Duff & Phelps Youniversity Deal Challenge

YOUniversity Deal Challenge
Valuation of Home Box Office (HBO)
November 11 2016
Prepared for

Time Warner Engagement Team
Duff & Phelps 2
Zachary Spencer
Junior
• Auburn University
• Finance
• Spring 2018
Bailey Sullivan
Sophomore
• Industrial Engineering
• Spring 2019
Jordan Carr
Junior
• Mechanical Engineering
• Spring 2018

Time Warner Engagement Team Cont.
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David Alderman
Senior
• Mechanical Engineering
• Spring 2017
Jason McKinley
Senior
• Information Systems
• Spring 2017
Daniel Robinson
1st Year MBA
• Finance
• Spring 2017

4
Section Topic Page
I. Industry Overview 4
II. Executive Summary 12
III. Deliverable 1: Fair Market Value Analysis 14
IV. Deliverable 2: Buyer Types & Recommendations 20
V. Deliverable 3: Damages Methodology and Valuation 29
Appendix A Financial Information 37
Appendix B Financial Forecasts 39
Appendix C Damages Calculation and Select Data 43
Table of Contents
Duff & Phelps

Industry Overview
Section 1
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• Entertainment businesses are characterized by one of two activities:
– Content Creation
– Distribution
• Content creation requires substantial upfront investment and often utilizes a deficit financing model
• Distributors generate revenues from various kinds of distribution arrangements:
– Sale or rental of their content to consumers
– Advertising sales
– Subscription service sales.
• The recent convergence of media platforms is providing both challenges and opportunities to market
participants.
– For example, content creation control has begun from businesses to the hands of consumers. (User
generated content is making up an increasing portion of the content provided on the Internet)
– New forms of distribution, (e.g. mobile, digital download, etc.) have resulted in opportunities (i.e.
Netflix, YouTube, Facebook) and threats (Cord Cutters, publishing industry, music labels, etc.) for
the industry players.
Entertainment & Media Platforms
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Television Industry Overview
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• The television industry is comprised of companies (both fee-based
and free) that produce and distribute entertainment content.
• Traditionally, Broadcasters have relied on local TV stations that
transmit TV signals over the air through their FCC licenses.
• Cable Networks, on the other hand, rely on the multiple-system
operators (“MSOs”) and telco companies (e.g., AT&T) for
distribution to American households.
• Pay-TV is a subset of the Cable Networks segment of the
Television Industry, where consumers can access content by
paying MSOs a fee for a specific channel (HBO).
• Subscription Video on Demand (SVOD) services use a
subscription business model, where subscribers are charged a
monthly fee to access unlimited instant streaming to a program
library. HBO NOW began in 2015 and is provided to subscribers
via SVOD.
Content
Distribution
Consumers

Global Entertainment & Media Industry Structure
Global Entertainment & Media
Industry
Television
Content
Major Studios
Independent
Production
Companies
Distribution
Broadcasters
Terrestrial
Television
Owned &
Ooperated
CBS, Fox
NBC, ABC
Independent
Sinclair
Hearst
Media General
Gannett
Over-the-Top
Cable Networks
Over-the-Top
Netflix
Hulu
WWE Network
UFC Fight Pass
HBO NOW
Sling TV
PlayStation Vue
Multiple-System
Operators
(MSOs)
Wired Cable
Comcast
Time Warner
Cox
Verizon
AT&T
Alternate
Delivery
Systems
DirecTV
Dish Network
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Movie Studio
The following illustrates the landscape of the television industry using 21st Century Fox (Fox) as an example:
• Cable Networks ➦ Fox produces and licenses programming for distribution primarily through cable television
systems, direct broadcast satellite operators, telecommunications companies and online video distributors.
• Broadcast Television ➦ Fox operates two main segments:
 Fox Broadcasting Company – Fox has 207 FOX affiliates, including
17 stations owned and operated by the Company, which reach
approximately 99% of all U.S. television households.
 Fox Television Stations – owns and operates 28 full power
stations. 17 stations are FOX affiliates.10 stations
are MyNetworkTV stations. 1 station is independent.
• Over-the-Top (OTT) ➦ The Company has an
approximate 33% equity interest in Hulu which
operates an online video service that offers video
content from Fox, the other one-third partners in
Hulu, NBCUniversal and The Walt Disney Company,
as well as over 400 other third party content licensors.
• Pay-TV (Premium Cable) ➦ Currently, Century Fox
does note operate a Premium Cable Channel.
Pay-TV (Premium Cable)
Cable
Networks
Over-the-Top (OTT)
Broadcast
Television
Television Landscape: 21st Century Fox Example
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• Subscriber-based business; No advertising
– Direct selling to customers
– Partnership with cable operators
• Premium Content
• Pay-per-view sports content
• Video on Demand
• General strategy: Releasing theatrical titles on TV and
producing and airing original content (films, TV series)
• Reliance on film studios and producers for quality products
• Providing a specific program that appeals to each segment of the population
– Creating original content (e.g. The Sopranos, Sex and the City, Game of Thrones)
Pay-TV Industry Overview
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Pay-TV Providers
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• Netflix has been targeting the premium network window
for several years and has secured Relativity Media film
rights, renewed its deal with DreamWorks Animation in
2016, and secured Walt Disney Co. film rights beginning
with those released in 2016.
• Netflix paid $30.0 million in 2008 to gain the rights to
stream Starz films. The deal expired in 2012.
• HBO / Cinemax extended its deal with Universal Studios
and Fox until 2021 and 2022, respectively.
• Epix, a joint venture of Viacom (Paramount Pictures),
Metro-Goldwyn-Myer and Lions Gate Entertainment, was
launched in 2009 as a premium cable network and a
subscription video on demand service.
• Original programming may receive much of the press,
but theatrical films remain a significant content source for
premium networks.
• On June 30, 2016, Lions Gate Entertainment Corp.
(NYSE:LGF) agreed to acquire Starz Inc.
(NASDAQ:STRZA) for $4.4 billion in cash and stock.

