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Hulu and the Subscription Model

This article was written by in Consumer. 12 comments.


This is an editorial by Smithee and a plea for your help in shaping the future of entertainment.

At our house, we enjoy some Hulu programming on occasion. Even though during the recent DVR years I’ve become accustomed to skipping commercials, I don’t mind them on Hulu, for these reasons:

  1. I’ve only seen one per commercial break
  2. They haven’t been suddenly, obnoxiously loud
  3. Hulu is free, and so advertising makes sense

And so far, there’s no ability to skip them. I can deal with that, because in an episode of, say, “Defying Gravity” on Hulu, there are five commercial breaks, for a total of five minutes of Lipitor commercials (at first, every episode would play five of the same Lipitor commercial, it was almost funny). I can accept five minutes. That means about 9.6% of a 43-minute show is an ad. That’s fine, so long as the service is free.

But that is going to change sometime in 2010. Hulu is owned by NewsCorp (who owns roughly half of everything), and they have decided:

It’s time to start getting paid for broadcast content online. 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. Hulu concurs with that, it needs to evolve to have a meaningful subscription model as part of its business

Anything more specific than this decision is just speculation: subscriptions for what, everything? premium channels only? groups of channels? Nobody knows.

What I propose is unacceptable is this: a subscription fee for any user, for any content, so long as the advertising remains part of the experience. In other words: unskippable ads are no problem, subscription fees for any content are no problem, but both together would be a problem.

You and I have a chance right now to help influence and inform Hulu’s decision to go forward with a subscription model, before we let ourselves get duped.

Sadly, we’ve been letting ourselves get duped for a long time.

Newspapers, Cable TV, mobile phones

Newspapers are filled with advertisements, and they also expect you to pay for each copy. The same is true of magazines. In fact you could argue that any fashion magazine is just one huge multi-part advertisement. So, I don’t read them. Oh, I look at the news online all the time, but between my banner-blindness and various browser plugins, it’s not often I see an advertisement.

TV is a different story. TV used to be just like radio: the good parts were ad-supported, and you also had a station that relied on member subscriptions. Cable messed that all up, and we were too busy with the colorful new channels to notice. A cable company would set up shop in your town and tell you all about the dozens of extra options you’d get for $X / month. We were totally psyched to get MTV and Nickelodeon at our house, but it didn’t occur to me until later than since the cable company replaced our over-the-air channels, we were now paying for something that used to be free. Thirteen free somethings, in fact (UHF was admittedly pretty empty).

There’s an argument that in the case of OTA / broadcast channels, what you’re paying the cable company for is consistent quality of signal. I’d be happy to see some proof of that, in the form of a cable company’s accounting spreadsheet. I’m sure that NBC is charging the cable companies regional monopolies a fee to include their programming, and cable is passing that cost on to the customer.

The mobile phone business model just depresses me whenever I think of it. Here’s how a phone worked since the time it was invented: if you called someone, you were expected to pay for it, but if someone called you, it was free. This makes total sense: the phone call recipient didn’t intend to have that conversation, he or she isn’t really responsible. Besides that, this seemed to work very well for decades, and phone companies never changed it. That is, until we were tooling around town with phones in our pockets and cars. Since it was new and fancy, providers decided to invent a different business model: you’d be paying for calls now whether you started it or not.

As far as I know, mobile phone companies have never had to justify this to their customers en masse.

AOL vs. World of Warcraft

Remember those CDs of AOL software? They were everywhere. It seemed like you’d get a new version in your mailbox every three months, especially if you weren’t even a customer. They were free, because AOL’s business model was a monthly fee for access, content, and software upgrades. And AOL did fine for a long time.

Everquest came along and messed that all up, charging both a monthly fee and an upfront fee for the software, and now WoW players suffer the same fate. You’re paying the company twice for the same things they were going to be doing anyway. What is wrong with us? Why do we enable companies to use more than one business model at a time?

Advertising is a replacement for subscriptions

And vice versa: subscriptions are a replacement for advertising. Advertising is one business model, and subscriptions are another. Employing both for the same product is unacceptable.

I’d like to ask for your help now in spreading this message to the managers at Hulu, so they understand the intelligent way to move forward is to either saddle us with a recurring fee and remove the commercials, or leave the commercials in an otherwise free service.

