19 Comments

Summary:

The Hulu-will-charge-you-money rumor mill is churning once again, and the blogosphere has lit up with preemptively angered Hulu viewers vowi…

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The Hulu-will-charge-you-money rumor mill is churning once again, and the blogosphere has lit up with preemptively angered Hulu viewers vowing that they will never darken Hulu

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This article originally appeared in Forrester Research.

  1. This sounds like more of a way to appease the cable companies than to grow Hulu. Surely $24.95 a month is a bit steep for modest enhancements to a free service. I’m not sure I see the value for the consumer here unless Hulu starts streaming live programming such as sports, especially since Netflix’s streaming service can be had for about $9 a month.

  2. matt_carrasco Friday, April 23, 2010

    Great summary James. I love reading the comments from pundits of paywalls, with their arguments focusing primarily on the idea that people will flee to advertising only supported sites or pirated sites to get their content. And to be sure, there will be some of that. However, when you turn around and ask these pundits a simple set of questions, you ultimately don’t get very far. Example, “You are aware that the creation of content costs money?” Answer, “Yes.” You are aware that there is considerable risk in developing content – i.e., a lot of ideas fail and that costs money?” Answer, “Yes.” “So, if content companies cannot recoup their costs with advertising alone, then how do you propose that content companies continue to produce future content that you and the masses want to watch?” Answer, – blank stare, well, almost. Often these pundits will offer side-ways arguments that talk about the need for efficiencies, cost cutting, large overhead, etc., that contribute to the inability to be profitable. And, yes, they’re partially right, but to date, no one, not Google, Microsoft, Apple, Yahoo, AOL, etc., have figured out a way to create content on par with that produced by the major studios in terms of popularity (awareness and reach) and profitably (targeted or otherwise) on a strictly advertising supported model.

    Moreover, the reason, at least in part, why cable networks now produce such great original programming (FX, USA, etc.) is due to their ability to take risks that are supported by dual revenue streams – subscription fees and advertising. Leakage of that revenue via digital distribution means – PC, Mobile, etc. – only dilutes a studio’s ability to continue to churn out great content over time.

    We tend to forget that part of the justification for Hulu was an answer to Google’s indexing of video content that played directly on their search page without any revenue returning to the studios that created the content – that plus YouTube (circa 2005-2006). And we tend to forget that it was only 6 years ago that we were focused on downloads for content – not streaming – as the next “big thing”. YouTube changed that. So, the studios rushed into a new model that focused more on adoption and combating piracy. And the fastest way to do that, was to offer the content in an ad supported fashion. Now that we’ve surpassed the adoption chasm, studios need to figure out how to monetize this content. Mobile platforms have already proven consumers’ willingness to pay for the added convenience and value of mobility and increasingly location based relevance.

    Look, this boils down to a basic premise – you get what you pay for. In other words, anything of material value tends to cost something in return and once we choose to engage our selective memory to recall this well accepted fact, we’ll realize and accept James’ premise – in order to have access to great content, we’ll have to part ways with some of our dollars (or other currency), otherwise we’ll be relegated to suffer from consumption of YouTube CGM content in perpetuity.

  3. Looks like they got another reason…some ad agency is spending $40 million on web video ads and looking to do only $2 CPM, not Hulu rate of $20-$30 CPM

    http://adage.com/digital/article?article_id=143486

  4. You don’t make any valid points in this article why Hulu should charge money when they pull in 100-200 million a year. Greed is the only reason they will.

    If they do, it will encourage people to continue going the illegal route to watch films. And Hulu is only licensed to show some tv shows and some movies, so don’t expect people to get rid of their tvs for a website, what a joke. If they want to charge money, have a free subscription too but with just the basics like it has now. Pay only will NOT work, no matter how they try to explain themselves to the public.

  5. We’ll see how “with cable you pay $10, without cable you pay $100″ pricing stands up.

    I would think that Hulu and the cable and broadcast industry could violate provisions of both the Sherman and Clayton Antitrust Acts specific to cartel behavior to invoke the former and price discrimination and tying/exclusive dealing to invoke the latter.

  6. I agree that this is a good move for Hulu and they will succeed where others have failed in premium online video. Their content and experience is unmatched, and I predict that Hulu Plus will bring in over $100 million with a million subscribers in 2011. http://digitalquarters.net/2010/04/hulu-plus-will-be-worth-100-million-in-2011/

  7. Dave Carpenter Saturday, April 24, 2010

    ‘”t will also finally give some purpose to the random movies that Hulu offers, because they can be discovered using the new tools described above and then watched on more devices than just browser-based PCs.”
    Good article, however I’m not following the logic you employ to movies becoming more popular on Hulu. Crap is crap, regardless of the multiple devices or tools to interact with said crap and movies on Hulu are pretty crap right now.”
    A paid subscription to Hulu may, however, allow them to afford to acquire the rights to better, more recent releases. You would think that’s what $100 million in profit would be used toward, mind you.

