I think you have a good grasp of how the execs at Time Warner Inc. (not TW Cable) see it. One can read the earnings call transcripts on seekingalpha where they all but spell it out.

But, just to make it clear here for Chuck and others (rather than wasting time reading earnings' transcripts):

1) As soon as HBO offers their content via other dist. channels, the cable and satellite companies claim in their negotiations that the content is now worth less and they deserve to pay lower rates.

2) Lots of people pay for HBO without ever watching it (i.e. my parents), simply because they'd rather just pay for the premium package than figure out which channels to subscribe to. They are like non-customer subscribers. HBO et al would not see a dime from these people otherwise.

Also, HBO collects revenue from real subscribers based on the promise of high-quality content down the road. They satisfy this requirement often enough that a huge portion of all cable subscribers automatically upgrade to HBO. An a la carte model would allow those subscribers to wait-and-see; instead of investing effort to get engaged with a show like Treme, they'd sit back and wait for the show's merit to be validated by other people, and opt in only to the shows that were immediately compelling.

Interesting. I should probably clarify that I'm paraphrasing CEO Jeff Bewkes's thoughts given a couple quarters ago; these aren't my own thoughts. It seems like you have found further reasoning on your own which makes sense, and would give greater justifications to the execs to shy away from a la carte offerings. It just makes no business sense with two-tiered distribution and bundling.

Ok, now we're talking. So lets deconstruct this argument a bit (I realize its not "your" argument, it is the offered argument)

"The issue is that it would be financially irrational of them to do so, because their subscribers would defect to the online offering; they would, in effect, be offering a fire-sale on their most valuable offering."

There are three claims embedded in this argument let's break them apart individually.

1] "Users of HBO only subscribe to HBO for the original content."

Let's stipulate that this is a rational market. You've got people who pay for "all" of HBO (which spends most of its air-time showing 'movies' not original content), people who pay for it only for the original content. What is that ratio?

I'll claim that most (aka more than 51% :-) of their subscribers are movie watchers. On Comcast they have 8 channels, HBO, HBO2, HBO Family, HBO Comedy, HBO Signature, HBO Latino, HBO West, and HBO Zone. The bulk of the content is movies. Based on the value proposition "you have to pay for 8 channels at an additional $10/month ($120/year) to get your one original content show." And the fact that boxed sets of the previous year's episodes are offered for $40 - $60. I claim that the majority of HBO's paid subscription is there for the movies, and that they get HBO created content is a 'nice to have' feature.

2] "The number of people who don't subscribe to HBO because they are only interested in one show or perhaps a small number of original shows is quite small."

I don't know that number of course. But one could reason about it if you knew the resale rate of the boxed sets of original content. That is an imperfect indicator since you don't have survey data that says "are you a subscriber to HBO or not?" and you don't know which of their original content shows would continue to hold value past their air date (dramas sure, newsy stuff not so much). If someone knows what the sales rank of those boxed sets are though could get an indication. They are quite popular on bittorrent so clearly there is a demand (I know that isn't really in question)

3] "The original content is the 'most valuable offering' and the revenue generated for that net original content in a two tier model would be significantly less (fire-sale) than their current revenue."

My claim is that the number of people who subscribe to HBO just for the original content is quite low (its not a good value) thus offering the original content through another channel would not change the value proposition to a material number of current subscribers.

But capturing the revenue from people who would subscribe to a service that offered the original content would increase their bottom line.

I am really surprised they haven't A/B tested this much. Put an original series out there and offer it through a third party service as well using a modified release-window model (say a week).

HBO is subsidized by the price of the entire cable bill. There are people who get cable in large part because they want access to HBO; HBO captures a portion of that revenue too.

HBO has stated directly that they would lose money if they offered a la carte access to their content. Recurring revenue is an extremely powerful thing; if you have a business model that works that drives recurring revenue, you stick with it.

HBO's business model works extraordinarily well; they have almost 30 million subscribers.

Ok, I think you've accurately communicated HBO's reasoning for thinking this would be a bad idea. I'm not persuaded by their argument. For the reasons that I enumerated.

I completely accept that they wouldn't be persuaded by mine either if that helps. I firmly believe however that someone will adopt this sort of model and then we'll have an empirical example to talk about.

Your second paragraph here is actually the root of my argument as well! I agree strongly. Content is inevitably going to be product for the direct Internet market, and that model will eventually supplant the pay TV model.

HBO is itself effectively just a middleman (at least for most of the content we care about). Maybe we should stop talking about what HBO should do, and start talking about what companies like Blown Deadline (David Simon's production company) should do. Again, my sense is that many more potential viable productions exist than are greenlit by AMC, FX, HBO, and Showtime.