Memo To Networks Re Hulu: You’re Making A Big Mistake

40 Comments

Kevin Wassong is the president of Minyanville Media Inc., a digital network that creates branded content about the world of finance. Prior to joining Minyanville, he built one of the first “new-media” advertising agencies, digital@jwt, within J. Walter Thompson, and before that was assistant to the chairman of Creative Artists Agency as well as a development executive with network TV shows including Golden Girls and Empty Nest.

This is the most transformational period in the history of media. It is the true conversion from analog to digital and from individual channels to a converged media landscape. Oftentimes, I live in the past as my proxy for the future. For those who remember PointCast, BMW films or the launch of Instant Messenger, you can hopefully relate.

Looking to the past, the year was 1994, when I first truly fell in love

40 Comments

John

I think what we really need is to bring back Battle of the Network Stars. Now THAT was brand loyalty. In the canoe relay race, nobody would be able to compete with ABC, CBS, and NBC… nobody.

Mike

Tyler – Good catch on the cable. (I forgot about cable, largely because I haven't had cable for 4 years.) My wife reminded me of a market study that users would watch **up to 8 commercials online** rather than pay for the content.

Evan Wired

Ok, so the network brands have value. Is the value in the network brand greater than the sum of the values of the individual shows? I'll bet not.

Maybe it is time for the network brands to take the positions of movie studios: become known for a particular quality of product, but put that product's brand foremost. With the distribution of content moving from a "river" (one channel) model to more of a "flood plain" (lots of channels, crossing and combining), and the removal of the constraint of time-slot competition (capturing people from the other channels at 8pm on a Monday night is way less important when they can watch any of you at 11pm on a Saturday if they want), it may be time for the networks to rethink their position in the ecosystem. They will need new strategies and tactics to find ways to pay for quality products. If they don't, someone else will.

Seth MacFarlane would be totally justified in creating his own online channel if it was more lucrative for him and his than accepting the constraints of working within a broken network system.

Anecdotally, I watch more shows now that Hulu exists than I have in the last 20 years, because there's a lower impact on my life to try a show out when I want, rather than having to be there when it airs. Corollary to that, if a show is not available to me via an RSS feed notification, I don't see it. Google Reader and Hulu are my DVR.

PT

The real solution isn't fighting this change it' changing how you market. For instance, instead of fighting your consumers, cable could become more relevant by allowing streaming television for it's consumers. Have a password verfication and allow the content to be viewed via the home computer via a proprietary browser that would allow access to billing information and even pay per view movies. Using this model you could compete with Netflix with your current infrastructure and your advertising would be provided to more viewers allowing you to make them happier. By adding this service while increasing your capacity cable companies can keep themselves relevant while allowing the consumer to have what they want. Networks would be able to keep the same contracts and this would allow for a gradual migration to more enabled networks. What is so hard about this? The whole thing could be built on existing infrastructure, a customized browser built off of mozilla or miro or a built in such as xmbc customized for your subscribers that would work the same on a set top box as a computer.

Bob

Kevin sounds like an out of touch authoritarian parent attempting to retain control over his kid who can now afford to move out.

> The reason all three networks have taken a controlling interest in Hulu is because they are going to build it up and then kill it!

Really? And what purpose would that serve? I can see further monetizing the service, perhaps by charging a small subscription fee. But, what could you possibly accomplish by creating a service, making it popular and crashing it? The only thing I can see happening is that you piss off your customers, many of whom will now feel that something of value has been taken from them and now feel justified in pirating your content.

I would advise Kevin to rethink his strategy. His position isn't nearly as strong as he thinks. To continue the metaphor I started in the first paragraph, if Kevin thinks he's going to ground that kid, he's likely to find that the kid tells him to take a flying leap & moves out. Kevin's authority over the kid falls to zero.

Bob

Way off base.

First, the networks brand name means very little. No one watches a show because it's on ABC, NBC or whatever. They watch it because the premise sounds interesting or there's a star they like on the show.

Second, this is an opportunity for the networks to get paid again for past work. EX. I don't see BUFFY the vampire slayer in syndication anywhere right now. But, if I watch it on HULU, I'll watch a few ads & they'll make a little money off it.

