by Ben Elowitz

Michael Learmonth at AdAge published an analysis today of Hulu’s financial conundrum:  while Hulu wants to remain purely ad-supported in order to grow its audience, it is struggling with the economic realities that make its current advertising-only model lackluster.

But while Learnmonth’s article portrays “an ideological battle over its future” of whether to stay solely ad-supported vs. consumer supported, I can’t help but read his analysis and take away that it is inevitable:  for Hulu too, just like for the rest of the media industry, a healthy and sustainable model will only be reached when consumers pay for content.

Hulu has attained remarkable success.  It’s the #2 video site by audience, and has created a true breakthrough consumer experience for video that is best in class — and miraculously not only survived the minefield of investor and content provider relationships but prospered with them.  But with the hefty 70% revenue split paid to content providers, Hulu is still challenged to make money on a standalone basis.  Just as the TV networks themselves have seen, the dual (consumer+advertiser) revenue streams of the cable and satellite systems create a much healthier model.

Hulu’s struggles are just another case of how — almost no matter how large the publisher is — advertising revenues are no longer enough for a healthy publishing model.  With an explosion of content created and the huge dispersion of where consumer eyeballs land, the advertising dollars can’t be piled on the way they used to be for the top publishers of content.

It is time for Hulu to — creatively — start offering premium consumer services.

The good news is that Hulu is in pole position to succeed at getting consumers to pay part of the bill.  Under CEO Jason Kilar’s leadership, Hulu has demonstrated that they are extraordinarily strong at product development and partner relationships in a way that lets them make a surprisingly great experience for consumers even with the myriad license restrictions that they need to deal with on the back end.  On top of which, their proprietary content library is worth billions and has earned them destination value for consumers.  They’ve got advertiser relationships and track records, and have even established a strong premium pricing precedent at reasonable fill rates on the ad side so they can keep their appeal broad with a free basic offering.

With those great assets, Hulu has the opportunity to build new applications, content packages, features, and other enhancements that are compelling enough to earn consumer payment.  All of which will put them in a healthier position to not only make profits for themselves, but for their partners.  In fact, for Hulu, it’s not only for the good of themselves and their partners that they should add paid offerings, but for the good of the industry in pioneering the best ways to offer experiences the consumer will pay for.

  • Yi-Jian

    It will be a significant challenge to persuade consumers to pay for online video on their PC. Prices tend to be sticky downwards, and it's especially hard to charge for something once people are used to getting it for free.

    Perhaps mobile might be a more promising path to monetization for Hulu? According to Morgan Stanley, 54% of users pay for digital content on the mobile internet, versus just 5% on the desktop internet. Plans may already be afoot – Hulu has been conspicuously absent from the iPhone & Android and has even gone as far as to block Skyfire users, but there have been no lack of rumors about possible subscription services, particularly around the iPad.

  • elowitz

    I think that's just a short-term problem, until we get consumers en masse paying as they go. We're already making progress on that with 99-cent songs and apps; it will only move further toward ubiquity.

    By nature of their longer-term implied commitment, I am confident subscription will end up being used for high-end content and services, where relationship is important. It will be a great way to get a package of shows, or a series of episodes or videos. But plenty of the rest of the video and other content we consume really isn't relationship oriented. If it's premium, but not relationship oriented, and if payment is ubiquitous (as it will be over time), then bite-sized on-time payments will fit the bill.

    After all, 50 years ago people used to put nickels in the video screens at the bus stations to watch TV.

    I'm sure we can do much better now.

    –Ben

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