Alas, Hulu, we knew ye well?
Posted by Daniel Granof on February 4, 2010
So NBC Universal will soon be controlled by Comcast (pending regulatory review and approval). What does this mean for Hulu—which was founded and is partly owned by NBC and which has taken the lead in commercially successful online video—as well as other free video sites?
The issue is front, center, and controversial because Comcast has recently begun leading a charge against the principles of sites like Hulu that provide TV shows for free. Last year it announced an initiative called “TV Everywhere” that was short on details but long on a clear purpose: to stop channels from giving away their shows for free on the Internet, in direct competition with Comcast, which pays good money to said channels so that it can not give it away for free.
A cable TV economics primer: cable providers like Comcast pay channels a monthly fee to feature them in its channel lineup offered to customers. So, for example, Comcast pays TNT around $0.90 per month per subscriber to have the channel in its basic cable lineup. At 24.2 million Comcast subscribers that’s $21.5 million per month, a hefty license fee, and that’s just for one channel out of hundreds that Comcast features—in 2008 Comcast paid a total of $6.5 billion in these “licensing” fees. Comcast then charges its customers ~$65 per month for access to all these channels (most of which we don’t want, but that’s a whole other issue). Add in revenue for premium channels like HBO as well as on demand channels and you get Comcast’s 2008 video services revenue of $18.8 billion. That revenue is nearly three times the cost of the licensing. A 66% gross margin is not a bad business, one worth protecting vigorously.
So what could threaten such a great business model? What’s Comcast’s worst nightmare? It’s consumers who realize they can watch “The Closer” not by paying Comcast $65 a month to watch it on TNT but by going to Hulu or TNT.com or Joost, where it’s free. TNT still gets advertising revenue from showing it online (albeit less than on TV because there are fewer commercials). But when that consumer decides to cut the cable cord, Comcast gets bupkis. With services like Boxee gaining popularity, the number of customers Comcast stands to lose is growing rapidly. In fact Comcast has seen total cable subscribers decline each of the past two years.
Though the attrition numbers are still small at this point, Comcast wants to head off the movement well before it reaches critical mass. So it and Time Warner Cable concocted “TV Everywhere,” a system whereby their cable customers can also watch on the Internet any content they are already paying for—as long as they are authenticated as paying customers by whatever site they visit to watch it.
This prospect would seem to leave Hulu out in the cold. What incentive does Comcast have to keep a service like Hulu going in its current state? It is simply not in the business of giving content to consumers for free.
The numbers for Hulu are still small compared to TV, but this coming conflict is really a bellwether battle for online video. It may accomplish something no one has been able to do successfully to date: turn the tide away from the heretofore bedrock principle that content on the Internet must be free.
Comcast may let divisions like Hulu continue to operate independently in the short term, but the company would be foolish, to do so in the long term. The whole rationale for the NBC deal is for Comcast to gain control of a major content source so as to ensure it gets paid for providing access to it. Eventually Comcast may either push to convert Hulu to a paid service (or at least an authenticated one) or phase it out altogether. It needs co-owners Newscorp and Disney to cooperate, but given Rupert Murdoch’s recently shared desires such cooperation shouldn’t be hard to come by. The best hope for it remaining independent is if Comcast decides it’s more trouble than it’s worth to absorb it.
Greg said
I’m skeptical they’ll actually find a way to put the toothpaste back in the tube. Consumers have gotten used to watching shows for free on Hulu; if they turn it off or try to start charging, my bet is that illegal sites (far more usable than BitTorrent or Pirate Bay) will proliferate.
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