Finally, and most compellingly, if they don't give people a legitimate way to watch their shows online, people will torrent them.

Tyler

Mike:

Consumers will not pay a subscription fee for content they are already receiving at a nominal cost. Albeit, cable non-subscribers MAY be willing to pay, however, I'd venture that with the advent of the digital transition, network content will still be as free as it was prior to the transition. So again, why pay for something again when you already pay for it via your cable fee?

The argument then leads to cord cutter who are getting rid of cable because they can consume the content "for free" via Hulu and the like. The question then becomes what am I paying for and how much can I get? Hulu is not exhaustive, so how many sites would I have to subscribe to?

In essence, we'd be looking at the a la carte model online and that model has been economically challenged to support content production at its current level.

I'm sounding like the "No" guy. My contention is that the solution is going to have to be much more nuanced. Patchwork solutions like a nominal fee hinder some of the other mandates and/or steal revenue from other distribution partners/channels. I think the solution is going to be more of a seachange than this.

Mike

Isn't the real issue whether Hulu can make a buck for the triumvirate?

1. Hulu's bandwidth costs must far and away exceed their revenues from advertising. Yes? No?

2. I would bet people would pay a nominal subscription fee to use Hulu. Perhaps the strategy is to cover costs with minimalist advertising, get a large following, and then eat iTunes by charging $2.99/month.

Thoughts?

EdG

This is an old world take on a new world challenge and is simply wrong. It's also indicative of how not taking a customer-focused approach will end up killing a business (and by "customer" here I mean the consumer, for without viewers you don't have advertisers or subscribers or any of the other sources that drive revenue).

The world isn't just changing when it comes to television; it HAS changed. Networks can take the same stance that so many other industries have and try to ignore it, or fight it, or slow it down, but in the end they can't stop the will of the 300 million US consumers who know they can get something better and will find a way to get it if their needs aren't being met by traditional outlets.

As comments above state, consumers don't care about the networks, with few exceptions like MLB perhaps. They care about the shows. No one watches only 1 network, or only 2, or 3. They spread their viewing across any network that has the shows they want. If American Idol moved from Fox to ABC it's viewership wouldn't drop. How many of us reading this admit to watching Fox for Idol and maybe Fringe but nothing else?

The reality is that today I have a better chance of finding what I want to watch online than I do on the cable service with hundreds of channels and thousands of VOD titles that I pay more than $100/month for. Did anyone see the full Susan Boyle clip on a TV show? No. Instead they saw a 10 second clip 20 different times that first week on 20 different TV shows. And then more than 100 million of them went to YouTube to watch the full segment. The need wasn't met via old media channels so consumers sought out the solution on new media ones.

Napster didn't kill the music industry; the music industry killed itself. Consumers wanted something they couldn't get by traditional means — access to the music they cared about in electronic digital form that could be listened to on all the devices they want to use. Sure, for some the fact that it was "free" was a benefit too but if we had the DRM-free, <$1/song options 10 years ago that we have today then the music industry would be in a much different place today.

Bottom line: the networks, content producers and distribution channels like cable have a huge opportunity in front of them. They can embrace the new media world and drive the train. Or they can fight it and be a passenger in the freight car. Yes the new world changes the dynamics and economics of the business.

Dave Barnes

@Kevin who wrote: "The value of NBC is the more than 70 years that it has taken the network to create expectations for generations."

So wrong. I am 60 years old. I should value NBC for its brand as I grew up with just a few channels and the branding back then was strong.

But, now, there is ZERO$ in the brand of NBC.
Now, HGTV and Food Network have brand value because I know what to expect when I turn to them.
Military Channel has brand value.
SpikeTV has brand value because I know they will be showing a James Bond movie.
NBC, CBS, ABC, Fox, UPN, etc. have no brand value as their shows are all over the map. And don't tell me it is about quality of programming when you show Survivor.

Tyler

Bruce:

1) License fees for cable are the lions share of revenue. For some of the biggest nets (specifically sports networks) the split is 80 percent from license fee contributions versus 20 percent from ad sales. So, yes, the cable story is vastly different than broadcast. The Time Warner efforts for user authentication are key in the cable discussion.

