12 August 2016

Hulu Puts Down Its Free Service - The Evolution of Broadcaster Streaming

Word came last week that Hulu is dropping its free service of fresh off-broadcast programs. It is hard to overstate how big a change this is.

The change has not gone unnoticed. When Seventeen magazine publishes a story "Hulu is Getting Rid of the One Thing You Love About Hulu"...well, having multichannel business issues show up in Seventeen...that isn't something this blog has ever seen before.

What it means to me is that the original motivation for the formation of Hulu by NBC and Fox (later joined by ABC and recently by Time Warner) -- the fear of piracy is now much less of a concern for these companies and the potential of creating a subscription revenue business is a much greater one.

At the time of Hulu's launch, it solved a few problems for its owners:

Because they controlled Hulu, they had opportunity to revise program licensing terms (if business conditions change/require it). Because the partners were all in the same business, they knew that they were all facing the same types of issues.

In the event there was a business in this, that would play out over time and the big networks didn't have to worry about valuation issues since they were equal partners (and were licensing programs to Hulu on similar terms).

Hulu launched to the public in March 2008 and was rightly declared a success within a year per Forbes. The successful launch decimated the market for pirating the programs available on Hulu.

And then the business evolved...

In 2009, Fox CEO Chase Carey said Hulu would need start charging for some content. Presumably there wasn't enough ad support to be attractive. Hulu Plus (a service at the time without ads) launched in 2010; Netflix was on the radar screen.

When Hulu launched retransmission consent revenues were a small part of the business of most broadcasters. When that revenue stream started growing, the multichannel providers (cable, satellite and telco) wanted something in exchange for their higher payments. Since the broadcasters couldn't shut off over-the-air access to their shows, they offered the multichannel operators a "window" of exclusivity in online access to their shows. If a viewer wanted to watch the program online during the week after it aired, the viewer would need to "authenticate" that he or she had a multichannel subscription.

Comcast bought control of NBC in 2011. Part of what made NBC attractive to Comcast was the growing retransmission consent revenue stream for the broadcast network.

In 2011, Fox changed its Hulu policy to push its most recent episodes of its network series behind the paywall for one week after airing. The impact on piracy was swift and dramatic. According to TorrentFreak pirate downloads of two representative Fox shows went up over 100% following the change.

When Hulu launched on the Apple TV in 2012, there was no free service only Hulu Plus was available.

As Netflix's growth exploded and its valuation followed, Hulu's owners saw the market making the investor case for a video streaming subscription service. Being ad-supported had become passé.

Some might see the change at Hulu cynically. Recode's Peter Kafka writes that Hulu's network owners "have been uncomfortable with the notion of putting all their stuff up for free on the web. And they’ve been trying to back away from it for many years." To my eye, the story is a bit more nuanced. The owners were always looking for the money and didn't have any idea where it was at first. Since they found the money, they have been following it.

In some ways, this latest change -- to exit free -- may be all about branding. As Seventeen notes, free streaming from Hulu will still exist, but not on hulu.com. The new streaming service will be called Yahoo View. I supposed branding a free service as from Yahoo is as good a way to kill it as any other.