Executive Summary
Section 2
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Executive Summary
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• The Entertainment and media industry continues to change as consumer demand
increases for smart–connected–device and internet media distribution platforms.
• These changes have led to increased M&A activity across the industry as larger firms
adapt to industry restructuring.
• Home Box Office (HBO) has significant concerns over online piracy of their most–
watched show, Game of Thrones, via the software titled Bit Torrent.
• Increase in subscribers due to new distribution platform HBO NOW. The addition of
HBO NOW has led to increase in growth and potential of future increase in subscriber
revenue.
• The FMV of HBO is determined to be $29.95 billion based on a weighted average of
discounted cash flows, trading comparables, and precedent transactions valuations.
• Amazon is willing to pay the highest premium for HBO as they will be able to extract the
greatest value through Amazon Video and are financially capable.
• Lawsuit against Bit Torrent for piracy of Game of Thrones should not be pursued
because increase in demand is greater than cost incurred from the illegal download of
2 million copies.
Situation Overview
Valuation and
Potential Buyers
Recommendations
• HBO content and platforms has steered HBO as a high potential target for strategic
buyers looking for new content and to enter Over–the–Top (OTT) distribution platform.
• Amazon and Apple are able to integrate HBO content and platforms into Amazon’s
OTT platform Amazon Video to boost OTT market share.

Deliverable 1:
Fair Market Value Analysis1
Section 3
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1. Financial Data sourced from Bloomberg Terminal (licensed) on 11/06/2016.

Discounted Cash Flow
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$mm, except per share figures
* See Financial Projections for Net Working Capital (#11); * See Appendix A for WACC
Enterprise Value
Perpetuity Growth Rate
$36,764 1.5% 2.0% 2.5% 3.0% 3.5%
10.0% $28,813 $30,230 $31,836 $33,672 $35,790
9.5% $30,632 $32,262 $34,124 $36,273 $38,780
9.0% $32,695 $34,584 $36,764 $39,307 $42,313
8.5% $35,053 $37,265 $39,845 $42,894 $46,554
8.0% $37,775 $40,393 $43,486 $47,200 $51,738
WACC
Enterprise Value (Perpetuity)
Normalized FCF in last forecast period (t) 2,595.3
Normalized FCFt+1
2,660.2
Long term growth rate (g) 2.50%
Terminal value 40,945.8
Present value of terminal value 28,685.8
Present value of stage 1 cash flows 8,078.3
Enterprise value 36,764.1
Implied TV exit EBITDA multiple 14.00x
2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E
Income Statement
Total Revenues 4,686.0 4,890.0 5,398.0 5,615.0 6,015.5 6,413.9 6,782.7 7,112.9 7,397.4
% growth 4.35% 10.39% 4.02% 7.13% 6.62% 5.75% 4.87% 4.00%
Total Cost of Revenues 2,400.0 2,368.0 2,708.0 2,811.0 3,007.7 3,207.0 3,391.3 3,556.5 3,698.7
Gross Profit 2,286.0 2,522.0 2,690.0 2,804.0 3,007.7 3,207.0 3,391.3 3,556.5 3,698.7
% margin 48.78% 51.57% 49.83% 49.94% 50.00% 50.00% 50.00% 50.00% 50.00%
Total Operating Expenses 647.0 631.0 813.0 831.0 872.2 930.0 983.5 1,031.4 1,072.6
EBITDA 1,639.0 1,891.0 1,877.0 1,973.0 2,135.5 2,276.9 2,407.8 2,525.1 2,626.1
% margin 34.98% 38.67% 34.77% 35.14% 35.50% 35.50% 35.50% 35.50% 35.50%
Depreciation & Amortization 92.0 100.0 91.0 95.0 102.3 105.2 107.2 103.8 103.6
EBIT 1,547.0 1,791.0 1,786.0 1,878.0 2,033.2 2,171.8 2,300.7 2,421.2 2,522.5
% margin 33.01% 36.63% 33.09% 33.45% 33.80% 33.86% 33.92% 34.04% 34.10%
Tax Rate 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%
EBIAT (NOPAT) 1,546.7 1,790.7 1,785.7 1,877.7 2,032.9 2,171.5 2,300.4 2,420.9 2,522.2
Depreciation and amortization 92.0 100.0 91.0 95.0 102.3 105.2 107.2 103.8 103.6
Change in Net Working Captial 82.1 81.7 75.6 67.7 58.3
Capital Expenditures (72.2) (77.0) (81.4) (85.4) (88.8)
Unlevered FCF 1,638.7 1,890.7 1,876.7 1,972.7 2,145.1 2,281.3 2,401.7 2,507.1 2,595.3
Discount factor 13.1% 113.1% 213.1% 313.1% 413.1%
Present value of FCF 276.9 2,069.6 1,999.0 1,914.5 1,818.2

