Anna Burckhardt, Brett Cychosz, Sam Pickett

Faculty Advisor: Belinda Mucklow

February 2nd, 2017
Agenda
I. Executive Summary
II. Company Profile
III. Industry Overview
IV. Valuation
I. Discounted Cash Flow
II. Comparable Company
III. Precedent Transaction
V. Potential Buyers
I. Strategic Buyers
II. Financial Buyers
VI. Game of Thrones Damages
VII. Appendix

1
 Executive Summary

2
Executive Summary
Industry HBO is the product of a merger between TV and movie producers and suppliers. This segment of the
Overview industry is called ‘Streaming Video On Demand’ (SVOD) and is growing rapidly.

Company HBO creates and distributes movies and television shows. HBO’s content has historically been distributed
Profile through traditional cable providers, but has recently seen a shift towards its streaming service, HBO Now.

Discounted cash flow, comparable companies, and precedent transaction analysis on HBO yielded a
Valuation valuation range of $28 - $32 bn.

We recommend a strategic buyer for HBO because of the synergy opportunities and premium price. Google
Potential
and Disney are two optimal buyers for HBO because of their interest in content and/or the SVOD industry.
Buyers HBO is a poor candidate for a financial buyer because of high investment required to create new shows.

Methodology for valuing the lost cash flows resulting from illegal online downloads of the 6th season of
GoT Damages Game of Thrones

3
 Company Profile

4
Industry Definitions

Industry Terms: SVOD and OTT

Subscription Video on Demand (SVOD): A service that provides users unlimited streaming
for a monthly flat rate

Over-the-Top (OTT) Content: Media delivery over the internet without the involvement of
a multi-system operator in the control of distribution or content

Sources: IBIS World; WSJ.com; Apple.com; techopedia.com; Wikepedia

5
Streaming Timeline

February 2007 – Netflix February 2010: HBO April 2015: HBO Now
launches streaming service Go Launched launched

2004 2006 2008 2010 2012 2014 2016

September 2006 – Original March 2008 – Hulu February 2013 – Netflix releases
Amazon Prime streaming service launches streaming first original content series, House
launched service of Cards

Sources: IBIS World; WSJ.com; Apple.com; techopedia.com; Wikepedia

6
TWX Overview

Sources: insidermonkey.com; turner.com; logodesignlove.com; hdiimagelib.com; hdreport.com; Cinemaxasia.com; sharealogo.org; americanbankingnews.org

7
HBO Products

Subscription: Purchase subscription through cable provider. Includes 13 multiplex channels, 7 24-hour multiplex channels,
and an HBO Go Subscription
Price to Consumer: $10 - $20 per month
Programming: Game of Thrones, Curb your Enthusiasm, The Wire, other original TV series, and Blockbuster movies

Subscription: Included free with your Subscription: Purchased from an Subscription: Purchased through cable
paid TV package internet provider or on a smart phone; provider. Online streaming service
Price: Free with HBO Over-the-top (OTT) (Max Go) included.
Programming: Unlimited access to Price: $15 per month Price: ~$10 per month
HBO Programming: Unlimited access to Programming: Action, comedy and
Devices: Computers, tablets, Xbox, HBO science-fiction movies and series
Apple products, PlayStation, Roku Devices: Same as HBO Go Devices: TV, Apple products, Android
Sources: Cinemax.com; HBO.com
8
Company Profile
Company Overview HBO Subscribers

Subscribers (mms)
84 92 98
53 73
CEO: Richard Plepler 40 41 43 46 49

Headquarters: New York, NY 2011 2012 2013 2014 2015*

Domestic Subscribers International Subscribers
Parent Company: Time Warner (TWX) *15.8 million subscribers for HBO India transferred to Turner operations Dec. 31st, 2014, which are
included in 2015 subscribers

HBO as % of TWX Revenue Award Winning Network

• HBO received 126 Emmy nominations
% of TWX Revenue

21.50% 20.70% in 2016

19.70% 19.90% o Most primetime nominations by
19.50% 18.50% 18.50% any network for the 15th year in a
row
17.50%
2012A 2013A 2014A 2015A 2016p
o Game of Thrones received 24
HBO Revenue Emmy nominations

Sources: TWX 2015 10K; HBO.com; tvweek.com

9
SWOT Analysis
Strengths Weaknesses
• High-quality original content • High pricing can turn away customers
• Extensive library of major motion pictures • Late to streaming content
• Large amount of brand recognition • Success highly dependent on consumer
• Ability to charge premium prices preference
• International presence • Only HBO content on OTT (HBO Now) service