  8. Juan Saldívar Saturday, April 24, 2010

    Interesante discusión en relación al contenido gratis o cobrado en un entorno donde el target 18-34 ya ve video en 3.3 aparatos por semana @eazcarraga

  9. David H Deans Saturday, April 24, 2010

    Mr. McQuivey your scenario is missing a key fact in the decision making process, Hulu is inherently handicapped. They have multiple owners that apparently agree to disagree more often than not, because they’re in a state of confusion about shifts in the marketplace.

    I believe that the Hulu management team did the best they could with the cards that they were dealt. Clearly, their charter was not built around a typical start-up business plan. Meaning, the needs and desires of content consumers was never a central part of their business plan.

    They had to mediate between a group of legacy big-media companies whose primary reason for funding the start-up was deep rooted fear that their status-quo business model was being threatened.

    I can’t think of a single successful new venture that was founded upon a reaction to an apparent threat to their key investors vested interests. I for one would not want to be tasked to innovate under those circumstances.

  10. Some great comments, thanks everyone. First, a quick note for those who think Hulu is greedy. The $100 million is revenue, not profit. Hulu said they made a profit on those revenues, but we don’t know how much. It might be $1 million, it certainly won’t be more than $5 or $6 million. Second, $100 million is not a lot of money in this business (yes, I know, I’d love $100 million in the bank, too, but compared to the billions the rest of the business brings in, this is not enough for a media company to start celebrating when it costs nearly $100 a year just to make a single hit show like Glee).

    Matt Carrasco’s lengthy comment is particularly appropriate on this note, certainly written from an industry perspective, but it sounds a note that I hear a lot when speaking to producers who sign the checks to make expensive shows. They can’t possibly afford to keep signing those checks if people begin to prefer a Hulu model — even a $10 a month Hulu model. So how does it break out in the future?

    Imagine 10% of Hulu fans want to pay for more content on more devices. Let’s say that’s 4 million subs x $10 a month or $40 million a month or nearly $500 million a year. Then, by quadrupling the ad model, Hulu can get $400 million in ad revenue instead of $100 million like they did in 2009. Now we’re nearly talking about a billion dollar business. That’s far less than the $13 billion CBS brought in last year, for example, but it’s enough that Hulu can really contribute to the cash flow of the networks from whom it buys content. And that’s ultimately what will happen. Just like a cable company does, Hulu will start paying networks a fixed bit per month per subscriber along with a few-cent fee every time a show is streamed. Sounds a lot like a cable company, eh?

  11. The numbers don’t make sense. If Hulu had to pay each network a fixed fee per user, lets say it was only $1 each month and they paid 5 networks, half of the $10 a month they are collecting is gone. Now pay a few cents each time the show is streamed, then pay to actually stream it, most likely in HD, then pay for the additional overhead that would come with a pay service and there is no money left for Hulu. That $10 a month is all gone.

    Not to mention, there is no chance that Hulu gets 4M paying subscribers a month. MLB.com has content people are actually willing to pay for and they don’t even have 1M subscribers, but Hulu is going to get 4x that? Never happen. Those numbers just aren’t realistic and can’t be used as it’s completely unrealistic.

    “With this fabulous service, Hulu would be nearly as good as your $54-a-month cable service today.”

    There is no way anyone can think any enhanced Hulu service will be like cable. 40% of all the season passes in my TiVo aren’t anywhere online, so how is an online service then as good as cable when I can’t get the shows at all? Not to mention, the quality of online video is no where near the HD video quality on cable.

  12. Dan, thanks for contributing, long time no talk. While my model was just a start, the fact is, my initial numbers are pretty solid. Consider:

    1 – The cable model is not several $ a month per sub, it’s several pennies per network per month per sub. Only premium networks can get a few bucks a sub per month. I don’t see those channels participating in Hulu (HBO, Disney, etc).
    2 – Netflix has nearly 8 million people a month who stream content for anywhere from $8 to $20 a month. Obviously, they get DVDs by mail as well, so it’s not a fair comparison. So let’s look at Xbox 360 memberships at $7 or $8 bucks a month. It buys you nothing other than the right to pay games online that you still have to spend $40 per game on. Yet more than 10 million people do it each month. Now, I’ll admit, four million subs for Hulu was assuming a year or two of marketing ramp to build out the value, but it’s not at all impossible.
    3 – You’re right that Hulu won’t begin to satisfy you and about another 40% of the viewing population. But for the total population, as much as 70% of content viewed comes from broadcast channels (which by the way are available for free over the air, yet 85% of people pay for those channels from cable or satellite, another testament to people’s willingness to pay for what they value). In my opinion, I think Hulu’s largest customer base will be people who pay for Hulu on top of what they already pay to cable or satellite because they value convenience. This is the same way that iTunes makes a few hundred million on videos a year, renting/selling TV shows that you already pay for some other way. But a small subsection of the population, people who use basic cable and really only want to watch the major networks will see value in Hulu, too, and that’s what the two-tiered pricing will be designed to prevent.