Trading Comps
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• Trading comparables is a valuation model that incorporates the trading value of
publicly traded companies that are similar to the company in question.
• Each company listed is included because these companies are the best publicly
traded companies to represent the value of HBO as a standalone company.
• Median of LTM EV/EBITDA is determined as best multiple to represent HBO value
as mean was skewed by Netflix.
Comments
Current Share Equity Enterprise LTM LTM LTM EBITDA Enterprise Value /
Company Ticker Price Value Value Sales EBITDA Margin LTM Sales LTM EBITDA
Time Warner Inc. TWX 86.42$ 69,063.3 91,226.3 28,506.0 7,256.0 25.45% 3.20x 12.57x
Twenty -First Century Fox FOXA 26.94$ 50,135.3 66,743.3 27,755.0 6,749.0 24.32% 2.40x 9.89x
Viacom VIAB 36.56$ 14,496.0 26,932.0 13,050.0 3,528.0 27.03% 2.06x 7.63x
Discovery Communications DISCA 25.64$ 15,812.1 23,831.1 6,471.0 2,131.0 32.93% 3.68x 11.18x
Walt Disney DIS 92.45$ 150,217.6 169,384.6 56,002.0 17,868.0 31.91% 3.02x 9.48x
CBS Coporation CBS 57.01$ 25,357.2 34,135.2 14,442.0 2,954.0 20.45% 2.36x 11.56x
Netfilx NFLX 115.02$ 51,067.0 52,097.7 8,176.5 391.8 4.79% 6.37x 132.97x
Mean 53,735.5 66,335.7 22,057.5 5,839.7 23.84% 3.3 27.9
Median 50,135.3 52,097.7 14,442.0 3,528.0 25.45% 3.0 11.2
HBO Implied Enterprise Value
LTM
Sales
LTM
EBITDA
LTM
Sales
LTM
EBITDA
5,752.0 1,964.0 17,397.6 19,709.3
Implied Valuation of Home Box Office
As of 6/30/16 Multiple Range Implied EV
EBITDA 1,964 8.89x - 11.89x 17,458.7 - 23,350.7

Precedent Transactions
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• Precedent Transaction approach is a valuation model that incorporates the
transaction value of deals where the target is a comparable company. Precedent
Transaction is an included model as it incorporates an acquisition premium to the
value of the company in question.
• Each transaction listed is included because these transaction have targets very
comparable to HBO as a standalone company which will best represent HBO’s value.
• Median of LTM EV/EBITDA determined as best multiple to represent HBO value
Comments
Announcement Transaction LTM LTM EBITDA TV/LTM TV/LTM
TWC Inc Acquirer date Form of consideration value Sales EBITDA % Margin Sales EBITDA
Direct TV AT&T 5/18/2014 Partial Cash/Stock 66,668.8 31,479.0 8,287.0 26.3% 2.12x 8.04x
TWC Inc Charter Communications 5/26/2015 Partial Cash/Stock 79,249.8 22,617.0 8,244.0 36.5% 3.50x 9.61x
Marvel Walt Disney 8/31/2009 Partial Cash/Stock 3,834.3 632.4 322.9 51.1% 6.06x 11.87x
Starz Lions Gate Entertainment 6/30/2016 Partial Cash/Stock 4,137.0 1,734.0 395.6 22.8% 2.39x 10.46x
Mean 3.52x 10.00x
Median 2.94x 10.04x
HBO Implied Enterprise Value
LTM
Sales
LTM
EBITDA
TV/LTM
Sales
LTM
EBITDA
5,752.0 1,964.0 16,939.1 19,709.3
Implied Valuation of Home Box Office
LTM as of
6/30/16
Multiple
Range Implied EV
EBITDA 1,964 9.04x - 12.04x 17,745.3 - 23,637.3

Financial Statement Analysis
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Working Capital Forecast
Net Working Capital 1151.0 1233.1 1314.8 1390.4 1458.1 1516.4
WC/Revenue 20.50% 20.50% 20.50% 20.50% 20.50% 20.50%
Change in Net Working Capital 82.1 81.7 75.6 67.7 58.3
Subscription Forecast Assumptions
HBO NOW Launch date 4/7/2015
Latest Fisical Year End Date 12/31/2015
Year Fraction from Lauch to FY 2015 73.33%
Launch to FY 2015 New Subscribers 2.70
Launch to FY 2015 growth rate 5.83%
Annualized growth rate 7.95%
Assumptions
OTT Impact
• Number of subscribers in 2015 and subscriber growth from
launch of HBO NOW to fiscal year end of 2015 is 49 million and
2.7 million, respectively. (Found in TWX 2015 10K)
• Subscriber growth annualized from fraction of year from launch
to fiscal year end
• Subscription revenue grown by subscribers times revenue per
subscriber held at $97/subscriber
Other
• Net working capital is held at Industry Average and grown as a
percent of revenue.
Comments
2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E
Revenue Forecast
Revenues
Subscription 4,010.0 4,231.0 4,578.0 4,748.0 5,109.5 5,467.1 5,795.2 6,084.9 6,328.3
Content and Other 676.0 659.0 820.0 867.0 906.0 946.8 987.5 1,028.0 1,069.1
Total Revenues 4,686.0 4,890.0 5,398.0 5,615.0 6,015.5 6,413.9 6,782.7 7,112.9 7,397.4
Rev/Sub 100.9 96.9 97.0 97.0 97.0 97.0 97.0
Subscribers 45.4 49.0 52.7 56.4 59.7 62.7 65.2
Growth % 7.95% 7.50% 7.00% 6.00% 5.00% 4.00%
Content and other 676.0 659.0 820.0 867.0 906.0 946.8 987.5 1,028.0 1,069.1
Growth % (2.51%) 24.43% 5.73% 4.50% 4.50% 4.30% 4.10% 4.00%