Opportunities Threats
• HBO Go and HBO Now can capture growing • Explosive growth and high competition within
streaming market share streaming services
• Licensing deals with other players could generate • Other original content creators drawing
additional revenue viewership
• Cord-cutters could replace premium cable • Relative ease of pirating content
packages with HBO Now

10
 Industry Overview

11
Industry Overview
US Television Producers US Cable Networks
Industry Description: Industry produces Industry Description: Distributes TV programs
programming and content that is then sold to cable through cable providers and other platforms.
providers. Industry excludes content creators.

Key Players: 3 Arts Entertainment, Bad Robot, ABC Key Players: Time Warner Inc., Walt Disney
Studios Companies, NBC Universal Media LLC

Major Deals Changes to Supply Chain

Pre-Consolidation
• AT&T to purchase Time Warner for $85.4 bn
• Comcast purchased 49% stake in NBCUniversal for Content Content
Consumer
$16.7 bn Producer Provider
• NBCUniversal purchased Dreamworks for $4.2 bn
Post-Consolidation
• Charter communications purchased Time Warner
Cable for $78.2 bn Content
Consumer
• Lionsgate purchased Starz for $4.1 bn Producer

Sources: IBIS World; Global Media & Consumer: The Big Shift Series Bernstein (2015)
12
Industry Drivers
Cable vs. Broadband Subscriptions Disposable Income
350
300
Cable Subscribers Broadband Connections • Increases in disposable income lead to higher
Millions of Connections

250 demand for premium entertainment

200 • Customers with greater disposable income are
150
more likely to add additional services
100
50
• Disposable income is projected to increase 4.3%
0 year over year into 2024
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Total Advertising Expenditure US Per Capita Disposable Income

• Most cable networks generate a significant
$50,000
$45,000
portion of their revenue from selling advertising $40,000
$35,000
time

US Dollars
$30,000
• HBO is not dependent on advertisements to drive $25,000
$20,000
revenue $15,000

• Lack of advertising is a major driver behind $10,000

$5,000
customer preference for premium subscription or $0

2003A
2004A
2005A
2006A
2007A
2008A
2009A
2010A
2011A
2012A
2013A
2014A
2015A
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
streaming services
Sources: IBIS World, Bureau of Labor Statistics, Broadband Commission for Digital Development
13
Industry Outlook
US Pay-TV Penetration Moving Instigates People to cut Cable
From survey of US Adults
• 21% of people who moved in the past year do not
Percent Penetration

subscribe to a pay TV service, up from 12% in

90%
88% 87% 87% 87%
86%
2010
86%
84%
84%
83% • 63% of non-subscribers get a subscription video
82% On-Demand (SVOD) service
80%
2010 2011 2012 2013 2014 2015 • 41% of US Households had an SVOD by end of
2014
HBO Now Revenue Impact Projected Revenue in US SVOD Market
8,000
• Very little advantage of using HBO Now for
7,000 7,511
consumers 6,000
7,029

Revenue ($mm)
6,508
o Growth prospects aren’t higher due to HBO 5,000 5,949
5,359
Now 4,000
o Protection against cable cutting 3,000
2,000
1,000
0
2016A 2017E 2018E 2019E 2020E

Sources: IBIS World; Pay TV Penetration Rates, 2010-2015 marketingcharts.com; statista.com

14
Streaming Competitors
Service Overview Popular Content Pricing Total Subscribers
Video streaming platform Original series, $14.99/month 1 million
offering current and past HBO blockbuster movies
content.
Video streaming platform
available across multiple Original series, legacy TV $9.99/month – basic 81.5 million
devices. Most entrenched content package
player in the space.
Video streaming platform
offering current-season TV, South Park, Seinfeld, $7.99/month with 12 million
Hulu Originals, and movies. Saturday Night Live ads - $11.99 without
TWX currently owns a 10% ads
stake in the company.
On demand video streaming
available to Amazon New release movies, HBO $99/year – includes 54 million
customers with Prime licensing other services
subscription.

