan was changed when Rupert Murdoch's Twenty-First Century Fox Inc FOXA.O made a surprise takeover bid for Time Warner last summer.
To justify to shareholders why they shouldn't consider the Australian-born media tycoon's overtures, Time Warner said that its own strategic plan would deliver more value to shareholders than Murdoch could.
In October, at its first investor day in four years, Time Warner outlined a series of measures aimed at bolstering revenue growth and cutting costs. Among those was an announcement by HBO’s CEO Richard Plepler that the standalone HBO was going to launch in 2015, news that quickly became the main headline from the event.
"Time Warner needed to show investors that they had a plan that the Murdoch bid was not factoring in," said Michael Nathanson, a media analyst at MoffettNathanson research.
At the time, HBO also decided to cancel the internal technology investment, and to use a third party to provide the new HBO service, a move in sync with a cost efficiency plan driven by Time Warner's Chief Financial Officer Howard Averill.
The more ambitious platform was going to eat up too many dollars and be too slow to come to market, sources familiar with Time Warner’s thinking said.
The sources said the decision to speed up the standalone product was not related to the battle with Murdoch. They said this year was viewed as simply the right time for the initiative given that rival media companies were starting to debut online offerings outside of a traditional cable subscription. Dish Network is launching its own $20 per month Internet service later this month and CBS CBS.N has said that its Showtime network, the biggest direct competitor to HBO, will sell its own separate offering later this year.
Shortly after the October announcement, HBO told its engineering team about the decision to cancel plans to develop its own technology platform. Instead of being developed internally, technology would be handled by MLB Advanced Media, a subsidiary of Major League Baseball best known for powering the technology that streams live baseball games. Going with this vendor would save millions, one of the sources close to Time Warner said.
A person who had worked on the earlier HBO strategy said that pulling back from building its own platform may come back to haunt the network. “HBO and Time Warner lost the appetite for the investment required to go big here,” the person said. “Old media lost its nerve.”
The people who worked on the earlier effort say there are drawbacks to having a third-party handle distribution of the product, including having less control over how subscribers experience it. They say HBO could be missing out on the long-term potential of owning all of the software behind the standalone service.
An HBO spokesman, in a statement, said “any business strategy undergoes many iterations,” and that it was confident in its decision. "We believe we landed in exactly the right place with MLB Advanced Media as our partner, and we will deliver a great product later this year that fully lives up to the reputation of the HBO brand," he said.
Among the casualties of the decision was Berkes. He left amid tensions with HBO management over his role following the change in strategy, the people who worked on the effort said. Thomas and Angeloff are leaving for similar reasons, these people said.
The 80 or so employees in Seattle still have jobs but HBO is without a CTO and has no immediate plans to hire a new one.
HBO declined to comment on the departures.
As for the big debut, the launch plans are still vague. Company insiders had anticipated an April start date to leverage off the fifth season of the top HBO series Game of Thrones. But a source close to the matter said HBO has other big shows beginning in the summer, such as a new series of True Detective, that any launch could leverage off.
The pricing of the new product and how it will be sold could not be learned. The company is exploring a number of options, including selling the standalone through pay-TV providers like Comcast Corp CMCSA.O, and through the likes of Apple AAPL.O and Amazon, one source close to the company said.
(Reporting by Liana B. Baker; Editing by Martin Howell)