Fair Market Value Calculation
Duff & Phelps 19December 20, 2016
Valuation Model Weight
Discounted Cash Flow 60.0%
Trading Comparables 20.0%
Precedent Transaction 20.0%
Fair Market Value
Implied Exit EBITDA Multiple 11.4x
Enterprise Value
36,764.1
19,736.8
19,709.3
29,947.7
Weighted Enterprise Value
22,058.4
3,947.4
3,941.9
• HBO’s FMV was determined to be 29.95 billion with an implied exit EBITDA multiple of 11.4x
• FMV was determined using a weighted average of each valuation model’s base case.
• The DCF was weighted at a higher percentage because of the ability to incorporate the impact of
their OTT business, HBO NOW.
• Implied Exit EBITDA multiple is for year 2020 and seems reasonable for a very successful
company looking to expand into OTT market.
Comments

Deliverable 2:
Buyer Type & Recommendations
Section 4
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Buyer Types
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• Value Criteria: Vertical/horizontal expansion to enhance existing
operations
• Typically a company in a parallel or equivalent industry. Pursues targets that
add value to existing segments and provide competitive advantages
• Willing to pay higher premiums due to future synergies and assumed added
value
• Vertical and/or horizontal expansion and/or strengthening weaker areas of
existing operations
• Value Criteria: Expected Future Earnings
• Typically a Private Equity Firm, Venture Capital Firm or Hedge Fund
• Pursues targets with robust earnings growth capacity, strong cash flow levels
and profitable exit opportunities
• Evaluates targets as stand-alone entities instead of integrating into existing
business operations
• Uses higher leverage ratios to finance acquisition; this increases IRR by
reducing equity exposure
Strategic
Financial

Buyer Type Comparison
Type of
Buyer
Synergies Leverage Premium
Time
Horizon
Exit
Opportunities
Strategic
• Integrate HBO into
existing content
productions
• High value brand
with very popular
content– increase
value of existing
content operations
• Combination
of equity and
debt financing
• Larger funding
resources
(access to
equity, etc.)
• Value enhancement
of existing
operations
• Elimination of
competitor/leverage
over current
competitor
• High Market Share
• Long
term(10+
years)
• Keep HBO as
subsidiary while
growing
profitability
• Sell for higher
premium
Financial
• Excellent and
innovative
management team
• Existing contracts
with leading media
providers (Amazon,
Apple, etc.)
• High use of
leverage to
increase ROE
• Utilize normal
cash flows to
pay off debt
and build
equity
• Valued brand with
popular content
• 4-7 years
before
selling
• Sell HBO for
premium by
continuing to
develop content
offerings

Strategic Buyer
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Pros
• Complements and enhances existing
media offerings
• Higher premium due to estimated
synergies
• Advantage over industry competitors
• Large existing customer base to
increase HBO subscriptions
Cons
• Consolidation of management team
• Loss of talent due to merger /
acquisition fears from employees
• Potential loss in brand value
Why Strategic?
• Technological and financial resources for the expansion of HBO offerings
• Existing content infrastructure that HBO will enhance to formulate competitive industry
presence
• Higher premium paid for value of HBO brand and operations
• Understanding of industry operations and growth structure
• Increased HBO subscription levels through existing customer database of acquirer
• Innovative environment for sustainable development

Potential Strategic Buyers

Buyer Analysis – Overview
In comparison to other companies in the buyer universe, Apple and Amazon are the leading choices.
Amazon.com, Inc. (NASDAQ: AMZN)
Headquartered: Seattle, WA
Founded: 1994
Employees: 230,800
Business: Online retailer with an extensive product
network and service capabilities including online
shopping and direct shipping.
Financial Data
Market Cap $349,675
P/E 168.19
EV/EBITDA 30.13x
Apple, Inc. (NASDAQ: AAPL)
Headquartered: Cupertino, CA
Founded: 1976
Employees: 116,000
Business: Designs and manufactures personal
computing and mobile communication devices in
addition to software and online content.
Financial Data
Market Cap $577,062
P/E 13.17
EV/EBITDA: 6.05x
• Diverse network of products and services, including
Amazon Prime
• Expanding content offerings through Amazon Studios
• Stable and extensive customer network
• No previous acquisition of cable network
• Seeking to expand into content space based on
guidance from executives
• Large cash position – ability to finance acquisition
• Looking for catalyst to offset declining iPhone sales
• No previous acquisition of cable network

