• by Philip Leigh , May 4, 2010

As Will Rogers put it, "If I don't see things your way, well, why should I?"

The Los Angeles Times reports that Hulu.com's Internet video streaming of popular TV shows will soon offer a premium version featuring more episodes and additional shows in exchange for a monthly subscription fee. But company strategists may discover that a number of constituents will fail to see things their way.

First is the consumer. Many already pay $100 or more monthly for a combination of television, telephony, and high-speed Internet access. They're unlikely to welcome an incremental fee merely to watch from the Internet some of the programs they already get via CATV or satellite. The great majority are likely to regard Hulu Plus as an unnecessary redundant cost -- with one qualifying exception. 

The qualification depends upon whether Hulu could offer enough popular shows to become an effective substitute for more costly services. For example, if subscribers can get a preponderance of the shows they like via Hulu for $10 monthly there's an economic incentive to "cut the cord" on conventional television. In my neighborhood, Hulu Plus might be an economical substitute for basic CATV service that provides just 20 channels and costs $23 monthly.

However, few people use basic service; more subscribe to costlier plans with more channels. For example, the next service tier locally is $67 monthly for about 70 channels. Hulu is unlikely to provide enough programming to be an effective substitute for such plans, especially considering that it cannot stream live sports. In short, Hulu Plus is not going to be a realistic replacement proposition for most CATV and satellite subscribers.

Second are the local TV broadcast affiliates. Most of Hulu's content is supplied by its joint venture owners, which are basically broadcast networks. Network affiliates who broadcast the same shows locally are not going to welcome Hulu as a new competitor essentially offering the same merchandise. Moreover, the shows can be watched on-demand at anytime via Hulu, whereas broadcast affiliates are limited to days-of-week and time-of-day schedules.

Perhaps its owners will use Hulu Plus as a weapon to motivate the local affiliates to share the carriage fees they're starting to collect from CATV and satellite operators. If so, they might reduce programming at Hulu if the broadcast affiliates begin to share those fees with the networks. Such an eventuality would diminish Hulu's value to the consumer.

Third parties to consider are the CATV and satellite operators. Like the broadcast affiliates, Cable and Satellite television companies regard Hulu as a competitor. As noted, Hulu's owners include companies controlling major broadcast networks such as ABC, NBC, and Fox. However, those same companies also own a number of cable networks such as Bravo, ESPN, and CNBC among many others. Such networks typically collect carriage fees from the CATV and satellite operators.

Although Hulu is unlikely to offer programming from the most popular cable networks such as ESPN, carriage fees have become an increasingly hostile bone-of-contention between the operators and the networks. For example, ESPN alone is collecting about $3 to $4 a month per subscriber. Furthermore, the cable networks try to get the rates increased each year, thereby forcing the operators to steadily raise subscription charges to consumers. The regularity of such increases, combined with the economic downturn, makes it increasingly difficult to get consumers to accept higher rates.

Consequently Hulu Plus will likely motivate CATV and satellite operators to bargain more fiercely on the matter of carriage fees in the future. They're not going to want to pay more for content that is being offered separately in a way that bypasses their traditional distribution.

Nonetheless, Hulu seems determined to proceed with a subscription model. Perhaps  the company has another lesson to learn from Will Rogers, who said, "There are three kinds of men. One learns by reading. A few learn by observation. The rest just have to pee on the electric fence for themselves."