For years, the economics> of the television industry have hinged on the networks role as the gatekeepers of the content they created. Now, the rise of a new delivery system, the Internet, is creating some uncertainty over how long the old rules will still apply.
The latest threat could come from Hulu, the second-most-popular site for free online video. A reportedly planned change to the site s revenue model raises new questions about the outlook for television companies.
Today, Hulu offers a menu of free streaming TV episodes, movies and clips for free, but the site plans to start charging a monthly subscription fee of $9.95 to access its full archive of videos, according to recent media reports. The last few episodes of most shows would remain free.
For some viewers, the availability of high-quality full episodes of their favorite shows online could present an opportunity to scale back or even cancel their increasingly expensive cable service. For investors, Hulu s growing popularity adds fuel to the debate over whether the Internet could undermine the business model of television s content creators and distributors.
Hulu is jointly owned by NBC Universal, News Corp. and Walt Disney. (SmartMoney is also owned by News Corp.) The site opened to the public just two years ago and has already become a significant part of the online video ecosystem. In 2009, the total number of minutes of video viewed on Hulu grew 140%, according to comScore, an Internet market research company. As of March 2010, the site was second only to Google (GOOG)
Analysts who study media consumption say the business of creating content won t change substantially any time soon. For the foreseeable future, the reality is beginning to set in that the revolution will continue to be televised, says Brahm Eiley, the founder of the Convergence Consulting Group, which focuses on the Internet, telecom and content industries.
Here s a look at Hulu s potential impact on the TV business:
How Hulu Could Kill TV
One clear threat to the television networks is a potential loss of advertising. If viewers watched their favorite shows on Hulu instead of on TV, the networks would make less ad revenue. Hulu content includes some ads, which would benefit the networks, but only about four minutes per hour. A comScore survey suggests viewers are willing to accept six or seven minutes of ads online, but that s still far less than the 16 minutes of ads shown in a typical hour of TV viewing.
Hulu also poses a danger to the networks because it could be changing audiences expectations. Sites like Hulu are also retraining the consumer that premium content is supposed to be free, says Laura Martin, a senior analyst covering entertainment, cable and media at Needham & Company. Charging $10 a month would send a message that content comes at a cost, but viewers would still be underpaying, Martin says. A typical cable package costs about $70, and half the content viewed by the typical household is on the four major broadcast networks, three of which (ABC, NBC and FOX) offer their shows on Hulu, so a fair price for the site would be closer to $30, she says.
Hulu could also interrupt a new revenue stream for the networks. Over the next three years, as contracts between networks and cable companies are renegotiated, cable providers could end up paying per-subscriber fees to the broadcast networks, Martin says. Already, disputes between Disney and Cablevision and Fox and Time Warner have ended in new fees for broadcast networks. (Cable providers already pay per-subscriber fees to cable networks.) However, if more network viewers were to watch programming online, the providers would owe the networks less in fees.
The bigger threat to companies like News Corp., Disney and CBS is that viewers may start cherry-picking their own television plans, Martin says. If enough content from the bundle of networks that consumers buy in a cable package is available for free, they may start looking for more a la carte options, she says. A survey conducted by Needham & Company found that if consumers could pay for only the channels they watch, they would pay more per channel, but would purchase far fewer channels. Viacom (VIA.B),
Why TV Is Still King
Right now, most people still turn to the Internet for video content distinct from television. Online video remains dominated by short-form content like YouTube videos, says Bruce Leichtman, the president of Leichtman Research Group, which focuses on the broadband, media and entertainment industries. The duration of the average video viewed online is growing, but as of December 2009 it was still only 4.1 minutes, according to comScore.
Some analysts are skeptical about the looming threat online viewing poses to TV s business model. It s been overblown, Eiley says. Only 3% of regular online TV watchers have given up their subscription television service, according to research by Convergence. Currently, just 0.6% of all U.S. households are cord-cutters. The group projects that number will double by 2011, but that s still only 1.6 million homes. Data suggest that people see online viewing as a supplement -- not a substitute -- for traditional TV-watching, Leichtman says.
Pricing could become a hurdle to online viewing. The television industry has a strong financial incentive to prevent an a la carte pricing model from catching on, and consumers may find the current all-you-can-watch model is a better deal for them, Eiley says. Apple s show-by-show iTunes offerings haven t gained traction with consumers because the model makes financial sense only for consumers who watch very little television, he says.