Amazon
• Both service a diverse range
of customers
• Expand on existing HBO
contract that offers limited
programing
• Improve Amazon’s content
service, Amazon Studios,
through HBO offerings
• Strong projected free cash
flow
• Low leverage and high
coverage
• High cash balance
• Increased online consumer
traffic and Prime
subscriptions driven by
HBO’s content
• Acquire innovative HBO
management team
• Prime members enjoy
HBO’s popular content
library without a fee increase
“…we want things that customers will love, can grow to be large, will have strong financial returns and durable and can last for
decades…We have pillars of the business right now with Marketplace, AWS and Prime and we're actively looking for a fourth and
fifth pillar.” (Brian Olsavsky, Amazon CFO, Q3 Earnings Call)
Strategic Alignment Financing Ability Value Enhancement
• HBO could be bundled into the existing $99/year Prime
membership plan. Non-Prime members and/or current HBO
subscribers would have the option of an HBO only subscription
for the current monthly price of $14.99.
• The “Prime + HBO” bundle improves the experience of Prime
members while also recruiting new members from the HBO
viewer base.
Conclusion

Apple
• Expands current partnership
created through HBO Now
• Innovative company
structure to foster HBO’s
growth
• Provides HBO with
exposure to massive
customer network
• Strong cash balance
• Low cost of debt
• High level of free cash flow
• Reverse mediocre
performance of past content
servicing
• Jumpstart company sales
after period of declining
iPhone sales
• Enhance the experience of
Apple TV users through
fresh content offerings
“I would confirm that television has intense interest with me and many other people here. In terms of owning content and creating content, we have started
with focusing on some original content, as you point out… We've got a few things going there that we've talked about. And I think it's a great opportunity
for us both from a creation point of view and an ownership point of view. and so it's is an area that we're focused on…we’re always looking in the market
about things that could complement things that we do today, become features in something we do, or allow us to accelerate entry into a category that
we’re excited about…” (Tim Cook, Apple CEO, Q3 Earnings Call)
Strategic Alignment Financing Ability Value Enhancement
Conclusion
• Apple needs a growth catalyst to jumpstart company sales
following several periods of mediocre growth. HBO is an
innovative content provider that fits within Apple’s business model
and grants ownership rights to valuable media content.
• HBO would strengthen Apple’s competitive position as a content
provider through its reputable brand and popular media offerings.

Final Recommendation
• Amazon is the strongest candidate within the strategic buyer universe for the
following reasons:
– High level of value enhancement through integration within the Prime membership
package
– HBO drives news customers to Amazon’s platforms.
– Strategic alignment and financing capabilities to complete the acquisition

Deliverable 3:
Damages Methodology and Valuation
Section 5
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Piracy Industry Overview
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• Estimates suggest that piracy costs the film industry
approximately $20 billion per year.
• Bit Torrent is a popular peer-to-peer file sharing
website that is utilized by over 200 million users per
year.
• While cases against torrent websites are common,
the structure of the software makes it difficult to hold
the owner of the site accountable for piracy that
occurs through their platform.
• Piracy can increase viewership and publicity for TV
series but it will prove problematic unless additional
revenue can be realized as a result of the increased
publicity.
• Game of Thrones has become the most pirated
show in the world with a trend that has consistently
increased during it’s existence.
"We've been dealing with this for 20, 30 years—people sharing subs, running wires down the backs of
apartment buildings. Our experience is that it leads to more paying subs. I think you're right that Game of
Thrones is the most pirated show in the world. That's better than an Emmy.”
- Jeff Bewkes (CEO, Time Warner)

Drivers of Piracy and HBO’s “Solution”
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• The legal viewing price of a TV Series is the key driver that affects piracy
numbers.
• Cost to purchase a full season of Game of Thronesis comparable to
other major TV series
• HBO Now is priced approximately 50% higher than other subscriptions.
• Given that consumers heavily favor subscription over season purchases, this
increases piracy for HBO.
Price Level
Availability
• Piracy is a last resort for viewers who have no other way to access
content.
• 90% of GOT piracy occurs outside the US
• Release dates that differ by region incentivize piracy in that viewers want
to be current on the plot.
• In many areas across the globe, viewers are forced to pay for an entire
cable package to gain access to HBO if they are to watch legally.
HBO has taken steps to reduce the impact that these two drivers have on the level of piracy that occurs with GOT
• HBO Now ➦ Released in 2015, this standalone streaming service is subscription based and allows users to watch HBO content
for a monthly rate of $15. While this will help with piracy, subscription numbers are low – in part because customers can only use
HBO Now on Apple devices and also because it is only offered in the US.
• IP-Echelon ➦ HBO has recently enlisted the help of an anti-piracy firm, IP-Echelon to try to curtail piracy further.