Sources: Netflix.com; Hulu.com; Amazon.com; TWX 10K 2015; Netflix 10k 2015; Hulu Grows to 10 Million Subscribers techcruch.com; Amazon 10K 2015
15
 Valuation

16
Financial Overview
X Income Statement
2015A 1Q16A 2Q16A 3Q16A 4Q16P 2016P 2017P 2018P 2019P 2020P 2021P Pent up demand for OTT service
boosts sales, then growth is
Subscription Revenue 4,748 1,236 1,253 1,262 1,259 5,010 5,311 5,576 5,799 5,973 6,153 expected to fade into 2019 as
Growth 3.7% 4.8% 6.1% 5.2% 6.0% 5.5% 6.0% 5.0% 4.0% 3.0% 3.0%
business is relatively mature
Content and Other Revenue 867 270 214 164 226 874 883 892 901 910 919
Growth 5.7% 23.3% (16.7%) (1.8%) 1.0% 0.8% 1.0% 1.0% 1.0% 1.0% 1.0% Growth estimates are line with
Gross Profit 2,804 723 759 736 767 2,985 3,221 3,461 3,585 3,683 3,783
analyst estimates
% Margin 49.9% 48.0% 51.7% 51.6% 51.6% 50.7% 52.0% 53.5% 53.5% 53.5% 53.5%

Depreciation and amortization (95) (22) (23) (21) (24) (90) (101) (97) (92) (86) (84) Gross margins increase slightly as
as % of Revenue 2.0% 1.8% 1.8% 1.7% 1.9% 1.8% 1.9% 1.7% 1.6% 1.4% 1.4% customers transition to the slightly
higher margin, HBO Now service.
EBITDA 1,955 499 504 551 622 2,088 2,320 2,520 2,610 2,682 2,755
% Margin 41.2% 40.4% 40.2% 43.7% 49.4% 41.7% 43.7% 45.2% 45.0% 44.9% 44.8%
Revenues generated through cable
Capex (68) (19) (74) (77) (81) (84) (86) (88) subscribers are subject to discounts
as % of Revenue (1.4%) (1.5%) (1.5%) (1.5%) (1.4%) (1.4%) (1.4%) (1.4%)
based on subscriber numbers or
Change in Working Capital (7) (29) (26) (22) (17) (18) other performance metrics
% of change in revenue (9.7%) (9.7%) (9.8%) (9.8%) (9.9%) (9.9%)

Sources: TWX 10-k & 10-Q

17
Financial Overview
X Income Statement
2015A 1Q16A 2Q16A 3Q16A 4Q16P 2016P 2017P 2018P 2019P 2020P 2021P
Depreciation and amortization fall to
Subscription Revenue 4,748 1,236 1,253 1,262 1,259 5,010 5,311 5,576 5,799 5,973 6,153 meet capital spending. Previous
Growth 3.7% 4.8% 6.1% 5.2% 6.0% 5.5% 6.0% 5.0% 4.0% 3.0% 3.0% years D&A was increased to account
Content and Other Revenue 867 270 214 164 226 874 883 892 901 910 919
for unusually high acquisition costs
Growth 5.7% 23.3% (16.7%) (1.8%) 1.0% 0.8% 1.0% 1.0% 1.0% 1.0% 1.0%

Gross Profit 2,804 723 759 736 767 2,985 3,221 3,461 3,585 3,683 3,783
% Margin 49.9% 48.0% 51.7% 51.6% 51.6% 50.7% 52.0% 53.5% 53.5% 53.5% 53.5%

Depreciation and amortization (95) (22) (23) (21) (24) (90) (101) (97) (92) (86) (84)
as % of Revenue 2.0% 1.8% 1.8% 1.7% 1.9% 1.8% 1.9% 1.7% 1.6% 1.4% 1.4%
Capital spending is in line with HBO’s
EBITDA 1,955 499 504 551 622 2,088 2,320 2,520 2,610 2,682 2,755 historical data
% Margin 41.2% 40.4% 40.2% 43.7% 49.4% 41.7% 43.7% 45.2% 45.0% 44.9% 44.8%

Capex (68) (19) (74) (77) (81) (84) (86) (88)

as % of Revenue (1.4%) (1.5%) (1.5%) (1.5%) (1.4%) (1.4%) (1.4%) (1.4%) Working capital was taken as a
Change in Working Capital (7) (29) (26) (22) (17) (18)
percent of revenue consistent with
% of change in revenue (9.7%) (9.7%) (9.8%) (9.8%) (9.9%) (9.9%) industry average

