Report: TV Networks Should Be Afraid -- Very Afraid -- of Hulu
- by Mark Walsh @markfwal, September 14, 2009
It's not the first time Martin has sounded the alarm on the rise of online TV. In a May report she warned that the entire $300 billion market valuation of the television industry is threatened by the shift of programming from TV to the Web. Spearheading the overthrow of TV-as-we-know-it is Hulu, the premium video site backed by NBC Universal, News Corp. and Walt Disney Co. that offers content from 120 partners from the Food Network to Paramount Pictures.
As of July, Hulu had grown to 38 million monthly viewers who watched 457 million streamed videos, making it the sixth-most-visited video site, ahead of competitors like AOL, CBS Interactive and the Turner Network, according to comScore.
On the financial side, Martin estimates that in 2009 Hulu will still lose money -- $33 million on revenue of $164 million. NBCU, News Corp. and Disney are believed to keep 75% of estimated revenue, or $123 million. With a rapidly growing audience, high-quality video and increasing revenue, Martin has little doubt Hulu will succeed in the long term.
In its success, however, lie the seeds of value destruction for its TV network creators. Martin's prophecy of doom is built on the assumption that the more content that becomes available on Hulu, the more likely it is that consumers will cut the cable cord altogether. Coupled with that trend is the less attractive economics of online video, which may offer higher CPMs but fewer ads.
The report derives the figure of $920 per viewer lost to Hulu by estimating that Hulu runs four ads each hour at a $50 CPM compared to 32 ads during each hour of programming on TV at a $35 CPM. ($1,120-$200 = $920). Hulu has not disclosed actual ad sales or ad rates.
"This alternative is much worse than keeping 100% of the ad revenue from the TV," wrote Martin. "Long term, we don't expect the internet audience to ever put up with as many commercials as there are on TV." She adds that the convergence of the PC and TV over the next two years will hasten adoption of the PC as an alternative for watching high-quality programming.
The report assumes the bulk of Hulu viewers use it as time-shifting device to catch up on shows they missed on TV and to avoid commercial interruptions. Hulu CEO Jason Kilar in April told Bloomberg that the site wasn't stealing customers from cable television.
What would be useful is specific research looking at the impact Hulu has had on users' TV-watching habits to inform the debate. While citing comScore figures showing the growing audience for online video (158 million in July), it doesn't take into account Nielsen's most recent Three Screen Report, which showed that people on average watched 141 hours of TV compared to three hours, 11 minutes of Internet video in the second quarter.
How can the networks survive even if the threat from the Web isn't imminent? Martin points to efforts like TV Everywhere, the Time Warner-led initiative that would require people to be cable subscribers to watch TV shows online.
Or they might adopt the approach of CBS, which aggregates all its viewers and sells them to advertisers at the same network CPM of $35, whether it was watched on an actual TV or its TV.com portal. There's also windowing -- holding programs off the Internet until after they aired on broadcast TV or through syndication -- and simply charging an upfront fee as on iTunes.
If nothing else, the report suggests the networks should at least quit airing those popular Hulu commercials starring Alec Baldwin as an incognito alien using Hulu as "an evil plot to destroy the world."
But Martin is not amused: "Moving viewers from the TV to the PC is value-destructive, and adding to the losses of Hulu by spending money on advertising destroys value faster."
Just as they survived cable, VCRs and DVRs, the TV networks are going to be fine. There are always going to be people who watch TV.
However, what they need to be concerned with his HOW they are going to survive. There is so much attention paid to the viewership numbers and the ridiculous A1849 demo that people are missing the fact: audiences have not stopped watching TV -- they are just watching it differently which means the networks are going to have to program differently.
First of all, stop programming for the advertisers. Television shows today are all about what the advertisers want to run their ads in instead of what viewers want to see. There is a "chicken/egg" element to it all but the advertisers will always follow the viewers. It doesn't work the other way around.
Second of all, networks cannot dictate consumer habits. The networks have done well with incorporating web elements to their TV broadcasts but must continue to do so in order to survive.
People watch TV on the web because it serves their lifestyles. Most people do not work a typical 9-to-5 job so getting home by 6:30 for the evening news is a rarity. Getting home by 8 these days is even becoming more difficult.
"American Idol" is the top program in the country. They don't stream their episodes online and they don't have to. Not only is it a highly-buzzed about program that people make a point to watch, it is also a program that requires immediate viewing before the following day's results are revealed.
Other programs do not have that same immediacy and it is therefore same-day viewing is unnecessary.
If Hulu is backed by the networks (or their owners), they are doing what they should be doing in this changing consumer climate -- evolving. And they are doing so by providing a sleek, functional solution to consumer lifestyles from which they can also make money.
Hulu is an example of the networks (and their owners) adjusting to consumer trends instead of trying to stem an irreversible trend.
There's no doubt that Internet TV is becoming hugely popular, but--even though Hulu is struggling with this now--it can also become a money maker. Take "The Simpsons" for instance. According to a Bloomberg article, it's getting $60 CPM; IGN‘s gaming site is getting $45 CPM. This is great news for quality niche content, because it proves that sponsors and advertisers are looking to reach targeted audiences. Read more in the three-part article, "3 reasons now is the time for broadcasters to become 'broadband-casters'" http://endavomediablog.typepad.com/endavo_media_blog/2009/07/3-reasons-now-is-the-time-for-broadcasters-to-become-broadbandcasters-part-3.html
An excellent article that 'continues the dialogue' on an important subject. While Hulu may be fledgling, I don't think its failing yet, at all.
A side issue not mentioned by you, is that Hulu is "captive" to the networks. In other words, an outside disruptor [i.e. from Silicon Valley] does not own the site, causing loss of expertise...and revenue...by the Networks. I would call this Oppt'y Benefit, as opposed to an Oppt'y Cost.
Also, approached correctly, Hulu can also be positioned to gain more access into the Webisode/short-form world, where much effort/visibility now resides. That could impact in reverse the Blip.tv's, DECA's, BBE's, and others going forward, while opening up unknown potential revenue models as they evolve.
We agree with Terrence Moss. Networks need to evolve to meet the needs of consumers. However, maybe they should look at the Hulu revenue model differently. Add a small subscription or PPV cost to for the privilege of watching a program with fewer commercials, without appointment, and the revenue numbers jump back where they should be.
Plus, don't forget about the potential interactivity of an advertising brand that sponsors programming on Hulu. When consumers can hook up with an advertiser with a single mouse click, suddenly the value of the CPMs should skyrocket. Look for advertisers to switch from 30 second in-your-face commercials to more engaging conversations that invite interactivity.
Jim Courtright
Partner
Big Thinking By The Hour, Inc