My brother and I had got into a little debate regarding whether Hulu could ever have a successful exit. If you know my brother, you wouldn’t be surprised that we were arguing, that’s what we do. And, if you’re curious as to why two brothers would be arguing about the fate of Hulu, well, you just have to chock it up to both of us being nerds.
But in thinking about it in the shower, where apparently all great ideas are hatched, I started arriving to the conclusion that there may be little opportunity for an exit, and its primary strategic role for the content providers which own it might be to simply gain additional digital revenue.
Key Asset: Relationship to Content Providers
Hulu is a slick site with a Flash-based player (which may limit it on the iPad). But its technology isn’t the best mousetrap. Its relationship to content providers – Fox, NBC and Walt Disney in particular – is the true asset. These three have equity stakes in the company, along with Providence Equity partners and Hulu employees. This relationship allows Hulu to navigate the thorny rights issues with the content providers that others (such as Netflix, iTunes, et al) have to battle around. Hulu can seamlessly expand its portfolio of programming by tapping into “sister company” relationship it enjoys with these broadcasters/studios. However, this very same strength constrains its upside….
Key Constraint: Relationship to Content Providers
These very same owners of Hulu also seek to protect and expand two vastly larger streams of revenue – DVD sales and cable fees. Historically, broadcasters have put affiliates on to cable/satellite networks as a courtesy, but as revenue pressures emerge from every corner, tapping into subscriber fees from cable and satellite providers has become critical (see recent Fox spat with Time Warner as an example). ESPN, Walt Disney Company’s crown jewel, reportedly gets a whopping $4/subscriber fee.
By seeking to maximize DVD sales and cable/satellite fees, these broadcasters must limit what Hulu can do on the living room TV or in its back catalog. You can see for many titles that Hulu limits the back catalog available, in order to entice consumers to purchase the DVD. In negotiations with cable providers, it must not be a perceived as a substitute for a cable/satellite subscription, so Hulu keeps limits on how long recent episodes of programs will be available, but more importantly goes to significant lengths to prevent its content from appearing on the Living Room TV at all (see its battles with Boxee for evidence). By handcuffing Hulu in this way to protect these other streams, the broadcast studios limit what Hulu can ever gain because…..
Can it differentiate itself enough from competitors?
Why would you pay for Hulu when you can get Neflix instead? Sure, Hulu has more recent episodes of programming available. But would you pay for that and cable? You certainly wouldn’t pay for Hulu instead of cable, since there isn’t a convenient way to pipe it to your big screen TV. If you pay for cable and have a DVR, paying for Hulu is a waste. Similarly, if you pay for Netflix, you get DVD access and streaming access (which through Boxee or XBox or PS3 or thru the Wii, can be piped to your TV). While the catalog for streaming content on Netflix is limited (though growing), a $10/month Netflix subscription would provide exponentially greater value than an equally priced subscription from Hulu.
What does the future look like?
Eventually the DVD will eventually fade away (though the studios will do everything they can to prevent/delay this (see record labels)) – so this could be 8-10 years out potentially. At that time, the studios may loosen the handcuffs on Hulu in terms of back catalog and Netflix will be in a significantly weaker position due to that loss of revenue stream. But as long as cable providers continue to provide a significant source of revenue to broadcast studios, it is unlikely that Hulu can get on the big screen TV. This not only limits its appeal as a paid product, it limits its reach, which limits its advertising revenue potential. The typical dilemma of the incumbent: seeking to preserve legacy revenue, the disruptive Hulu’s prospects for the future (and certainly an exit) look dim. Even if mobile video continues to gain steam, the true upside is getting on the big screen TV. So it may remain a nice side pool of digital revenue for broadcasters, but will never be huge if it can't get into the living room.
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