On Hulu’s discussion forum, there are already many threads decrying the decision to start charging. You could try adding your own voice there, or e-mailing feedback@hulu.com. Another less elegant method would be to add an irrelevant comment on one of the entries at the official Hulu blog. In my experience, site owners are more likely to read blog comments than they are discussion forums, but your mileage may vary.

Hulu’s Free Glory Days Are Official Numbered, John Herrman, Gizmodo, Oct. 22 2009

Updated October 30, 2009 and originally published October 27, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Smithee formerly lived primarily on credit cards and the good will of his friends. He is a newbie to personal finance but quickly learning from his past mistakes. You can follow him on Twitter, where his user name is @SmitheeConsumer. View all articles by .

{ 12 comments… read them below or add one }

avatar Randy

There are several “free” newspapers in our area, but they have very limited distribution. The “subcriber based” newspapers have a much larger distribution.

The subscription fee partially covers the cost of printing and paper, but very little of the reporting and other fees. That comes from advertising.

There is something about paying for a subscription that makes a person value it more. Give it away for free and no one wants it.

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avatar Mike

If you don’t like paying a subscription plus watching ads then don’t subscribe – the choice is yours.

Keep in mind that they aren’t going to provide the product without a proper rate of return on their investment. If they don’t have ads then the subscription rate will be that much more. It doesn’t have to be one or the other just because you would prefer it that way.

I pay $50/month for my cable tv plus I get to enjoy the commercials as well. Do I like that? No, I do not. But I watch anyway – thanks to my tivo I don’t have to watch the commercials.

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avatar Smithee ♦1,358 (Quarter)

If removing the ads means a higher subscription fee, I am totally fine with that.

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avatar Mike

Fair enough – you should let them know your opinion.

Problem is that not everyone will agree with you. I too would rather pay a higher fee with no ads but lots of people would rather do the opposite.

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avatar Amber

Exactly. This is how capitalism works. If a company can make more money both charging subscriptions and reeling in dollars from advertising, it is going to. We vote with our wallets and (many) Americans have been voting with their wallets for cable TV +advertising for years. If you don’t like advertising on cable TV, don’t subscribe.

The same thing is going to play out on the internet where companies will need to make a choice between reaching a greater number of users (free model) or possibly making a larger profit (paid model). Hulu is big enough where a significant number of people have cut cable TV in favor of internet TV. If I were NewsCorp, I’d be milking that for all it’s worth.

Related to this conversation, I’d like to reference the book Free: The Future of a Radical Price by Chris Anderson. It specifically addresses television shows streamed over the internet.

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avatar Apex

To Smithee’s point,

While I agree with the concept that capitalism works out the model that the customers will support. The issue with a number of these things he mentions (like cable TV, mobile phones, etc.) is allogopolies. These markets have either almost no competition on a local level or are national markets with only 3 or 4 viable players and their is no diversity of choice in the market place as to the kind of services you want or what payment model you want.

If you look at Sprint, Verizion, AT&T and their payment plans, its almost like reading the same book three times. It’s amazing the level to which the choices are exactly the same. Why doesn’t one of them offer radically different choices than the other? Allogopolies don’t bring out the best in capitalism.

Cable companies are even worse. There is often only one choice in any local market. Now we have satellite companies but there is a hassle factor that makes the cable company an easier choice and even with the satellite companies, the prices and channels may be a little different but the model and the packages are not much different. None of them give you individual channel level selection for example. I like a joke I heard a comedian tell about the cable company. He says he calls them up to subscribe and the person on the phone asked him how he heard about them (as if they needed to market themselves against their non existent competition). He says, oh, kind of like I heard about the IRS.

Long distance companies used to have an allogopolistic racket going until the 10-10 numbers came in and showed what true competition can do to companies running a cash cow.

