Hulu and the End of Free TV

Some day, perhaps soon, analysts will look back on the past week as the beginning of the end of Hulu, at least as it was originally conceived. The web TV portal, which sought to blend video-on-demand functionality with a free-to-the-user broadcast monetization model has been hugely popular with consumers. But its architects are now bent on dismantling it.

Speaking at Broadcasting & Cable’s OnScreen summit last week, News Corp. President and Deputy Chairman Chase Carey said, “I think a free model is a very difficult way to capture the value of our content. I think what we need to do is deliver that content to consumers in a way where they will appreciate the value.” If that wasn’t clear enough, he added, “Hulu concurs with that, it needs to evolve to have a meaningful subscription model as part of its business.”

It wasn’t the first time one of Hulu’s joint-venture partners had expressed wariness about their creation. Back in May, NBC Universal forced Hulu to remove its content from Boxee. But coming from Carey, who was only recently appointed to his post, it had the feel of a new wind blowing.

Reaction from the blogosphere was swift, and much of it predictably hyperbolic. Yet even some of the more sober analyses tended to view the move through too narrow a lens, seeing it largely as a conflict between free and paid content online. While that’s certainly part of it, I think News Corp. is motivated by deeper concerns that go to the very nature of free broadcast television.

In addition to his Hulu comments, Carey also suggested last week that News Corp. is laying the groundwork for a battle with cable operators over retransmission consent for Fox Broadcasting content. “We need to move that business [broadcasting] to a place where we are getting fair value,” he said, according to a report on the SportsBusiness Daily web site. “You have to have conviction and do what’s necessary to do.”

What’s necessary to do, in Carey’s view, is to get cable MSOs to pay for the right to retransmit free broadcast programming. “It’s about trying to get our business to a place where it can be a healthy, long-term business,” he said. “It starts with making dual revenue.”

Under FCC regulations (and court rulings) cable and satellite operators must license the right to retransmit broadcast programming. Until now, however, the major broadcast networks have used that leverage not to extract payment from the MSOs but to gain carriage or tier placement for their affiliated cable networks.

Clearly, News Corp. plans to change that. As Deutsche Bank analyst Doug Mitchelson pointed out in a research note last week:

Fox is beginning to negotiate its retrans deals including, we believe, one with a top-5 cable operator right now. We expect Fox is asking for $1+/sub/mo given Chase Carey…former DirecTV CEO, knows how crucial broadcast carriage is to pay TV operators, especially sports programming (like the World Series).

What does that have to do with Hulu? Well, if you’re looking to charge MSOs to retransmit your free broadcast content, you really can’t be giving it away online.

Mitchelson again:

In exchange for significant affiliate fees, we would expect broadcasters would dramatically expand VOD availability and place greater limitations on free internet availability of their shows. Ultimately, we expect the networks and TV stations to convert to hybrid local/national cable networks…and then sell or give back the local broadcast spectrum. With 100m pay TV households, $1/sub/mo would be $1.2b of revenue and EBITDA per network per year.

That’s a much bigger payoff for Fox, NBC and Disney than they’re likely to earn from Hulu, with or without a pay wall.

Question of the week

Would you pay for a premium Hulu tier if it had content that is not currently available on the site?