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Chris Baysden
How financially mighty is Game of Thrones?

In honor of the recent finale for Season 4 of HBO’s Game of Thrones, the JofA asked a business valuation expert to consider the financial might of the blockbuster franchise.

June 18, 2014
by Chris Baysden

Diehard Game of Thrones fans know that HBO wouldn’t trade the success of its medieval fantasy epic for a trio of dragon eggs or a castle full of Red Wedding gifts. But just how much does the show, whose fourth season debuted April 6 and wrapped on June 15, contribute to the network financially?

It’s not an idle question. Game of Thrones isn’t just popular entertainment—it’s also an extremely valuable chip in the subscriber “game” between the venerable premium cable channel and Internet Age upstarts such as Netflix. HBO hopes to fortify its business model against the threat of cable cord cutters precisely by keeping a tight grip on distribution rights to its addictive original content. Thanks to its exploding popularity, GOT has emerged as a centerpiece of HBO’s strategy.

Unfortunately, it’s impossible to know the show’s exact financial impact on the network without a detailed look at HBO’s financials, which parent Time Warner does not provide. And HBO spokesman Jeff Cusson said in an email that the network does not discuss revenue and profit figures for the show.

What is required, then, is a financial detective who can comb through disparate sources to determine what we know, what we think we know, and what we wish we knew about the show’s financials.

Enter Brad Pursel, CPA/ABV, the managing director at San Diego-based business valuation (BV) boutique firm Transcend Valuation LLC, which has provided valuation services to media properties in the past. Pursel pored over published reports to provide a glimpse into the show’s financial might. (For the record: Pursel’s firm does not work for HBO, and he does not have access to its internal financial information.)

Although Pursel has extensive experience with media properties, GOT offers an interesting challenge for a BV specialist, thanks to HBO’s opaque business model.

While most networks rely on commercials for a significant portion of their revenue, much of HBO’s revenue comes from subscription fees. The network offers a host of original programming, such as the cultural zeitgeist Girls, to say nothing of its slate of licensed movies. GOT’s third season was the network’s most popular original programming since the glory days of the mob drama The Sopranos.

Such a flagship property is bound to attract and retain subscribers—especially since HBO doesn’t sell digital or DVD copies of GOT until many months after the season ends. Yet, from the outside, it’s difficult to quantify exactly how many are paying specifically for the privilege of watching GOT as opposed to, say, Girls’ Millennials behaving badly in the Big Apple.  

Game of Thrones is a piece of the puzzle,” Pursel said.

Below, Pursel details (in a slightly edited format) what his research reveals about GOT’s finances (sources are provided via hyperlink):

Game of Thrones, Season 4

Time Warner owns HBO, which owns the television rights to the GOT franchise. In early February 2014, Time Warner formally released financial results for HBO. For 2013, HBO’s revenues were $4.9 billion with operating income of $1.7 billion. HBO is considered the most successful and valuable premium TV network. But what role does GOT play in HBO’s success?

Subscriptions: GOT’s Season 3 viewership eclipsed all but the 2004 season of The Sopranos. At an average of 14.2 million viewers per episode for Season 3 across original airings, encores, OnDemand, and HBO Go, the show’s viewership far exceeded that of any other HBO series. By comparison, Girls averaged only 5 million viewers for its most recent season. GOT’s Season 4 ratings have been higher than Season 3 ratings, with HBO recently announcing that the show is now the most watched program in its history.

HBO does not report data such as viewership across shows or the reasons individual subscribers sign up for the premium channel. Not knowing how many viewers subscribe to HBO primarily to watch GOT is the biggest stumbling block to determining how much revenue the show generates for the network. Here’s what we do know: The network has 117 million subscribers worldwide and 28 million in the United States. HBO reportedly receives 50% of the subscription fee for its new subscribers, and its cable partners receive the other 50%. So one scenario, assuming an average monthly subscription cost of $15, is that HBO’s take would be $7.50 per month, or $90 per year per subscriber.

Here’s a hypothetical example of how that could translate into big bucks for the network: If only 10% of its U.S. subscriber base, or 20% of the Season 3 GOT audience, subscribed to HBO for Season 4 of GOT, the revenues to HBO on 2.8 million subscribers at $90 a year would be $252 million.

Foreign licensing fees: HBO reportedly receives $2.6 million per episode in foreign licensing fees, but this amount may not reflect GOT’s increased popularity. Therefore, based on 10 episodes for Season 4, the amount of foreign licensing fees could be at least $26 million.

DVD/Blu-Ray Sales: While total Blu-ray/DVD sales breakdowns are not available worldwide, the numbers that are available can provide a sense of scale. In the United States, 975,593 DVDs of Season 1 were sold in 2012, which was followed by 623,529 DVDs of Season 2 sold in 2013. Blu-ray sales of Season 1 were 533,952 units in 2012, which was followed by 509,772 units of Season 2 in 2013. Sales of Season 1 for DVDs/Blu-rays in the U.S. totaled $57.2 million, while sales of Season 2 for DVDs/Blu-rays in the United States totaled only $37.3 million. (Increased digital downloads help explain the decline.) HBO’s estimated profit margin for DVDs is 50%.  

GOT is highly popular internationally, which also increases HBO’s profit potential. For example, in the U.K. alone, 190,000 DVDs of Season 3 were sold during the first week of its release.

Online downloads: This is another instance where the partial information that is available can provide at least a sense of scale. Here’s what we know:355,000 individual episodes of Season 2 were downloaded on the first day of GOT’s release through online retailers such as iTunes and Amazon.com. Based on an average download price ($3.57) and HBO’s estimated split on such sales (70%), the estimated profit equals $887,000 for this single day.

Due to limited availability of HBO in many international markets, GOT is highly pirated internationally. GOT was the most pirated TV show in 2012 and 2013, respectively, which represents potentially lost income. The Season 3 finale alone reportedly was illegally downloaded 5.9 million times. However, the nature of the relationship between HBO and its premium subscriber base limits HBO’s ability to monetize the demand for GOT among those unable or unwilling to pay for either basic cable and/or the bundled premium channel.

Future syndication rights: HBO sold syndication rights for The Sopranos for $2.5 million per episode to A&E in 2005. However, GOT’s producers have estimated that there may only be content to carry the series through seven or eight seasons, or an estimated 70 or 80 episodes. (Editor’s note: One hundred episodes historically was the magic number a show needed to go into syndication, though, as The Sopranos (86 episodes) illustrates, that’s not always the case anymore.) However, it is uncertain what impact GOT’s graphic content, changing technology, and HBO’s evolving distribution strategy might have on such potential revenue. For instance, the network recently reached a deal allowing Amazon Prime to stream a host of older HBO shows.

Merchandising:No data reported.

Production budget:Season 1, 2, and 3 production budgets were estimated to be around $60 million, $70 million, and $50 million, respectively. Advertising, infrastructure, customer service, billing, and other functions are mostly covered by HBO’s distribution channel, the cable companies. GOT has received generous tax incentives from shooting in locations such as Northern Ireland, which may mean that GOT’s producers were able to sustain a similar production budget for Season 4.

Conclusion

GOT’s true value is impossible to quantify without additional data from HBO about its revenue streams or its subscribers’ viewing habits. But the available numbers indicate that the show is a powerhouse franchise that directly and indirectly contributes a sizable chunk of coin to the network’s coffers.

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Chris Baysden is a senior editor with the AICPA Magazines and Newsletters team.

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