To Hulu or Not To Hulu
Posted by Daniel Granof on June 17, 2009
Deadline Hollywood recently had a thought-provoking post about whether studios and networks are ensuring their destruction by putting their TV shows online.
Brief background: for those who like their entertainment news served with a side of sauce, Nikki Finke’s Deadline Hollywood is the ultimate source. It has breaking industry stories combined with insider gossip and some pretty smarmy commentary from Ms. Finke, who regards herself highly but with good reason: she’s accurate and often provides dead-on and insightful analysis with her commentary. The blog became the go-to place during the WGA strike for the absolute latest developments, with Finke clearly siding with the writers and other creatives. Digital revenues were at the heart of the strike, and Finke has now added that topic to her inventory.
In her post she covers a Wall Street conference call that looked at a big-picture question: are studios destroying their ecosystem by racing to make so much of their programming available for free on sites like Hulu? The consensus was yes, they are, because their shows make significantly less in ad revenue when shown on the web (64% less for a broadcast show, 36% less for a cable show, according to reputable analyst Spencer Wang). They argue that such lower revenue can only lead to shrinking or negative profit margins. And this growing problem will eventually require studios to figure out a way to charge web viewers for content, most likely through some kind of subscription system, or to place more ads on the content.
Such conclusions continue to amaze me because of their implied assumptions:
- The studios’ ecosystem hasn’t already begun changing significantly in irreversible ways.
- The cost side of the standard consulting uber-equation (profits = revenues – costs) is fixed – that is, high-quality shows will always cost $500K per half hour or more to make.
- Unit revenues for web video advertising are the same or lower than those broadcast or cable TV.
Each of these assumptions is flawed in its own way and indicates why both the studios and the analysts have blinders on. First, the ecosystem has obviously been changing now for several years; the proliferation of broadband has only accelerated it. Second, high-quality series can now be made for much, much less than the studios realize, thanks to inexpensive digital cameras and Final Cut Pro. And third, viewers of web video should be much more valuable to advertisers than those of TV: on average they are younger, have higher incomes, and are more engaged.
Perhaps these points are obvious to any average digitalist. They don’t appear as such to those ensconced in the old ecosystem.
If studios were smart, they’d be exploring new ways to incubate content for much lower costs. They have dipped their toes in the water, with varied success. But the fact that the top floor execs and the analysts present a false economic choice indicates why the future for these entertainment giants looks bleak – just not for the reasons the analysts are saying.
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