Why Hulu has a perverse incentive to make its online video service worse.
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Hulu is still too good. It’s been getting worse, bit by bit, but not fast enough. The video website, which lets you watch a vast array of network and cable TV shows for free, in high resolution, anytime you like, remains so far superior to actual television that it’s becoming a serious problem. The only question is what Hulu is going to do to make itself crummier.
I’ve never paid for cable TV—I can’t justify spending $1,000 a year on something I know is going to sap my will to leave the couch—but if I did, I would have dropped it as soon as Hulu came along in 2008.* Not only can you watch most of the same shows for free, but you can watch them anywhere, provided you’re willing to wait one day after they first air on TV sets. It’s the solution to the three greatest irritations of the cable TV era: listlessly changing channels because nothing’s on, fighting over the remote when there’s too much to watch, and having to pay exorbitant prices to get basic boob-tube programming.
The problem is that Hulu knows it’s too good. If it were a startup company, like Facebook or YouTube or Amazon, this wouldn’t be a problem at all. It would just go on being too good until it grew to dominate the market. Then it would go public and set about figuring out how to turn a fat profit. But Hulu isn’t a startup. Owned by NBC, News Corp., Disney, and a private-equity firm, it’s a traditional media company that has been acting like a startup in order to defend its old-media business model. And that’s why the fun can’t last. Hulu has to make itself less awesome, and soon, before it eviscerates its own corporate parents.
That’s exactly what it’s in the process of doing. It started in late 2010 when it introduced a subscription service, Hulu Plus. At first, Hulu Plus only offered features you couldn’t already get on Hulu, like expanded access to shows’ past seasons and better integration with smartphones, Blu-ray players, and video-game consoles. Earlier this year, though, Hulu Plus began to usurp Hulu features that had originally been free. The most notable change was to give $7.99-per-month Hulu Plus subscribers privileged access to Fox shows. On plain old Hulu, you now have to wait until eight days after the first television airing if you want to watch the latest episode of Glee.
Rumors are that the next step will be for more networks to begin requiring “authentication” from Hulu watchers. If this comes to pass, you’ll have to log in and prove that you pay for cable or satellite television before you’re able to watch an episode of Modern Family. The point would be to thwart cord-cutters like me from accessing Hulu’s content (and advertising) without paying a toll to its corporate masters.
Time Warner’s CEO apparently thinks that’s a great idea. Let’s hope he’s the only one. The idea isn’t just bad; it’s downright insulting, given that network shows like Modern Family have always been free on the very day they air to anyone with a television and an antenna (and as of 2009, a digital converter box). It would also be self-defeating, which is why it might not happen on a broad scale.
Hulu was conceived by the networks as a bulwark against the type of online piracy that ravaged the record industry earlier in the decade. In its wise bid to get out in front of any potential Napster-like competitors, the television industry has largely succeeded. Since Hulu launched, I’ve never been tempted to look for pirated downloads of the shows it offers. Others clearly feel the same way: Hulu’s free service has attracted 29 million users and is still growing. Hulu has capitalized on that growth to become the Internet’s leading purveyor of video advertisements, and it reported $420 million in revenue last year. Those networks that haven’t joined in, such as CBS, have replicated the model on their own websites.
Television advertising, however, is a $70 billion industry, and Hulu’s corporate overlords are focused on protecting that larger pie. That’s why the authentication model is quickly gaining steam. If you want to watch NBC’s streaming coverage of the Olympics this summer, for example, you’ll have to log in to the NBC Olympics website with your cable or satellite account. Having paid $4.4 billion for the exclusive broadcast rights, the peacock wants to make sure it isn’t giving away the goods for free. It can afford to shun the cord-cutters because live Olympics coverage isn’t much threatened by piracy.
Hulu, then, is facing a conundrum. If it requires all of its users to authenticate themselves as paying TV customers, its viewership and revenues will dwindle. The move to delay Fox shows for eight days reportedly spurred a spike in piracy of Fox programs. Cut off the cord-cutters entirely, and the migration away from Hulu would accelerate.
There’s no getting around the fact that the company has to do something to make its free service less appealing—just not too much less appealing. That is, it needs to make “plain old Hulu” plain enough and old enough to dissuade committed cable-watchers from canceling their paid subscriptions—but not so plain and old that freeloaders swallow their scruples and turn to BitTorrent (or in my case, just watch less TV). It’s not like Hulu can’t make money from cord-cutters: I’ve consumed more and better advertising there than I have anywhere else on the Web.
Hulu has been cagey in response to the authentication rumors, published in the New York Post earlier this month and attributed to anonymous sources, saying only that nothing has changed for the time being. It’s possible there’s even an internal battle brewing—Hulu’s executives have been known to clash with its owners over similar issues in the past. It’s also possible the company is currently embroiled in negotiations with its content partners. (A few, including Verizon and Dish Network, have already gone the authentication route for next-day viewing.)
If so, it’s a tug-of-war not just for Hulu’s soul, but for the future of the television industry. To come through the long-term transition to online video with their revenues intact, Hulu’s owners have to steer a careful middle course between making the online streaming service too good to be true and not good enough to be true—between the Scylla and Charybdis of Napsterization and cannibalization. Here’s hoping they achieve mediocrity.
Correction, May 31, 2012: This article originally misstated the year that Hulu launched in the United States. It was 2008, not 2009. (Return to the corrected sentence.)