Why Hulu Will (and Should) Charge for Hulu Plus

The Hulu-will-charge-you-money rumor mill is churning once again and the blogosphere has lit up with preemptively angered Hulu viewers vowing that they will never darken Hulu’s digital door again. Some call it greed, others point to nefarious pressure from ailing broadcast and cable operations, while some decry the end of a freewheeling era. They are all wrong.

Hulu charging for content is a good thing. In fact, it’s a necessary next step to get us where we need to be. Let me explain.

This comes at an awkward time, to say the least. The site’s CEO, Jason Kilar, admitted just weeks ago that the free site is profitable, taking in more than $100 million last year and on a run-rate to more than double that this year. Blunting that momentum would be foolish. But letting it run absent the burden of helping to pay for the shows it profits from would also be irresponsible, and not in a Father-knows-best “charging for content builds character” kind of irresponsible, but in a more “not taking advantage of the opportunity to take Hulu to the next level in benefit of the consumer” kind of irresponsible.

When (not if) Hulu finally announces its subscription plans, it will have a small but critical window of opportunity to explain itself to the market – to the viewers, to its content partners (who also happen to own it), and to its frenemies ranging from cable companies to cable networks. If it gets the details of the plan right – and explains the purposes behind the plan properly – it will succeed. Here’s the key: The secret is to position Hulu Plus (or Hulu 2.0 as I’ve called it for over a year now) as more. More content, more control, on more devices. More everything. I'll explain in reverse order:

  • More devices. Currently online people watch video on 2.6 video devices a week. Young adults aged 18-34 have already expanded that number, watching video on 3.3 devices a week – usually a TV, a PC, a portable device like a phone or an MP3 player or both. We estimate that by 2015 people will watch video on 4 to 5 devices each week, including new platforms like netbooks and tablets. That’s a world that Netflix has already shown you can profit from by effortlessly serving up video on whatever device the consumer happens to be in front of. Hulu wants a piece of that action. You, as a consumer, should want Hulu to get in that game so you can download a Hulu widget to your Samsung connected TV, pull up the Hulu experience in your Wii, and, yes, even get a Hulu app on your iPad.
  • More control. In this multi-platform world, Hulu will necessarily have to offer more control – playlists, bookmarks, TiVo-like search, even auto-assembled recommendations that consider your entire viewing history, not just what you’re viewing right now. This is one of the secrets to Netflix’s success with its back catalog of Watch Instantly content that you didn’t know you wanted to watch until Netflix identified it for you.
  • More content. This ability to control content across multiple platforms will require more content options, not just the last 5 episodes of current shows, but an entire library of older shows, from last season to a decade ago. It will also finally give some purpose to the random movies that Hulu offers, because they can be discovered using the new tools described above and then watched on more devices than just browser-based PCs.

This one-two-three punch of more content, more control, and more devices, makes Hulu worth paying for. And it lets an industry that behind closed doors currently talks about Hulu as the devil, finally have to release its anger and start using Hulu to reach consumers without fear. So what remains of the old Hulu in this scenario? All the worried freeloaders can relax: of course the free Hulu.com will still exist, it has to. It will hum merrily along, gradually increasing the ad load at first to 12 ads per 45-minute show, then eventually 24. This gives Hulu the ability to defend itself against angry industry voices while still retaining its current value to the customer who has yet to hear the siren call of Hulu Plus beckoning to a better world.

If you’re following closely, you notice one significant problem I haven’t solved. With this fabulous service, Hulu would be nearly as good as your $54-a-month cable service today. I’ll preview that answer for you, too, though the details would require another lengthy post. It’s this: Hulu will eventually end up with two pricing tiers – one for people who subscribe to cable and one for people who don’t. That’s right, the $9.95 price will be for people who pay for TV service already, right in the range of what you pay today to subscribe to HBO, something you can only do as a paying customer. If you cut the cable cord, your Hulu Plus service price will rise to $24.95 a month. Still cheaper than most cable bills, but roughly what it costs to get basic cable, and similarly incomplete since you won’t have any content from Discovery, Viacom, AMC, HBO, etc.

This scenario as I have laid it out makes sure that watching content online is easier than piracy – a very important consideration – but still promises people that they can have more of everything they like if they are willing to pay. Despite whatever knee-jerk reactions viewers have to the idea of paying for Hulu content, it’s the convenient access to Hulu content they’re really being asked to pay for. My money says they will gladly pay for that as they always have in the past.

(Also posted on Paidcontent.org)

Comments

Fundamental disregard for customer needs or wants

Mr. McQuivey your scenario is missing a key fact in the decision making process, Hulu is inherently handicapped. They have multiple owners that apparently agree to disagree more often than not, because they're in a state of confusion about shifts in the marketplace.

I believe that the Hulu management team did the best they could with the cards that they were dealt. Clearly, their charter was not built around a typical start-up go-to-market agenda. Meaning, the needs and desires of content consumers was never a central part of their business plan.

They had to mediate between a group of legacy big-media companies whose primary reason for funding the start-up was deep rooted fear that their status-quo business model was being threatened.

I can't think of a single successful new venture that was founded upon a reaction to an apparent threat to their key investors vested interests. I for one would not want to be tasked to innovate under those circumstances.

David, I appreciate your

David, I appreciate your thoughts about the challenge that Hulu faces/faced. It's definitely a tough position to be in. But it's no different than the challenges faced by all of the other media companies and there's really no way around it other than to try to serve consumers. It's on that basis that I disagree with the title of your comment -- I would argue that Hulu has done a phenomenal job of satisfying consumer needs and wants. The 1 billion views per month attest to that. And those views will continue undiminished as Hulu adds a pay model to give even more satisfaction to the 10% of its customers who will likely want it. So it's hard for me to agree with any criticism of Hulu's past decisions or future moves on the basis that they're not taking care of their customers, though I can completely agree that it's a lousy place to be stuck between all these owners who have varying levels of commitment to the new model.

iPhone app

Hi James,
I'm sure you've heard the rumors that Hulu's iPhone app has long since been developed, but that they are waiting for this new subscription model before launching it. That jives with your point about adding more devices so you can sell the new price point as "more." However, when it comes to the iPhone specifically, do you think Hulu might be holding back over concerns about the overall viewing experience given the bandwidth problems on AT&T's network? A bad experience is a bad experience (whether it's Hulu's fault or not), and I think Hulu may want to protect its brand from that sort of fallout. What do you think?
Thanks and great post, as always!
Paul

You're right, Paul

The iPhone would be a disaster for Hulu -- mostly because of AT&T, certainly not due to anything Apple can control. I've got my eye on a likely announcement from Hulu regarding the iPad following in the wake of the ABC app which appears to be doing well. With Netflix also joining the iPad fray (and with the iPad focusing on wifi rather than 3G, intentionally, methinks), I think that will be the moment that Hulu will start charging, probably in two pieces: Buy the app for $14.99 for free, ad-supported content (because Hulu.com won't work on the iPad browser), or subscribe at $10 a month and get the app (for access to deeper content) for free. No reliable rumor here, just "here's what I would do in Jason's job" opinion.