Sources: TWX 10-k & 10-Q

18
HBO Discounted Cash Flow
Cash Flows x WACC Calculation
all in $millions

4Q16P 2017P 2018P 2019P 2020P 2021P Market Rate 9.50%

Discount period 0.25 1.25 2.25 3.25 4.25 5.25 Risk Free Rate 4.00%
Beta 1.3
EBIT $628 $2,343 $2,552 $2,652 $2,733 $2,812 Cost of Equity 11.04%
Tax (220) (820) (893) (928) (957) (984) Credit Spread 1.81%
Pretax Cost of Debt 5.81%
EBIAT 408 1,523 1,659 1,724 1,777 1,828
Tax Rate 35.00%
D&A 24 101 97 92 86 84
Cost of Debt 3.78%
Changes in working capital (7) (29) (26) (22) (17) (18)
Debt/Equity 40.5%
Capital expenditures (19) (77) (81) (84) (86) (88)
Weight of Debt 28.85%
Free Cash Flow $407 $1,517 $1,649 $1,710 $1,759 $1,806
Weight of Equity 71.15%
Present value of FCF 398 1,363 1,360 1,295 1,222 1,152 WACC 8.94%
Perpetuity Growth Perpetuity Growth Sensitivity LT Growth Rate 2.75%
Sum of PV of FCF 6,789.9 LT Growth Rate:
Risk free rate is the normalized
Terminal Value 29,953.2 $25,893 2.25% 2.50% 2.75% 3.00% 3.25%
20yr US Treasury yield
PV of terminal value 19,103.5 8.44% 26,359 27,228 28,173 29,205 30,336
Implied Enterprise Value 25,893.3 8.69% 25,332 26,125 26,985 27,921 28,942
Implied exit multiple 10.87x WACC: 8.94% 24,381 25,108 25,893 26,745 27,672 Weights of debt and equity taken
9.19% 23,498 24,166 24,886 25,664 26,508 from median industry capital
9.44% 22,677 23,293 23,954 24,668 25,438 structures

Valuation Range: $24,166 - $27,901 mm Market rate is base US Equity cost

of capital used by Duff & Phelps

Sources: TWX 10-k & 10-Q; Duff & Phelps Equity Risk Premium Client Alert, March 2016
19
HBO Comparable Company Analysis
Final Comps
3.0 6.0 8.0 10.0 12.0 #
Company Enterprise NTM EBITDA 3 Yr Sales
Name Value ($mm) EV/EBITDA Margin Growth Est.

HBO -- -- 32.3% 15.2% NTM

Expected Multiple Range EV/EBITDA
The Walt Disney Company 171,263 9.8x 26.3% 15.7%
High 12.0x
CBS Corporation 33,637 9.7x 21.5% 6.2%
Netflix, Inc. 53,469 56.4x 3.5% 99.1% Low 9.5x
Starz 4,255 8.6x 21.6% 9.5%
Twenty-First Century Fox, Inc. 66,861 9.2x 22.2% 6.6% Expected Valuation Range Implied EV
Discovery Communications, Inc. 23,034 9.1x 32.6% 14.5% High $26,469
Lions Gate Entertainment Corp. 4,353 15.0x (1.8%) 83.2%* Low $20,913
Comcast Corporation 210,889 7.7x 21.1% 19.2%
Time Warner** 83,652 9.4x 27.9% 15.0%

High 210,889 56.4x 32.6% 99.1%

Median 43,553 9.5x 21.6% 15.1%
Mean 70,970 15.7x 18.4% 31.8%
Low 4,255 7.7x (1.8%) 6.2%
*Lions Gate growth includes the acquisition of Starz
**Time Warner statistics as of Sept 2016 (before acquisition announcement)
Sources: Capital IQ
20
HBO Precedent Transaction Analysis
X Transactions

Implied EBITDA LTM

Announce Date Target Buyers/Investors Percent Sought Consideration EV ($mm) Margin EV/EBITDA

4/28/16 DreamWorks Animation SKG Inc. NBCUniversal Media, LLC 100.00% Cash 4,147 12.5% 34.3x
5/26/15 Time Warner Cable Inc. Charter Communications 100.00% Cash; Equity 78,200 34.4% 9.8x
6/30/16 Starz Lions Gate Entertainment Corp 95.37% Cash; Equity 4,159 21.6% 11.3x
2/12/13 NBCUniversal Media, LLC Comcast Corporation 49.00% Cash; Equity 39,997 22.8% 9.3x
10/22/16 Time Warner Inc. AT&T, Inc. 100.00% Cash; Equity 107,056 27.9% 12.6x