2) Online advertising is pulling about 20% of the revenues that broadcast networks can pull for the same content.

Bruce

A couple of comments:

1) The cable story is an important one: No cable network has succeeded without subscription revenues. That is as true then as it is today. ESPN would still be running Australian Rules Football instead of the NFL, if it didn't count on subscription revenue to subsidize the ad revenue. The Military Channel without subscription revenue garned by parent Discovery? I don't think so.

The creators of online video content seem to think that advertising revenue will allow them to succeed. Last time that happened I think Milton Berle was in prime time.

2) Hulu must be making boat loads of money on the minimal commercial interruptions… Why else would I be seeing so many PSAs?

Tyler

Kevin:

I don't see that anyone here has disagreed that the broadcasters are faced by a major dilemma. My point of contention is with your solution. The displacement of broadcast revenue is what has driven the networks to seek a solution: more of the same – as I see your solution – by trying to re-establish the strength of the network brand is not viable. Your comparison to Napster is also not fully vetted: Hulu is generating revenue via the ad supported model, whereas Napster was simply P2P without any revenue thrown the way of the labels. Granted, the revenue being generated by Hulu pales in comparison to the revenue generated via the linear delivery, however, it is additive, not cannibalistic.

As you have outlined, new/digital media is disruptive. Unfortunately, the strategy you suggest as employed by a large incumbent spells their doom, not its continued success. Hulu is an attempt to make sure that the major media companies are not undermined the way print and recording have been. Furthermore, your examples for the NFL and MLB are not fully explored: MLB is also testing the water with MLB.net to and threatening their relationships with their distribution partners in the meantime: they are doing this in an effort to make sure they're not caught with their pants down as well.

In summary, while I agree that Hulu may not be the terminal solution, it is a valid exploration of what will be viable. The broadcast network brand equity has already been compromised and the consumer has surpassed that avenue. It's time to explore economic solutions that do not ignore the consumer's alternatives (i.e. piracy, international proxies, etc.). Hulu is a solid attempt that DOES generate revenue, albeit a smaller rate of return.

kevin

Let me clarify – this is not a question of analog versus digital. It is a question of control of content and its delivery. Everything is digital or will be digital. TV, Internet, mobile – it's all just input (keyboards, remotes, etc.) and output (screens and speakers) devices.

Hulu is a fantastic experience. From a consumer standpoint, I think it is the promise of what digitization will be. But it is also a major dilemma for broadcasters.

Whereas TiVo is out of the broadcasters’ control, solely about consumer control, Hulu is not. Consumers loved Napster – why buy the milk when you can get the cow for free?

Greg

I think the big elephant in the room here is the effect that Hulu and TV.com has over local television and the ad revenues that they pull in. Hopefully, online TV sources will expand the advertising and allow local affiliates the ability to sell ads. Otherwise there may be a "trickle-up" effect from the local stations losing revenue because the networks decided to bleed off viewers on the local level. I for one don't mind having to look at ads in order to get my shows when and where I want them. I don't think I'm alone on this either.

Tunde

Regardess of medium or industry, whoever/whatever the paying (with money or attention) customer prefers wins. In this case, the networks MUST stay close to the customer and make decisions based on that relationship.

@Kevin, just like the music industry has never recovered from Napster, the networks CAN NOT eat Hulu before it eats them because the customer has spoken…they LOVE the internet. Rather than trying to protect the brand, they can BUILD the brand by delivering value to their customers via the medium they love…the internet.

Rafat Ali

@Loel

We are a forum for industry opinion and not taking sides on the debate. Kevin's views are his own, and not necessarily indicative of our company's position. And there is no one company position: it is a collective of opinions of all of our writers…

invitedmedia

ok, you go with nbc(dotcom), abc(dotcom), cbs(dotcom)… you soon prove jeff zucker's fear of "turning analog dollars to digital pennies" into reality.

no, i'd say you build new brands to deliver digital dollars.

Rory Maher

I agree that the networks are destroying their brand value, but I wouldn't blame the internet, or hulu (which is way too easy).

