Hulu's Days Are Numbered - Jonathan Bokor - MediaBizBloggers

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Published: December 10, 2009 at 03:49 AM GMT
Last Updated: December 10, 2009 at 03:49 AM GMT

By Jonathan Bokor

Comcast's recently announced acquisition of NBCU has many pundits questioning where online video, and particularly Hulu, fit into the new entity's plans. Comcast brass have said they see Hulu as a logical complement to TV Everywhere, with broadcast shows made available free on Hulu and cable shows available behind the authentication wall of TV Everywhere. Whether that is Comcast's true intention, or merely a feint to appease regulators, doesn't really matter. All signs point to Hulu having a very difficult time carving out a sustainable (i.e., profitable) niche for itself. My guess is that it is either toast or acquisition bait within the next 24 to 36 months.

Hulu's U.S. video views rose to 856 million in October, representing a 47% jump over its September total of 583 million. While that's an impressive achievement and validates Hulu's ability to deliver a great user experience, it doesn't address the key factor in evaluating its future, which is its ability to monetize those views effectively. Although it doesn't release sales figures, it appears that Hulu's ad sales numbers aren't keeping pace with its viewing numbers, which means that its losses are probably increasing. And since the average visit is only around 6 minutes and Hulu runs fewer ads per hour than traditional TV, it is difficult to sell enough ads to turn a profit.

That problem might be solved if Hulu could sell its ads at sufficiently premium prices. The lack of clutter achieved by running fewer ads per hour, and the resulting scarcity of ad inventory, has typically resulted in premium CPMs. But by nearly doubling its monthly views, Hulu now has significantly more inventory to sell, which will lead to downward pressure on CPMs. And if it can't get a sufficient CPM premium, it will have to increase the number of ads per hour to make up for it, which in turn will create even more inventory, further reinforcing the downward pressure on pricing.

Any reduction in Hulu's CPM premium will exacerbate another emerging problem – conflict between Hulu's ad sales team and the ad sales teams of its constituent content partners. Some tension has already been reported in the press, with network ad salespeople complaining that Hulu is undermining the pricing for the network's traditional TV ads. That is disturbing because online video has typically been able to garner higher CPMs than traditional TV, particularly due to its ability to target specific demographic groups, which TV has a hard time doing. If Hulu can't maintain premium prices for its ads, then network TV sales groups, who already feel they are better at monetizing online video on their own sites (i.e., NBC.com and ABC.com) will increasingly lobby their management to bring all online video sales in-house.

This will push Hulu towards some sort of pay model, which Jason Kilar, the company's CEO, has indicated is under consideration. But what exactly would the offering consist of? Pay-per-episode? Apple and Amazon have already shown that's a decent little business, but no world beater. Subscription model? Since most of the content on Hulu is already free on broadcast TV, how much would most users pay to get it on demand, especially when many cable operators are providing quite a bit of it on free VOD? So that doesn't appear to be the road to large profits either. Subscription for library content? That seems promising, but Netflix is already there, and they give you DVD's by mail to boot for as little as $8.99 a month. Realistically, Hulu doesn't seem to bring anything unique to the table in terms of a pay model, and it's difficult to imagine how it will make such a transition without offending Comcast, which isn't likely to be in favor of setting up a cheap subscription alternative to cable.

Which brings up the issue of holding on to all three of its principal content providers. Although its deals with Disney, News Corp. and NBCU provide for some exclusivity for a period of time, those contracts will eventually come up for renewal. If Hulu is in fact losing money, it's reasonable to assume that one of the partners may not be willing to continue to fund ongoing losses. Alternatively, as the broadcast networks move toward seeking subscriber fees from cable operators (see my prior piece on this topic), they may have to agree to put their online content exclusively into TV Everywhere. Losing even one of the broadcast networks would be a damaging blow, since other than its user interface, which is admittedly fantastic, Hulu's unmatched ability to aggregate content from 3 out of 4 of the broadcast networks is its biggest selling point.

The company certainly has a talented team of people, and they may figure out a way to develop a powerful revenue stream and begin churning out consistent profits. If not, it's only a matter of time before the broadcast networks begin either pulling their content back into their own sites, or putting it exclusively into TV Everywhere in exchange for subscriber fees from cable, satellite and telco operators. At that point, Hulu will face either shut down or acquisition, perhaps by an MSO looking to add a little sizzle to their TV Everywhere offering.

Jonathan Bokor is a consultant specializing in monetization strategies and business development for both digital media and traditional media companies. Jonathan can be reached at jbokor@yahoo.com.

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