High 107,056 34.4% 34.3x

Mean 46,712 23.8% 15.5x
Median 39,997 21.6% 11.3x
Low 4,147 12.5% 9.3x

Expected Multiple Range EV/EBITDA

High 15.0x
Low 12.5x
Valuation Range:
Expected Valuation Range ($mm) Implied EV $27,571 - $33,086 mm
High 33,086
Low 27,571

Sources: Capital IQ
21
Valuation Football Field
Valuation Ranges
$35,000

$33,086
$33,000

$31,000

$29,000
$27,921

$27,000 $26,469 $27,571

Suggested Valuation Range:
Enterprise Value ($mm)

$25,000 $28,000 - $32,000 mm

$24,166
$23,000

$21,000
$20,913

$19,000

$17,000

$15,000
DCF - Perpituity Growth Comparable Companies Precedent Transactions

22
 Potential Buyers

23
Financial Buyers
Definition Leveraged Buyout (LBO)
Financial Buyer: Investors interested in return they • Methodology for the acquisition of a company
can get from buying a business using debt to finance a large portion of the
o Known as a private equity (PE) firm purchase price

Purchase Price Exit Strategies

• PE firms often pay less than strategic buyers Sale of business: Sell company to strategic buyer or
because they don’t realize synergies another financial buyer
• Small equity stake from PE fund, remainder o Strategic buyers often pay a higher price for
funded by leverage synergies
Initial Public Offering (IPO): Sells a portion of shares
through equity offering
o Partial monetization of investment initially,
creating a liquid market for investment

Sources: Investment Banking by Rosenbaum and Pearl; Deal Book; TWX 10k
24
Strong LBO Candidate Characteristics
Characteristic Analysis HBO
Strong Cash Flow Generation •
• Ability to pay down debt and make interest payments
Strong brand recognition and stable customer demand resulting in
consistent monthly payments 
Growth Opportunities
• Creates EBITDA multiple expansion and increase • Saturated market with strong competition
Enterprise Value

Low NWC and Capex Requirements • Programming costs ~50% of revenues

• Enhances a company’s cash flow generation

Strong Asset Base

• Pledged as collateral against a loan and dictates debt • Illiquid intangible assets, rights to media content
available for LBO

Proven Management Team • Lavish corporate culture will conflict with cost saving efforts of a
• Necessary to operate leveraged company financial buyer

Leading and Defensible Market Position •

• Predicts strong cash flow generation
49 million domestic subscribers with award winning content Game
of Thrones and True Detective 
Sources: Investment Banking by Rosenbaum and Pearl; Deal Book; TWX 10k
25
Strategic Buyers
Strategy Premium
Strategic Buyer: Buyer that looks for synergies Maximum Premium: present value of synergies
between its existing business and target company • Higher premiums than financial buyers cause
strategic buyers to pay more for acquisitions
Types of Synergies:
• Cost • Revenue
• Tax • Financial

Stock Purchase Cash Purchase

• Use an exchange ratio to trade buyer shares for • Use cash or issue debt to buy company
seller shares o Debt financing options: revolving credit, term
𝑆ℎ𝑎𝑟𝑒𝑠 𝑖𝑠𝑠𝑢𝑒𝑑 𝑏𝑦 𝑎𝑐𝑞𝑢𝑖𝑟𝑖𝑛𝑔 𝑐𝑜𝑚𝑝𝑎𝑛𝑦 loan, bond, note, commercial paper
Exchange Ratio = • Cheapest purchase consideration from tax
𝐴𝑐𝑞𝑢𝑖𝑟𝑒𝑑 𝑐𝑜𝑚𝑝𝑎𝑛𝑦 𝑠ℎ𝑎𝑟𝑒𝑠
benefits
• More expensive to buyer
• Preferred by buyer because of the concrete
o Lack of interest payments provides more
purchase price vs. stock purchase
financial flexibility for issuer
• Often used in a merger of equals transaction
Sources: Investment Banking by Rosenbaum and Pearl; Deal Book; TWX 10k
26
Types of Synergies
Operating Synergies
Definition: Allows firms to increase operating income, revenue growth, or both

Sources of Operating Synergies HBO Application

Economies of scale • Merger with content creator creates cost

• Combined firm more cost-efficient and profitable synergies from production costs