I think mobile phone companies and cable companies need some 10-10 like competition. When 10-10 came into the long distance business, rates dropped from 15-25 cents per minute down to 3-5 cents per minute. I don’t see why 10-10 level competition wouldn’t have very strong price pressure effects on the mobile phone and TV markets as well.

avatar BobBobBob

You actually can block the ads. Blocking the ads though replaces every commercial with a 30 second black screen that says “Hulu cannot display commercials, please check your adblock. We are supported by commercials” (paraphrased, and poorly)”. Since some commercials are only 15 seconds, it leads to longer viewing times and nothing to watch for 30 seconds! On the upside, you don’t have to watch the moist-lubricant commercial some shave cream was promoting.

To block the ads (if you were so inclined) you would watch the websites being accessed (you can see the domain names flashing in the browser status bar when commercials load). Add those domain names to your hosts file and point them at the 127.0.0.1 IP address. Now none of the commercials can load.

Once they added the option to thumbs-down advertisements, I stopped blocking the commercials.

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avatar Mike

In this particular case why can’t they make everyone happy? (or everyone equally unhappy as the case might be).

Hula should offer different types of subscriptions along the lines of (all numbers made up):

Free – but you get 8 minutes of commercials per hour.
$1/hour with 3 minutes of commercials
$1.50/hour with no commercials.

They could also do monthly fees ie free for 8 minutes of commercials/hour, $10/month for 3 minutes of commercials and $18/month for no commercials.

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avatar Craig

Business needs to make money, can’t give everything out for free. This is no surprise and I think they will still have some sort of freemium model. I have to believe its more than just commercials, I wouldn’t pay just to forgo a minute or two of commercials. Maybe certain shows will be free, and the best shows you have to pay for.

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avatar Erica Douglass

Read between the lines. Hulu isn’t making money with those commercials. It’s possible that they are doing this because advertisers aren’t getting the expected ROI from Hulu commercials.

If you don’t like it, may I suggest a Tivo?

-Erica

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avatar Tom Sawyer

Screw that. I say go ahead hulu, and see what happens. NOBODY will pay for their services when they can get the same on their DVR or NBC/ABC/CBS.com for free. I love hulu because it is extraordinarily stable in comparison to the networks websites and I dont have a DVR, but there is no way I would ever pay for it. If they need more money then they can start to advertise MORE. Im ok with that because most of the time I can bundle all of the commercials together and check my email while their playing.

But that is just my personal feelings and economic opinion.

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avatar AJ

I agree with most of your points save the one discussing newspapers and magazines. And though what I’m about to write probably can be applied to most if not all of your points, I think it’s most applicable to newspapers and news magazines (I’m not going to get into fashion or style or pop magazines because I don’t read them and don’t have the background to comment one way or the other – also I don’t care for them that much).

Newspapers, and news magazines use ads to subsidize the cost for the consumer. One could argue, the high cost of keeping a newspaper running reputably – by which I mean not only with strong local coverage, but also national correspondents, and international bureaus, with strong investigative reporters, would cause the price of a newspaper sans advertisements to be too high for people to purchase it on a daily (or even possibly weekly) basis. Taking away the cost to the consumer and relying completely on advertisments could not only affect the journalistic integrity (over relience on an advertiser to finance their paper could affect how they report stories as to not offend said advertiser), but also create such an overabundance of ads that they resemble less a paper, and more a glossy magazine.

Newspapers need the right balance of both to stay profitable, maintain their journalist integrity, and stay affordable for the comman man (i.e people like me). And even so, the cost of papers are rising, since less people are buying them, and as such can’t charge the same premiums for ads – and are losing ads in general. It’s a downward cycle that I think will affect (actually, already has affected) the quality of newsreporting in this country. Especially as we have been so accustomed to getting our news for free online. And I think the quality, and to a certain extent trustworthiness, will only go down if we rely only on free online newsreporting.

(and no, neither am I a reporter, editor, or have anything to do with the newspaper industry at all. I just value them as a resource, and institution for getting out the news in a reliable and overall trustworthy way)

As for hulu, I never use it – I watch all the shows of which I’m interested using the DVR, on tv as they air, or from the specific channel’s website (ie. watching House on Fox.com, or Flashforward on ABC.com), and I don’t really know much about how profitable Hulu needs to be (or even if it needs to be profitable other than just being prefferable to be profitable for Fox and its Hulu network partners) to keep the shows or networks afloat – specifically in regards to how much satellite or cable bills, extra subscription fees, DVD sales, and TV ads pay for the shows I watch.

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