    BTW, I never mind people bringing their own experiences into the discussion, as you did, but I should warn you, as a TiVo subscriber, you are one of 1.6 million households who value video enough to pay for the most elegant (and expensive) way to get awesome control of your video. You are not typical (and probably don’t want to be) so your experience is not a good guide for what the other 99% of the population will do.

  13. Should be entitled: Why Hulu users will not pay and why they will never come back!

  14. If the number of in-video ads on Hulu is quadrupled, the appeal to viewers will be significantly diminished. People may put up with a long stream of ads while sitting on the sofa, but their patience is going to be tested on a PC or mobile screen.

    What’s great about Hulu is that, unlike television, you can go straight to the content you want with a truly bare minimum of nuisance. No reason for anyone to bother looking for illegal content sources. Raise the nuisance level substantially and that may change. Hopefully Hulu will continue its innovation streak by introducing less intrusive forms of advertising.

  15. Hey James, I guess the problem I have with the theory is that if premium channels are not going to provide content to Hulu, then Hulu’s inventory is going to be very small and not very good. Who will pay $10 a month for access to a limited inventory of content?

    I don’t see how Xbox LIVE subscriptions can be compared to Hulu subscriptions? If I want to play games on Xbox LIVE, I have only one option, to buy the service. If I want to watch TV shows, I have more than one option both online and on TV.

    As for TiVo, it’s not more expensive, it pays for itself in less than two years. Buying a TiVo unit and paying for lifetime service costs less than a cable DVR. In less than two years time, you make back all the money you spent on TiVo since you are not paying $20 a month to rent a DVR and you start saving that money each month.

    So I’d rather spend the money upfront, have a better user experience like you suggest, and save money less than two years later. The downside is that you have to spend the money up front, but it’s hard to argue with a better experience and saving money. More consumers don’t do this is probably due to the fact you have to spend the $500 all at once, but if you can, you save a lot of money on the long run.

  16. Dan, you’re preaching to the choir here on why a TiVo is worth it. But the fact that so few people have done it tells us something about what people will pay for. And the fact that 85% of the population pays for TV and then goes on to mostly watch content that is available over the air for free also tells you something about what people will pay for. In both cases, they’re paying for convenience. They perceive the TiVo value, though considerable, is inconvenient (if they grasp the value in the first place, that is), and they consider cable/satellite as convenient. It’s not rational, but it fits the pattern. I maintain that if Hulu makes itself convenient across many platforms, they are worth the money, just the way the extra $10-$20 people spend a month to have a DVR is worth the money even though they already paid for the content (which was mostly free, remember). Talk about double-paying for something!

    Not directed at you, Dan, but I do want to note that it’s interesting when I suggest that $10 is not too much to pay for convenient content, some people think I’m nuts. But when I suggest that $499 is too much to pay for a device like the iPad that you then have to pay extra in order to get content delivered to, people think I just don’t get it. That in itself says a lot about how irrational we are when it comes to how we allocate our $.

    And Chris, I agree with you. A straight up quadrupling of ads will be dangerous. Hulu has already tried to change the ad model, with limited success. We’ll see how far they can take their innovation as they ramp up the ad load.

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  18. This is the biggest waste of time, charging you to watch TV isn’t going to protect the show from being canceled. All the networks care about is the crappy Nielsen rating system, paying to watch TV this way and with commercials doesn’t help the show in the least bit.

  19. One thing I am not interested in and that is more damn commercials on Hulu. Since they started putting those 3 minute drug shill commercials on Hulu, I just stand up and walk away from my computer because I’m not willing to pollute my mind with that corporate nonsense.

    Basically any commercial longer than 15 seconds gets actively avoided and discarded by my conscious mind and I make a point to avoid purchasing products advertised in this manner. The number of annoying commercials on TV is why I stopped watching years ago.

    You want to make more money off of Hulu? Charge more for your commercials. As you add more commercials the economic value of these commercials tends to wane because of viewer fatigue when it comes to advertising.

    TV commercials should be something special and regarded as valuable by companies, not a given for every piece of junk manufactured.

    And who cares if 99% don’t pay, eventually if the industry would switch to this model, they would realize that again, TV eyeball are pretty much the only game in town and pony up whatever is necessary to get their 15 seconds of fame.

    I believe this idea would improve the quality of consumer products released because it would become to expensive to put out crap like the richard simmons jump up and down tapes and the enzite commercials we were forced to endure at some point and time in our lives.

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