Make no mistake about it: 2011 will be a make-or-break year for Hulu. The company needs to strike a balance with content owners and present a business model to them that they’re comfortable with, or it will see shows pulled and be left with little more than a good-looking user interface. Hulu’s best chance at survival is to suck it up and become a tool for broadcasters and cable companies rather than a disruptive force in the broadcast TV ecosystem.
Money is at the heart of Hulu’s issues with its content partners. Hulu pulled in more than $260 million in revenues last year, which is a success for any startup, but it’s a pittance in the world of broadcast television. To put things in perspective: Disney’s ABC broadcast network generated $1.3 billion in revenue in the third quarter alone. When broadcasters are pulling in billions, it’s difficult to see Hulu’s ad revenue split as a vital or material part of their business.
Not just that, but Hulu is creating tension between broadcasters and their distributors, as those parties seek to negotiate retransmission agreements. Broadcasters are seeking ever-higher retrans fees from cable, IPTV and satellite providers, but they’re doing so at the same time Hulu is giving away their content for free online. We’ve seen this most recently in the retrans spat between Fox and Cablevision, which resulted in a two-week blackout of Fox’s broadcast signals from Cablevision customers.
The lack of value created, as well as the disruption of their traditional business models, has some broadcast partners second-guessing their commitment to Hulu. ABC and Fox are reportedly considering pulling their shows from Hulu’s programming lineup, according to the WSJ, or negotiate longer windows between the time a show airs until it becomes available on the site.
That window would likely be similar to the one that Netflix agreed to when it struck a deal with Disney, adding a 15-day delay before new episodes appear in its library. But while Netflix is primarily a long tail play, providing entertainment recommendations when viewers aren’t sure what to watch, Hulu was created as a TV catch-up service. Viewers go to Hulu because they know the latest episode of a given show will be there the day after it airs. And it’s difficult to “catch up” on the latest episode if you have to wait two weeks before it shows up online.
Another option suggested by the WSJ is the possibility of Hulu becoming a virtual cable operator: that is, creating a subscription TV service that wouldn’t just make shows available on demand, but also display live TV. But there are a number of challenges to that model, the most important of which is money: Given Hulu’s existing revenue stream and cash on hand, it’s unlikely it would be able to license the same live feeds given to cable providers, even if it wanted to. BTIG Research analyst Richard Greenfield estimates that it would cost upwards of $1 billion a year to license NBCU’s catalog of channels for online streaming, which is clearly too pricey for Hulu to consider.
Where Hulu can provide value to broadcasters and cable companies alike, however, is in adding authentication and tying the availability of its free, ad-supported shows to the TV Everywhere scheme already being developed and rolled out by cable operators and cable programmers. Moving to an authenticated model would add peace of mind to cable operators, since broadcasters would no longer be giving their content away for free, but tying it to services that consumers already pay for. It will also provide leverage for broadcasters seeking higher retrans fees by providing additional services that cable providers to pitch to consumers.
Not only that, but linking Hulu to cable subscriptions would make it easier for cable providers to make on-demand content available on a number of mobile and connected devices using the startup’s existing Hulu Plus infrastructure. And for those that aren’t already cable subscribers, Hulu Plus will still provide a way for them to continue to access to broadcast content for a reasonable price.
It’s not an ideal solution, and clearly many Hulu watchers would be unhappy to have their viewing linked to a cable subscription. But for Hulu, playing ball with cable is probably it’s best bet for remaining a viable service — even if it’s one hidden behind a pay wall.
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