• Damages can be simplified into two major
components:
– The number of viewers who would have
contributed to revenue (season purchase or
subscription) if piracy was not an option
– The average revenue contribution per customer
» This is calculated by using a weighted average
of the two consumption methods (monthly
subscriptions and full season purchase)1
Damages Calculation & Methodology
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Total
Damages
Number of
Piracy-Based
Viewers
willing to pay
Average
Revenue per
Customer
1. Analysis of comparable data, current revenue streams and online information allows for relevant assumptions to be made

Duff & Phelps 33
Total Damages =(Wview* Nview )[Wseas Pseas+ Wsub Psub]
Unmonetized Demand (Wview * Nview)
Method of Consumption Weights (Wseas , Wsub)
Revenue per Consumption Method (Pseas , Psub)
• Wview is the percent of piracy-based viewers who would pay to watch Game of Thrones if it were not
available through piracy.
• Nview is the estimated number of viewers who pirated Game of Thrones in 2016.
− Unmonetized Demand - the number of viewers that would contribute to revenue if piracy was not an option.
• Wseas is the percent of customers who would purchase the full season of Game of Thrones.
• Wsub is the percent of customers who would subscribe to HBO Now in order to gain access to GOT.
− These values can be roughly estimated using the common size income statement and looking at the percent of
revenue associated with “Subscriptions” vs. “Content.”
• Pseas is the price to purchase full season of GOT ($29 per season).
• Psub is the price to subscribe to HBO Now for the required time to watch entire season ($45 for three
months).

Duff & Phelps 34
Total Damages = 95% ∗ 2,000∗
10% ∗ $29 + 90% ∗ $45
• Given the high demand and interest for GOT, it is assumed
for that 95% of piracy-based viewers would choose to
purchase the series if piracy was not an option.
− When applied to the estimated two million piracy-based
viewers, this implies that 1.9 million viewers would transition to
purchasing GOT.
− Referring to the common size income statement, 85% of
revenues are generated through “Subscription Services” and
15% are generated through “Content & Other” services.
• Taking into account the content purchases by other media
platforms, weights for season purchases (Wseas) and
subscription purchases (Wsub) were determined to be 10%
and 90%, respectively.
− The price to purchase the full season (Pseas) is $29 and the
price for a three-month subscription (Psub) is $45.
Total Damages
$82, 4601
1Using this method, damages for the piracy associated with Game of Thrones were calculated to be $82.46
million – slightly less than ~1.5% of 2015 Revenues for HBO.

Precedent Piracy Litigation
Duff & Phelps 35
• One of the most notorious Torrent sites
and based in Sweden
• Prosecution called for over $3 million in
damages and prison time
• Court decided on community service
and $148,000 in damages awarded to a
film producer
In most cases targeting Torrent Websites, the owners or operators of the website are held
accountable in court. Two recent lawsuits are detailed below:
• Currently the most visited bit torrent
website in the world1
• Case filed by Universal Music, Sony
Music, Warner Music and the Swedish
and Nordisk film companies
• The ruling states that Pirate Bay’s
operations cannot be deemed as
infringement of copyright when these are
utilized by it’s users to pirate media.
1. www.techtimes.com

Litigation Recommendation
Duff & Phelps 36
Partial
Damages
Reparation
a possibility
Precedent Rulings
Subscribers held accountable
Few Trials on
Record
Although significant damages have been incurred as a result of Bit Torrent, precedent rulings on
torrent websites suggest that plaintiffs are typically awarded fractions of actual damages, if any
reparations are paid at all. For that reason, it is recommended that HBO consider the costs
associated with pursuing further legal action against Bit Torrent before filing a lawsuit.

Financial Information
Appendix A
Duff & Phelps 37

Weighted Average Cost of Capital
Duff & Phelps 38
Comparable Companies Unlevered Beta
Predicted Net Value of Debt/ Marginal Unlevered
Company Levered Beta Debt Equity Equity Tax Rate Beta
Time Warner Inc. 0.817 22,163.00 69,063.26 32.1% 38.0% 68.1%
Twenty-First Century 1.110 14,807.00 50,135.34 29.5% 38.0% 93.8%
Viacom 1.307 12,173.00 14,496.04 84.0% 38.0% 86.0%
Discovery 1.124 7,772.00 15,812.06 49.2% 38.0% 86.1%
Walt Disney 1.012 15,214.00 150,217.61 10.1% 38.0% 95.2%
CBS Corp 1.076 8,778.00 25,357.17 34.6% 38.0% 88.6%
Netflix 1.540 6,649.70 51,066.96 13.0% 38.0% 142.5%
Mean 1.07 39.9% 94.3%
Median 1.09 33.4% 88.6%
HBO Relevered Beta
Mean Target Target
Unlevered Debt/ Marginal Relevered
Beta Equity Tax Rate Beta
Relevered Beta 0.94 39.9% 38.0% 1.18
Company Name Net Debt Value of Equity Weighted Cost of Capital
Time Warner Inc 22,163.0 69,063.3 Capital Structure
Twent-First Century 14,807.0 50,135.3 Value of Debt 18.9%
Viacom 12,173.0 14,496.0 Value of Equity 81.1%
Discovery 7,772.0 15,812.1
Walt Disney 15,214.0 150,217.6 Cost of Debt
CBS Corp 8,778.0 25,357.2 Cost of Debt 2.21%
Netflix 6,649.7 51,067.0 Tax Rate 30.0%
Debt Adjustment Factor 1.43
Mean 12,508.1 53,735.5 After-tax Cost of Debt 2.21%
Median 12,173.0 50,135.3
Cost of Equity
Amount % of Total Risk-free Rate 1.82%
Net Debt 12,508.1 18.88% Market Risk Premium 7.55%
Value of Equity 53,735.5 81.12% Expected Market Return 9.37%
Levered Beta 1.18
Cost of Equity 10.70%
WACC 9.1%
• Cost of Debt: Bloomberg (TWX)
• Capital Structure: Industry Median
• Tax Rate: 30%
• Predicted Beta: Bloomberg
Assumptions