I would point to "Who Wants To Be A Millionaire" which ABC started as a cheap form of programming (compared to expensive dramas) that was also a ratings winner. Eventually they aired it five nights a week because viewers loved it so much and it made them lots of cash on very little costs. Game shows were around at the time (though not really in primetime), but many viewed this as the beginning of reality programming that has spawned an entire genre that takes up a large chunk of primetime currently. Most reality programming started looking the same and the networks lost a lot of brand value they once had with their signature dramas.

Also, don't forget cable, which is a good history lesson for the internet. Cable networks were first launched as startups and were bought up by the networks (sound familiar?). Now they are the most profitable part of many media companies, generating far more cash and brand loyalty (from quality programming) than the broadcast networks.

The networks aren't losing their branding with hulu. You know when you're watching Lost on hulu that its an ABC show, you know that when you watch the Simpsons its a FOX show.

Digital distribution is a natural progression driven by consumer demand and also economics and profitability, or even survival. The networks should embrace it, participate in it, and try to conquer it.

Loel

PaidContent, why would you have this guy and his opinion on here? I'm really shocked, the argument he makes is lame and 10 years too late. There is no mention of what the networks are up against in terms of piracy, failing dvd sales and the economy in general. If you guys are going to have these simplistic arguments on here just because Hulu is a buzzword right now I'm going to stop reading….

Ken Leebow

They need to reposition themselves. And they need to use existing old content. As just one example, the CBS Sunday Morning show has an incredible archive of interviews with musicians, artists, and other well-known people. Those interviews are gathering dust – somewhere. Put them online.

Of course, that's one example of thousands.

In other words, rethink the business. And maybe, just maybe, they won't go the way of the newspaper biz.

zane

70-years of History is to dictate the entire future?

Human consumption of Content (entertainment) changes over time. Laws change or are invented or destroyed (i.e. Copyright).

Adapt or die. Remember the dinosaurs.

Nick

When there were only 3 networks on TV it was about Brand loyalty to an entire network, built on individual shows.

Medias value is based solely on the viewers belief of it's value. What we are seeing is a shift in what viewers value. One of the ways networks have kept control is through limiting access, if you want A you have to do B to get it. There are more options, more choice, and people are willing to start looking for those options. Hulu is a big part of the "awakening" of viewers.

Several years ago I started to question medias value, it felt artificially inflated… Maybe other people were thinking the same thing.

Ryan

It seems everyone had the same response as I did on first read….networks have brand equity? People watch shows, not networks. While I think the general assumption made is wrong if you tilt the question on it's head a bit a much bigger one pops up…how relevant will the big networks be in 5-10 years? Will shows even need to go to networks to be produced and successful?

Hulu seems to be a safety net for the networks. They might not be networks in years to come but they'll each have transformed their business into Hulu where producers will ultimately go to get their shows produced.

Zulu

I'll expect any NBC comedic series premiere to be top-notch….until it proves me wrong. The Friends, Seinfelds and Offices of our time have proven NBC capable of entertaining my particular demographic — and as a result, we'll expect the network's future offerings to be just as good.

So what is the pillar of a network's brand equity? Is it not it's content? If the mode of content consumption is changing, networks must change with it. So yes, networks should (and will) stand by their brand. But if Hulu can simplify media consumption, then the likes of NBC, ABC and FOX are doing their brands a great service.

But Hulu isn't just easier access. It's easier selected access. NBC can no longer hope the spillover from its 30 Rock audience will help sustain a mediocre following comedy…if viewers can hop on Hulu and grab exactly what they want. This puts the onus on the networks to ensure quality amongst all its offerings.

And if that's the case, I'd say viewers and networks will be much better off.

