Digital Lockdown

Hulu, Murdoch, and the monetization of free TV

by by Jeffrey Martin

Welcome to the world of tomorrow, where all your media dreams come true. Allow me to catch you up: Americans left behind rosy domestic gatherings before that boxy antennaed contraption decades ago. The country entered a centrifugal swirl, and increasingly frenetic lives clashed against static television programming schedules. The advent of a wired world that circulated media gratis exacerbated the situation, causing viewers to shy away from cable’s cost. Speed up the reel, and we arrive home. Today, TV teeters on the brink of uncertainty. Profitable? Yes, still. Precarious? Absolutely.

Then in walks a bombshell: 50-plus broadcast networks offering 665 programs, browseable by season and episode; 586 full-length movies; personal recommendations based on one’s viewing history; and all of it, free. The collective jaw drops, horny-cartoon-wolf style. America, meet Hulu.

Yet trouble brews in this perfect romance. Antsy investors and jealous competitors, wring their hands in disbelief at Hulu’s lack of fees. Soon, they may strike; Hulu lies prone to the dreaded paywall.

TV on the Interwebs
Hulu, an extensive Internet media library, uproots the domesticity of the small screen by putting broadcast television programming on every computer. Since March 2008, when Hulu’s substantial resources opened to the public, the bedroom, office, library, or coffee shop has replaced the living room as a viewing auditorium. Claustrophobic media addicts breathe easier.

The site has occupied a significant corner of the Web’s vast domains since its launch. By September 2009, media ratings agency Nielsen placed Hulu second only to Youtube among online video sites based on views. Hulu also ably cultivates relationships with advertisers. Their website currently lists companies from State Farm to Wal-Mart as sponsors. Arash Amel, an analyst for the marketing research firm Screen Digest, told Newsweek that Hulu earned $12 million in gross profit last year. (Youtube brought in none.) This year, Amel expects Hulu’s revenues to jump from $65 million to $175 million. The funding that their pristine broadcast content precipitated has guaranteed viewers universal Hulu access within the United States. All one needs is an internet connection—not a bank account—to watch television.

Yet the swarms of viewers that Hulu’s free content attracts has aroused unease in the traditional purveyors of broadcast programs—cable providers such as Comcast—who collectively pay $22 billion a year for the content the site offers for free. We should recognize this anxiety by now: it provoked a litigative fury from the Recording Industry Association of America earlier this decade; it unsettled the Newspaper Association of America to the point of calling an industry-wide conference that reeked of price fixing this past May.

Comcast, fearing subscriber flight, has decided to stop the deluge at the source. Negotiations are under way for Comcast to buy a 51 percent share in NBC Universal, one of Hulu’s four principle owners, from a beleaguered General Electric. Following this transfer, Comcast will likely push Hulu to adopt business policies that put less pressure on their own revenues. One such policy, the TV Everywhere initiative, would bar Hulu access to consumers who do not already pay for cable. This parasitic relationship would steady a cable industry whose future has become uncertain in a payment-averse Internet age.

Prime Time price tags
If Comcast does pursue the TV Everywhere initiative, it may face an uphill battle in the Hulu boardroom. Two of Hulu’s other three owners—News Corp. (Rupert Murdoch’s omnibus media monstrosity) and the Walt Disney Corporation—have no hand in the cable provisioning business. Their emphasis on content production, not distribution, means that the TV Everywhere initiative would cut them out of an augmented revenue flow.

Perhaps, then, a spirit of compromise, a desire to accommodate the newest member at the Hulu table while also enriching himself, elicited Murdoch’s recent suggestion of a more direct method of monetization. In September, he floated the idea “of adding subscription services in there and pay-per-view movies.” Though Murdoch assured anxious Hulu viewers that matters remained up in the air, News Corp. Deputy Chairman Chase Carey reiterated his boss’s musings more definitively at the On Screen Media Summit a month later. “A network like Fox sits there with truly the best programming in sports and entertainment,” he said. “We need to move that business to a place where we are getting fair value.” Carey postulated that fees could come as soon as 2010. The coercion of payment for Hulu’s immense, underexploited resources must appear attractive to those at News Corp. who meticulously watch the bottom line. Indeed, a pay-wall separating consumers from the expansive media library would placate the disgruntled Comcast while fattening Murdoch’s own pocketbook.

But the profit-maximizing ways of Murdoch and Co. may end up rubbing Hulu’s directors the wrong way. Provoked by Carey’s announcement, a source at Hulu told Entertainment Weekly that no such timeline for charges exists. 2010 will not necessarily bring with it the death of free, legal broadcast programming online. Moreover, the Hulu source emphasized that any hypothetical subscription service would add to the site’s current offerings. Whatever form this service might take, it would entice viewers to pay, not compel them. By and large, content would remain free.

This anti-payment ethic, so characteristic of the Internet today, has kindled the ire of more traditional money-minded individuals. Laura Martin, an analyst with growth-oriented investment bank Needham & Co., recently ranted to an OMMA Video audience about how little Hulu viewers pay for professionally produced programs. She grumbled that “the 27-year-old geniuses” that pioneered the Web’s current outpouring of free sites such as Hulu “have run amuck in these companies.” Invoking the gargantuan sums that network studios lavish on their shows, she charged that Hulu’s directors “steal from the guys spending the $3 billion dollars and they don’t do anything about it.” Though her diction ignores Hulu’s legality, it does foreground the fact that the website does not generate enough revenue to grease the palms of everyone in the television chain. By sapping much of television’s storied profitability, Hulu imperils the paychecks of everyone from the besuited executive to the boom operator and casting director.

Between Apple and apathy
Yet a straight monetization policy would lead Hulu into dangerous territory. The anti-payment ethic does not emanate from “the 27-year-old geniuses” alone, but rather from the millions of Internet users who have refined the process of extracting free content over the past decade. Hulu fees would simply redirect viewers to one of the Hydra’s many other heads. Though these sites frequently operate on the shadier side of Internet legality, they would nevertheless siphon viewers off of a paywalled Hulu.

The prospect of Apple jumping into the Internet television fray undoubtedly poses a much greater threat to Hulu than does piracy. Reports circulated early this month that the iTunes Store may soon offer a $30-a-month subscription service for unlimited access to network broadcasts. Apple can count on a large customer base, given the loyalty its clientele exhibit and the adeptness with which it conquers markets. If Hulu erects any sort of paywall, it would venture into the ring with this over-muscled Ivan Drago of digital innovation.

Hulu, then, must tiptoe carefully towards any possible payment scheme. On one side lie the sleeping, petulant Internet masses, endowed with a sense of entitlement and innumerable options for skirting payment. On the other side resides a colossus of Internet profitability, eager to engage young Hulu on monetized ground. The hybrid model, combining vast amounts of free content with attractive pay features, will likely prove the most viable means of navigating these narrow straits.

Yet to what extent that will compromise Hulu’s position as the epitome of Internet accessibility, of Internet promise, remains unclear. Hulu seems to reside at the end of digital history. Media devices have grown smaller, interfaces have become more user-friendly, and minimal distribution costs have rendered content all but free. Hulu emerged from this perfect storm, delivering old media’s most precious gems through new channels free of charge. Murduch’s machinations, though, may effect yet another paradigm shift. We may soon awake from our decade-long dream—the first stirrings of which appeared with Napster—and find reality, now displaced to the Web, with the familiar price tags attached to the margins.

JEFFREY MARTIN B’10 puts the blame on VCRs.