Rupert Murdoch, who heads media conglomerate News Corp (NWS), has been a major proponent of charging web users to view copyrighted content, such as the company’s Wall Street Journal online offering. Paying for content, however, is something that web surfers aren’t used to doing. Indeed, when the Internet first started to become a mainstream communications medium, the concept was to get people to a website at any cost. As a result, many content providers gave content away for free. However, this move has proven a poor choice, as web users are now used to receiving free content that would once have required a subscription. The original thought of subsidizing the free dissemination of information with advertising simply hasn’t worked.
This helps explain why Hulu is beginning to offer a premium service for a $10 monthly fee. Hulu is a partnerships between News Corp’s Fox, General Electric’s (GE - Free Analyst Report) NBC, and Disney’s (DIS - Free Analyst Report) ABC. The site provided users with free access to on-demand television programming, that, like traditional television, included commercials in the video stream. This, in itself, was a large shift in the way content was provided at the time. However, those advertisements have not been enough to sustain Hulu and the partnership appears to be crafting a two-tiered approach with a free, more limited, level and a premium level that offers far more content.
Hulu Plus, as the premium membership is being called, is not just meant for the web. It also works with Apple’s (AAPL) iPhone and iPad, Microsoft’s (MSFT) Xbox, Sony’s (SNE) Playstation, among other devices such as newer DVD players. Hulu’s founders have been grappling with the web for years, apparently unsure of how best to take advantage of the new medium. At the same time, they were seeing pirated copies of their copyrighted content travel onto the Internet, arguably costing them money. Pairing up in the form of Hulu created a site with enough valuable content to give Hulu the scale needed to compete with Google’s (GOOG) YouTube, which was often the destination of pirated content.
Now that Hulu has gained a good deal of traction with consumers, despite limitations in the amount of content that is made available (several recent shows versus an entire season, for example), a second level of service seems appropriate. The question is whether or not there is enough content for consumers to spend the money to subscribe.
Indeed, The New York Times (NYT) has flirted with several different pay models without resounding success. News Corps’ Wall Street Journal offering has been one of the few subscription successes on the web, but the site could hardly be called a major triumph for the pay model. Moreover, the content created by a newspaper isn’t truly analogous to the video content created for television and movie screens. Assuming that the pay model works for Hulu, the big question is will customers pay for an additional video provider or will they cut a provider to make room for Hulu Plus?
The $10 cost of the new Hulu service seems to pit it squarely up against Netflix (NFLX), which offers unlimited streaming at that price point. Clearly, that is a possibility, but, to some extent, the two services satisfy vastly different needs. Netflix’s strong suit is the back catalog of DVDs and streaming videos it offers. Hulu Plus, while providing some older shows, is mainly about giving customers access to the current season’s shows. In fact, Hulu is, by design, not showing many older seasons or catalog offerings so that its content partners can sell DVDs. So, it may turn out that customers are quite willing to pay for both services, to the tune of about $20 a month.
That $20 is well below the cost of video services provided by cable companies like Time Warner Cable (TWC) and Comcast (CMCSA), or the newer Internet based services like FiOS provided by Verizon (VZ - Free Analyst Report). Customers often pay around $100 a month for such video services, which are usually bundled with phone and broadband connections. That said, Hulu Plus and Netflix customers still need access to the web, so they can’t forgo a relationship with the cable and telephone companies altogether.
The only missing ingredient for a Hulu Plus/Netflix combination for the customer is news and sports. However, many people get this type of content from the web now, so missing these pieces may not be as big a deal as some think. Moreover, services such as MLB.TV can often provide die-hard fans more sports content than cable companies because of the odd nature of television rights licensing.
Even with the news and sports limitation, the old joke about cable having so many channels but nothing interesting to watch could prove a hard obstacle for cable companies (and other more traditional providers) to overcome as customers start examining the cost/benefit analysis of their viewing habits. Perhaps getting most of what they want is enough if it can save them hundreds of dollars over a year’s time. Add the additional viewing options, such as on an iPhone, and the needle may start to shift even further toward the Hulu/Netflix combination.
In fact, the real winner in this new service might actually be the consumer, as a viable competitor enters into what has historically been a protected market. It remains to be seen, however, if the companies involved will be able to make Hulu Plus a profitable enough venture to warrant its continuation.