Financial Forecast
Appendix B
Duff & Phelps 39

Financial Statement Model Forecast
Duff & Phelps 40
2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E
12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020
Income Statement
Revenues
Subscription 4,010.0 4,231.0 4,578.0 4,748.0 5,109.5 5,467.1 5,795.2 6,084.9 6,328.3
Content and Other 676.0 659.0 820.0 867.0 906.0 946.8 987.5 1,028.0 1,069.1
Total Revenues 4,686.0 4,890.0 5,398.0 5,615.0 6,015.5 6,413.9 6,782.7 7,112.9 7,397.4
Cost of Revenues
Programing Costs
Acquired Films and Syndicated Series 885.0 894.0 1,007.0 1,003.0 1,073.8 1,144.9 1,210.7 1,269.7 1,320.4
Originals and Sports 856.0 856.0 960.0 1,032.0 1,103.8 1,177.0 1,244.6 1,305.2 1,357.4
Total Programing Costs 1,741.0 1,750.0 1,967.0 2,035.0 2,177.6 2,321.8 2,455.3 2,574.9 2,677.9
Other Direct Operating costs 659.0 618.0 741.0 776.0 830.1 885.1 936.0 981.6 1,020.8
Total Cost of Revenues 2,400.0 2,368.0 2,708.0 2,811.0 3,007.7 3,207.0 3,391.3 3,556.5 3,698.7
Gross Profit 2,286.0 2,522.0 2,690.0 2,804.0 3,007.7 3,207.0 3,391.3 3,556.5 3,698.7
Operating Expenses
Selling, General and Administrative 632.0 705.0 746.0 831.0 872 930 983 1,031 1,073
Gain on Operating Assets 0.0 (113.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Asset Impairment 0.0 0.0 4.0 0.0 0.0 0.0 0.0 0.0 0.0
Restructing and Severence Costs 15.0 39.0 63.0 0.0 0.0 0.0 0.0 0.0 0.0
Depreciation 85.0 91.0 77.0 81.0 90 92 94 90 89
Amortization 7.0 9.0 14.0 14.0 12 13 14 14 15
Total Operating Expenses 739.0 731.0 904.0 926.0 975 1,035 1,091 1,135 1,176
Operating Income 1,547.0 1,791.0 1,786.0 1,878.0 2,033 2,172 2,301 2,421 2,523
Segment EBITDA 1,639.0 1,891.0 1,877.0 1,973.0 2,135 2,277 2,408 2,525 2,626
Less: Corporate SG&A 59.3 75.1 92.4 17.6 60 64 68 71 74
EBITDA 1,579.7 1,815.9 1,784.6 1,955.4 2,075 2,213 2,340 2,454 2,552
Segment Capital Expenditures 65.0 45.0 58.0 68.0 72.2 77.0 81.4 85.4 88.8
Allocated Portion of Corporate Expenses
Capital Expenditures 8.0 14.4 7.6 4.1 14.2 13.7 13.3 12.9 12.5
Depreciation 5.0 5.2 5.6 1.1 4.2 4.8 4.7 4.5 4.4

Growth Rates & Margins
2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E
Trend Analysis (Year to Year)
Subscription Growth 5.5% 8.2% 3.7% 7.6% 7.0% 6.0% 5.0% 4.0%
Content and Other Growth (2.5)% 24.4% 5.7% 7.0% 6.6% 5.7% 4.9% 4.0%
Total Revenue Growth 4.4% 10.4% 4.0% 7.1% 6.6% 5.7% 4.9% 4.0%
Total Cost of Revenue Growth (1.3)% 14.4% 3.8% 7.0% 6.6% 5.7% 4.9% 4.0%
Gross Profit Growth 10.3% 6.7% 4.2% 7.3% 6.6% 5.7% 4.9% 4.0%
Total Operating Expenses Growth (1.1)% 23.7% 2.4% 5.2% 6.2% 5.4% 4.1% 3.6%
Operating Income Growth 15.8% (0.3)% 5.2% 8.3% 6.8% 5.9% 5.2% 4.2%
EBITDA Growth 15.0% (1.7)% 9.6% 6.1% 6.6% 5.7% 4.9% 4.0%
Common Size Analysis (% of Revenue)
Acquired Films and Syndicated Series 18.9% 18.3% 18.7% 17.9% 17.9% 17.9% 17.9% 17.9% 17.9%
Originals and Sports 18.3% 17.5% 17.8% 18.4% 18.4% 18.4% 18.4% 18.4% 18.4%
Total Programing Costs 37.2% 35.8% 36.4% 36.2% 36.2% 36.2% 36.2% 36.2% 36.2%
Other Direct Operating costs 14.1% 12.6% 13.7% 13.8% 13.8% 13.8% 13.8% 13.8% 13.8%
Total Cost of Revenues 51.2% 48.4% 50.2% 50.1% 50.0% 50.0% 50.0% 50.0% 50.0%
Gross Margin 48.8% 51.6% 49.8% 49.9% 50.0% 50.0% 50.0% 50.0% 50.0%
Selling, General and Administrative (% of Revenue) 13.5% 14.4% 13.8% 14.8% 14.5% 14.5% 14.5% 14.5% 14.5%
Depreciation (% of Revenue) 1.8% 1.9% 1.4% 1.4% 1.5% 1.4% 1.4% 1.3% 1.2%
Amortization (% of Revenue) 0.1% 0.2% 0.3% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%
Operating Expenses Margin 15.8% 14.9% 16.7% 16.5% 16.2% 16.1% 16.1% 16.0% 15.9%
Operating Income Margin 33.0% 36.6% 33.1% 33.4% 33.8% 33.9% 33.9% 34.0% 34.1%
Segment EBITDA 35.0% 38.7% 34.8% 35.1% 35.5% 35.5% 35.5% 35.5% 35.5%
Corporate SG&A 1.3% 1.5% 1.7% 0.3% 1.0% 1.0% 1.0% 1.0% 1.0%
EBITDA Margin 33.7% 37.1% 33.1% 34.8% 34.5% 34.5% 34.5% 34.5% 34.5%