Greater pricing power • HBO merges with an OTT service, increasing

• Stems from reduced competition and higher market share market share and power in SVOD

Combination of different functional strengths • The acquiring company has a more efficient
• Marketing skills, good product line, efficient supply chain supply chain with DVD sales and distribution

• An international content creator buys HBO,

Higher growth in new or existing markets
giving the company a stronger presence
• Occurs when a company acquires a firm in a different market
internationally

Sources: NYU.edu
27
Types of Synergies
Financial Synergies
Definition: Synergies that create higher cash flows or lower costs of capital

Sources of Financial Synergies HBO Application

Tax benefits • HBO is acquired by a European company with a

• Use of acquisition tax laws or using net operating losses to shelter
lower corporate tax rate
income of buyer

Increase in debt capacity • Merger of equals creates higher debt capacity

• Stability of combined company cash flows allows for more debt, and
for both companies
thus tax benefits

Combination of a firm with excess cash and a firm with project

• Company with a big balance sheet has funds
opportunities to develop HBO Now
• Projects can be funded from firm with excess cash and create value

Sources: NYU.edu
28
Strategic Buyer Characteristics
Pre-Disposition for Acquisitions Strategy Compatibility
• Companies tend to use same strategy for new • Interest in entering the SVOD and OTT market
business ventures • Media or technology company with similar
o Mergers and acquisitions corporate culture
o Research and development • Content creation

Capability for Large Acquisition Synergies

• Little long-term debt and/or large cash balance • More synergies equate to a higher premium
preferred • Acquirer characteristics for maximum synergies
o Can raise cash through equity offering or with HBO:
debt issuance o Global presence to expand HBO
• Necessary because stockholders prefer cash over internationally
stock for consideration o Competency in the media, content, or
streaming business
o Cash to invest in HBO Now

Sources: IBIS World; Investment Banking by Joseph Perella and Joshua Harris
29
Recommendation
Sale to Strategic Buyer
1. Synergy Opportunities
• HBO’s content creation platform is attractive to many potential strategic acquirers
o Synergy opportunities exist with both content creators and content distributors
o Economies of scale would reduce supply chain and/or production costs

2. Strategic Buyer Premium

• Strategic buyers have historically paid a premium for potential synergies
o Greater premiums help the board to best maximize shareholder value

3. Poor LBO Candidate

• High cost of producing new shows reduces cash flow available for debt repayment
o New content creation is a key driver of HBO’s success
• Small tangible asset base
o Limits ability for financial sponsor to add additional leverage

30
Google Profile
Company Overview Key Financials
Revenue $85,537 mm
EBITDA Margin 33.1%
CEO: Sundar Pichai EV/EBITDA 16.6x
Headquarters: Mountain View, CA Net Debt -$79,188 mm
Year Founded: 1998 Enterprise Value $453,075 mm

Prior Acquisitions Video Services Entry

• Google occasionally acquires multi-billion dollar • YouTube Red is a subscription based premium
companies to enter new industries YouTube
o $1.7 bn YouTube acquisition in 2006 – Online Video • Google is creating a new live “skinny” bundle TV
o $12.5 bn Motorola acquisition in 2011 – Smartphone streaming service off of its YouTube platform
o $3.2 bn Nest Labs acquisition in 2014 – Home automation
o CBS recently signed to distribute content
o 21st Century Fox, NBC, and Disney also in talks with Google

Sources: Alphabet 10k, google.com; wsj.com; Capital IQ

31
Google Synergies with HBO
Interest in Entering SVOD and OTT Space
• Google has shown interest in SVOD and OTT through new TV-streaming service,
‘Unplugged’
o Service will be a “skinny” bundle of TV channels, ranging from $25-$40
o CBS reached agreement with Google
o 21st Century Fox, NBCUniversal, and Walt Disney Co. also in talks with Google
• HBO can give Google an edge in the new skinny bundle space
o HBO content on Unplugged can create a premium service – at a premium price

Both Companies have a Large International Presence

• 46% of Google revenues and 37% of HBO subscribers are domestic
• Similar geographic presence will create an ease in HBO strategy integration to
Google
• International markets are a source of SVOD subscriber growth
Sources: Google 10k; Google Signs up CBS for Planned Web TV Service wsj.com; Capital IQ
32
Disney Profile
Company Overview Key Financials (as of LTM July 2 nd, 2016)

