How Netflix could finally beat HBO

"The goal," Ted Sarandos, chief content officer for Netflix, told GQ earlier this year, "is to become HBO faster than HBO can become us."

That wasn't just empty talk. This week, Netflix announced that it had passed 30 million domestic subscribers, beating HBO's 28.7 million, according to analysts from SNL Kagan.

The two are often cast in David-versus-Goliath terms. Cord-cutters, upset that they can't watch HBO shows like Game of Thrones without paying $15 to $20 on top of their monthly cable bill, are often rooting for Netflix as the underdog.

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It's too early to call Netflix the winner, of course, considering that HBO is still immensely profitable. In July, after Netflix's drama House of Cards gained nine Emmy nominations, Variety's Todd Spangler was quick to point out that HBO actually produces and owns most of its original content — meaning it profits handsomely from foreign TV rights and DVD sales.

Netflix licenses its original content, spending far less than HBO, but also watching the profits from big hits go elsewhere.

Last year, HBO reported revenue of $4.5 billion, compared to Netflix at $3.6 billion, with a lot of that money going towards expanding into international markets and building infrastructure. HBO, a 40-year-old veteran with longstanding contracts with cable companies, doesn't spend anywhere near as much money trying to get into more people's homes.

Still, there are signs that Netflix could, eventually, dethrone HBO and force Goliath to change course.

First, while HBO is currently more profitable than Netflix, the two companies "make roughly the same amount of money per paying subscriber," wrote All Things D's Peter Kafka. In the long run, Netflix could start closing the profit gap, especially as it moves towards HBO's more traditional studio model, taking more risk with each original show but also seeing a bigger return.

The future looks brighter for Netflix for another reason — it's easy to convince young people to shell out $7.99 for Netflix's streaming-only service. While HBO does offer a digital streaming service, HBO GO, it comes as part of a cable package, which can cost around $100 before the additional HBO surcharge.

That has left Netflix as the main content provider for a key demographic: College students.

"The general sentiment goes something like this: If it's not on Netflix, why bother?" wrote professor Anne Helen Petersen in the Los Angeles Review of Books earlier this month, noting that many of her students have never watched most HBO shows, save for the few they might pirate. That could be a huge advantage for Netflix, she argued:

Not only that, but Netflix is in talks with cable providers to be included in future cable packages for as little as $7.99.

Now imagine Netflix with a bona fide cultural phenomenon, like HBO's Sex and the City, The Sopranos, or Game of Thrones, along with increased reach via cable providers and a younger, more influential subscriber base. That future certainly looks bright — probably too bright for HBO's liking.