Growth Rates & Margins (Continued)
2012A 2013A 2014A 2015A 2016A 2016A 2016A 2012A 2012A
Margins (Other)
Capex (% of Revenue) 1.4% 0.9% 1.1% 1.2% 1.2% 1.2% 1.2% 1.2% 1.2%
Depreciation (% of Capex) 130.8% 202.2% 132.8% 119.1% 125.0% 120.0% 115.0% 105.0% 100.0%
Allocated Corp Capex (% of Corporate Capex) 17.9% 18.0% 19.1% 19.2% 19.2% 19.2% 19.2% 19.2% 19.2%
Corporate Depreciation (% of Corporate Capex) 62.2% 36.4% 73.0% 27.6% 30.0% 35.0% 35.0% 35.0% 35.0%
Acquired Films (% of Total Costs) 36.9% 37.8% 37.2% 35.7% 35.7% 35.7% 35.7% 35.7% 35.7%
Originals and Sports (% of Total Costs) 35.7% 36.1% 35.5% 36.7% 36.7% 36.7% 36.7% 36.7% 36.7%
Other Direct Operating costs (% of Total Costs) 27.5% 26.1% 27.4% 27.6% 27.6% 27.6% 27.6% 27.6% 27.6%
• Capex is driven as a percentage of revenue.
• Depreciation is driven as a percentage of Capex.
• Allocated Corporate Capex and Corporate Capex are driven as a percentage of Corporate Capex
• Acquired Films costs, Originals & Sports costs, and Other operating costs are driven as a percentage of the total
costs.
• Total costs is driven by gross margin shown in the previous slide (41).
Comments

Damages Calculation and
Select Data
Appendix C
Duff & Phelps 43

Piracy Overview and Drivers – Supporting Documentation
Duff & Phelps 44
• The Motion Picture Association of America performed a study that suggests costs of piracy to be $20.5
billion for the film industry on a yearly basis.1
• Torrent websites are set up such that the data is not stored at any particular location or central location.
Rather, each user contributes bandwidth to allow for direct peer-to-peer sharing. For this reason, pinning
responsibility to the torrent website has proved difficult for media originators.
• Two of HBO Now’s competitors, Netflix and Hulu, are priced at $8.99 per month and $7.99 per month,
respectively. This is a considerable discount when compared with HBO Now’s price of $14.99 per month.
• With nearly 90% of piracy for Game of Thrones coming from outside the US, Australia leads the group
with over 30% of GOT viewership due to piracy.2
1. http://moviepilot.com/posts/2889420
2. http://www.ew.com/article/2015/04/21/game-thrones-piracy-record

Damages Methodology – Supporting Documentation
Duff & Phelps 45
• Many viewers who watch pirated films and TV series indicate that they are willing to pay for content, but
often times the content is not available or is grossly overpriced compared to other forms of media. Given
this willingness to pay for content and the obsession that many viewers have for Game of Thrones, the
percent of piracy-based viewers that would have paid for GOT was estimated at 95%.
• The value of two million viewers who watched Game of Thrones illegally is an estimate that can be
revised based on additional data.
• Weighting the costs based on consumption methods yields a weighted average cost for the consumer of
$43.40 to watch the full season of GOT.

Litigation – Supporting Documentation
Duff & Phelps 46
• Comparing the amount sued for and the amount paid in reparation for the SwePiracy case, only 5.8% of
the original amount was paid out by the Torrent website. This percentage was applied to the $82,460,000
damage calculation to yield a more appropriate value for HBO to expect.
• Both the SwePiracy case and The Pirate Bay cases could be revisited in the coming future. Given the
relative youth of piracy, many precedents have yet to be set. For that reason, it is possible that a lawsuit
becomes more practical in the future for HBO to pursue.
• Many precedent rulings are either ongoing or have ruled on the side of the Torrent websites. Additionally,
trials are limited in number as they pertain to large torrent websites.

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