Revenue $56,002 mm
EBITDA Margin 30.63%
CEO: Bob Iger EV/EBITDA 9.3x
Headquarters: Burbank, CA Net Debt $15,214 mm
Year Founded: 1923 Enterprise Value $170,845 mm

Recent Activity Brands

• Disney took a large stake in Hulu in order to
gain access to streaming market
• The company has made large acquisitions to
increase its content portfolio
o $4.1 bn Lucasfilms acquisition in 2012
o $3.9 bn Marvel Studios acquisition in 2009

Sources: Capital IQ, Disney 10K FY2015; thewaltdisneycompany.com

33
Disney Synergies with HBO
Disney Fully Monetizes its Customers
• 40% of Disney’s FY2015 revenue was from consumer products, parks and resorts
• Disney can use popular HBO content to generate additional revenue
o Game of Thrones themed rollercoaster at theme parks
 Creates competitive edge against Universal Studios for older generations
o Memorabilia from content sold in Disney stores
 Costumes, toys, posters, DVDs
 Increased margin on content sold through Disney store

Synergies Available with Disney and HBO Strength in Content Creation

• HBO’s strength in the adult space and Disney’s strength with children can help each content
creator enter a different age bracket
• Disney content can be added to HBO Family channel and HBO Now
o More valuable subscription to families since quality content is available for all age groups

Sources: Disney 10k; Capital IQ

34
 Game of Thrones Damages

35
Background/Task
Background Task
• Game of Thrones is one of the most popular TV • Create a methodology to estimate the lost cash
shows on the air flows to HBO from the 2 million illegal downloads
o 23 million people viewed the 6th season of season 6 Game of Thrones
finale
• BitTorrent made pirated copies of the 6th season
available for download within hours of broadcast
o Over 2 million people illegally downloaded
the season
Traditional Cost of Game of Thrones Broad Methodology
• Watch live over 4 month release period on HBO 1. Estimate Lost Revenues
$15 x 4 months = $60 • Would the downloaders buy the season?
• Purchase season on DVD • How would they buy?
$35 • Could piracy drive future sales?
• Purchase Episodes over Amazon Prime or iTunes 2. Project effect on profits
$3.99 x 10 = $39.99 • What are the marginal costs associated with
revenues?
Sources: HBO.com
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Methodology
Estimating Lost Revenues Example
• Assume 40% of downloaders would make a purchase
• Estimate the percent of downloaders that would had the free version not been available
have bought the season had the season not been o 2,000,000
2,000,000x 40% = 800K
x 40% lost
= 800K unit
lost sales
unit sales
pirated
• The 15% of sales are physical copies while 85% are HBO
• Estimate the method of purchase for the lost subscriptions
o 800K800K
x 15% = 120K
x 15% physical
= 120K unitsunits
physical
buyers
o 800K800k
x 85% = 680K
x 85% subscriptions
= 680K subscriptions
o Find the breakdown of HBO subscribers vs.
physical units sold • On average, season 6 sells for $40
o Estimate the average length of an HBO o 120K x $ 40 = $4.8M lost revenue
120K x $40 = $4.8M lost revenue
subscription
• The average length of an HBO subscription is 4 months
• Value new subscribers added at $15
o Illegal downloaders may want to watch more 680K x 4 months x $15 = $40.8M lost revenue
HBO content after seeing Game of Thrones
• 5% of downloaders will create HBO subscriptions
o Illegal downloads could add subscribers
2M x 5% x 4 months x $15 = $6M gained revenue

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Methodology
Estimating Margins Example
• Physical Sales • Physical Sales
o Determine the margins on permanent o Assume a gross margin of 30%
content purchase $4.8M x 30% = $144,000 lost pretax income
 i.e. physical content (disks) or online marketplace
purchase (iTunes etc) • HBO Subscriptions
o Assume a marginal cost of 1%
• HBO Subscriptions
$40.8M - $6M = $34.8 Net lost revenue
o Estimate any marginal costs for new
subscribers $34.8M x (1-1%) = $34,452,000 lost pretax income
o Include lost gains from subscribers added
• Tax rate is assumed to be 35%
• Corporate Tax Rate
$34,596,000 x (1-35%) = $22,487,000 Damages
o Assumed 35%

Total Damages = $22,487,000

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Summary

1. HBO is a poor LBO candidate

2. We suggest a sale to a strategic buyer for $28 - $32 bn

Summary
3. Google and Disney are recommended potential buyers

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 Q&A

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