Interviews with Digital Media Thought Leaders

Hulu and the Cowboy Philosopher

Podcast Audio | Posted by Phil Leigh on May 4, 2010

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The following post was first written by me and released by Online Video Insider on May 4, 2010.

Hulu and the Cowboy Philosopher

Phil Leigh

As Will Rogers put it, “If I don’t see things your way, well, why should I?”

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The Los Angeles Times reports that Hulu.com’s Internet video streaming of popular TV shows will soon offer a premium version featuring more episodes and additional shows in exchange for a monthly subscription fee. They may discover that a number of constituents will fail to see things their way. First is the consumer. Many already pay $100 or more monthly for a combination of television, telephony, and high-speed Internet access. They’re unlikely to welcome an incremental fee merely to watch from the Internet some of the programs they already get via CATV or Satellite. The great majority are likely to regard Hulu-premium as an unnecessary redundant cost with one qualifying exception.

The qualification depends upon whether Hulu could offer enough popular shows to become an effective substitute for more costly services. For example, if subscribers can get a preponderance of the shows they like via Hulu for $10 monthly there’s an economic incentive to “cut the cord” on conventional television. In my neighborhood, Hulu-premium might be an economical substitute for basic CATV service only providing 20 channels and costing $23 monthly.

However, few neighbors use basic service and instead subscribe to more costly plans with more channels. For example, the next service tier is $67 monthly for about 70 channels. Hulu is unlikely to provide enough programming to be an effective substitute for such plans, especially considering that it cannot stream live sports. In short, Hulu-premium is not going to be a realistic replacement proposition for most CATV and Satellite subscribers.

Second are the local TV broadcast affiliates. Most of Hulu’s content is supplied by its joint venture owners which are basically broadcast networks. Network affiliates who broadcast the same shows locally are not going to welcome Hulu as a new competitor essentially offering the same merchandise. Moreover, the shows can be watched on-demand at anytime via Hulu whereas broadcast affiliates are limited to days-of-week and time-of-day schedules.

Perhaps its owners will use Hulu-premium as a weapon to motivate the local affiliates to share the carriage fees they’re starting to collect from CATV and Satellite operators. If so, they might reduce programming at Hulu if the broadcast affiliates begin to share those fees with the networks. Such an eventuality would diminish Hulu’s value to the consumer.

Third are the CATV and Satellite operators. Like the broadcast affiliates, Cable and Satellite television companies regard Hulu as a competitor. As noted, Hulu’s owners include companies controlling major broadcast networks such as ABC, NBC, and Fox. However, those same companies also own a number of Cable Networks such as Bravo, ESPN, and CNBC among many others. Such Cable Networks typically collect carriage fees from the CATV and Satellite operators.

Although Hulu is unlikely to offer programming from the most popular Cable Networks such as ESPN, carriage fees have become an increasingly hostile bone-of-contention between the operators and the networks. For example, ESPN alone is collecting about $3 - $4 a month per subscriber. Furthermore, the Cable Networks try to get the rates increased each year thereby forcing the operators to steadily raise subscription charges to consumers. The regularity of such increases combined with the economic downturn makes it increasingly difficult to get consumers to accept higher rates.

Consequently Hulu-premium will likely motivate CATV and Satellite operators to bargain more fiercely on the matter of carriage fees in the future. They’re not going to want to pay more for content that is being offered separately in a way that bypasses their traditional distribution.

Nonetheless, Hulu seems determined to proceed with a subscription model. Perhaps they have another lesson to learn from Will Rogers who also said, “There are three kinds of men. One learns by reading. A few learn by observation. The rest just have to pee on the electric fence for themselves.”