Tyler

The assertion that the most important aspect of digital media and the internet for the networks is to create and maintain brand equity is erroneous. Furthermore, the notion that distribution platforms like Hulu and its brethren represent the “greatest destruction of media value in our lifetime” is unfounded.
Akin to physicists search for a unification theory, I contend that media value – while it is created – is not destroyed: it is shifted. TV and film are facing the same giant: new media threatens the economic model and we’re struggling to strike the balance between the legacy structure and the emerging economic model. This does not indicate that value is being destroyed. Instead, like the print and music industries, the surplus is steadily being shifted to the consumer. One key indicator from the previous two industry shakeouts is the consumer view of brand. The efficiency, immediacy, innovation, creativity and commerce of new media contribute to an erosion of the network brand, and a blanket response like the recording and print industries to strengthen brand at the expense of the aforementioned benefits to consumers is debilitating. The value NBC has offered former generations over the past 70 years does not fit the value-price proposition of the current and burgeoning generation. New media was not at the forefront of network brand erosion: do not forget that time shifted programming a la DVRs and VOD has been just as guilty a contributor to network brand erosion. When the consumer signals that the content is the driver and technology offers a mechanism that increases efficiency, satisfies immediacy and lowers the price point to obtain the content, clinging to brand equity is a foul solution.
That being said, Hulu has yet to prove itself to be the solution. While the consumer enjoys the price point Hulu offers and the content diversity available, the profit shift to the consumer can only be sustained for so long: there will be an optimal point achieved where the decrease in revenues warrant a decrease in content production. Content producers must find an economic model which consumers are willing to support in order for current production levels to continue. This is a nuance the consumer fails to grasp.
But how much time can you dedicate to trying to figure out the model and protect your existing revenue streams? Before long, you’re going to find yourself in catch up mode like print and music. When the cost structure shifts so strongly to consumers, the response from traditional media players has been less than stellar overall and in those areas that have been successful from a publicity and consumer standpoint (i.e. Hulu), the cash flow story is TBD.
For high fixed cost film and television studios, consumers have been poised to capitalize on gaining additional power from significant revenue streams. Like print and music, the cost to distribute content will be reduced by an order of magnitude as in-home broadband capabilities continue to expand. International broadband speeds and the significant piracy issues in foreign markets provide data illustrating the pressures encroaching on the domestic market. A digital home entertainment complex has slowly been emerging, and this will place additional pressure on content providers to satisfy the immediate appetite of content hungry consumers. Media companies will also be forced to streamline cost structures the same way the previous industries have done. Whether or not this includes decreasing content production has yet to be determined.
With the understanding that both television and film studios are being forced to evolve, the goal for the large multi-business media firm is to realize economies of scale across its business units: sources of competitive advantage must be leveraged to survive the disruptive technology curve. Without sufficient evidence regarding a specific economic model, firms must source and harvest its best ideas from its various competitive business units. Ideas must be solicited that establish or strengthen existing cost and value (willingness to pay) drivers. Hulu is one experiment to do this and cannot be dismissed so easily simply based on the idea that it destroys network brands. Consumers have already established that network brands are not primary considerations for their consumption habits. Let’s not waste resources on this straw man.

kevin

The issue is not whether people like Hulu or the generational gap if there is one. Fundamentally it comes down to business. If you like to watch shows with less commercials, then be prepared for some really bad programming!.

Here's a little history about TV – In 1967 an NAB survey found that the public was dissatisfied with TV; 63% preferred TV without commercials. In 1973 by a margin of 5-1 Americans said TV ads are "a fair price to pay for being able to view programs." (Iconocast – 2001)

In other words – who do you expect to pay for the creation of good programming?

dever

There is no such thing as network loyalty among anybody under 40. In the premium world, HBO has some brand value because of its fairly consistent quality over the years. But that's really it.

The best networks can do is to focus on delivering the best content they can on television, using its best programming to drive the audience to other programs (with neighboring time slots or heavy promotions during the best stuff's time slot), and get the most value for that programming on all platforms.

The days of any post baby boomer turning to NBC because they trust the network's quality are over. They might give Parks and Rec a try because they saw the promotions on The Office and thought it looked funny, or because they read a good piece on it, or more likely because their friend recommended it, but NOT because they assume every new NBC show is worth a shot because it's on NBC.

There are other valid arguments to make against putting content on Hulu, but this isn't one of them.

Fabricio

I don't think you get it. We love Hulu because it gives us great shows when and where we want them without many commercials. That's what younger audiences demand and HULU gives it to us. Television is so XXth Century.

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