Why Slashing The Price Of Hulu Plus Is The Right Thing To Do

If Hulu were a dramatic figure, it would occupy a classic character role: the ingenue. The fair and unassuming ingenue naively enters a perilous circumstance with the best of intentions and soon finds that ruin awaits at every turn. The story typically plays out in one of two ways: Either the ingenue is sullied and descends to the level of the forces that surround her (think Grease), or a dashing hero enters to redeem the ingenue, removing the burdens her exposure to the world has caused (think just about everything else). These paths are both open to Hulu, and many observers are actively rooting for one or the other outcome.

There's a third, if rare, outcome: The ingenue evolves to become the hero, using guileless sincerity to overcome the evils of the world (think Pollyanna, a Hayley Mills classic). Nobody believes in Pollyannas anymore. Certainly not in the business world. But to succeed in its plans to build a paying customer base, Hulu has no other choice to but play the ingenue all the way to this third end.

Consider this: One might see Hulu blocking Google TV owners (all 5 of us at this point) from accessing Hulu.com, a move swiftly copied by ABC, CBS, and NBC, and wonder: Is this a grown-up Hulu playing hardball? Not really. Instead, it's Hulu being honest. It has contractual obligations that force the company to make a good-faith effort to block its content from making it to TV screens without the help of a cable or satellite provider. And it's Hulu being intentionally naive because the company certainly knows what I've been telling my clients all year long -- that 21% of online adults have connected a PC to a TV in the past year, with millions of them using that connection to stream online video to their TV screens. 

I submit that once again, in cutting its Hulu Plus price to $4.95, Hulu would be playing the honest and somewhat naive ingenue, a role it has to keep playing to stay afloat in its shark-infested waters.

First, finding the right price for a monthly video service is tough because it depends on three things: 1) the range of content available, 2) the availability of substitutes for that content, and 3) how convenient the experience is. Pricing Hulu at $9.99 assumes that the value of number one -- which is very high for Hulu since it has first-run TV shows that millions of people want -- can overcome the issues raised by number 2 and 3. It does not. Specifically, there are substitutes available. Indeed, most of what you want from Hulu is actually available on Hulu for free, and the additional content you get from Hulu Plus is not of high-enough value to pay that much for, at least when it's all hindered by ads, which reduces the convenience of the experience. What's more, back-catalog content is more easily substituted than first-run TV shows are. Stacking Hulu Plus content against similar Netflix content makes Netflix look positively cheap and easy to access, especially once Netflix offers a digital-only plan in early 2011 at a price likely to be far below $9.99. 

So is Hulu running scared and cutting prices in a panic? No, I see a potential Hulu price cut as the honest move. Cue spotlight: Hulu comes forward, flashes its dimples, and sincerely acknowledges, “We have some content you want, but not a lot. We know you have other options, some good ones. And we know that while what we offer is convenient, it's not as convenient as it needs to be to charge you $120 a year. But what about $60?” By that time, enough people will have iPads and connected TVs that Hulu Plus is optimized for that they'll see Hulu Plus as a great complement to Netflix on those devices, the way HBO subscribers are also often Showtime subscribers. 

The price cut and its attendant positioning are both honest and naive, and it may just work.