Making Hulu play nice with cable

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The Times’ piece Monday on Hulu’s growing pains raised an awkward question about the media conglomerates that produce the television industry’s most popular programs: how dependent are they on cable and satellite TV operators? As my colleagues Dawn Chmielewski and Meg James reported, a number of programs on cable networks have either been withheld from Hulu or restricted to brief windows on the site. Even one of Hulu’s founding owners, News Corp., has yanked cable programs off Hulu.

One alternative being contemplated would be to create premium tiers on Hulu for cable programs, available free to pay-TV subscribers and (possibly) for a fee to everyone else. Such a move would protect the pay-TV incumbents’ business model against the online upstarts’ ad-supported approach.

But why should Hollywood be defending cable? Shouldn’t the studios be supporting an array of distributors to maximize their audience, rather than trying to protect the incumbents against competition? Not necessarily -- it all depends on the revenue produced. Hulu, like other online video outlets, isn’t generating the kind of dollars yet that Comcast and DirecTV can, so it can’t pay the studios as much for content. And like the music industry at the beginning of this decade (now there’s a role model), Hollywood is afraid to undermine today’s key revenue sources by supporting the ones that might prove lucrative tomorrow.

The problem with Hollywood’s approach to Hulu is that the studios are addressing the wrong problem....

There’s little evidence (other than anecdotes from bleeding-edge geeks) that cable and satellite customers are jettisoning their subscriptions in favor of free outlets online. Instead, the main effect of Hulu appears to be expanding and/or sustaining the audience for programs by shifting episodes to times and places that are more convenient to those viewers. More important, it’s providing a monetized alternative to file-sharing networks and unauthorized streaming sites, which are remarkably easy to find. In other words, keeping shows off Hulu doesn’t pull them off the Internet, nor does it prevent the audience for online TV from watching them via the Net. It just stops the studios from deriving revenue from those viewers.

Granted, the situation will change once it’s easier to watch Hulu, Sling.com, TV.com and other online TV outlets on an actual television set. That’s when the online sites will become truly viable alternatives for mainstream TV viewers. But consumers won’t be able to tune in those sites from their sofas until they bring new gear into their living room, whether it be an Internet-enabled set, a computer or a Net-connected set-top box. So it will take years for the Internet-directly-to-the-TV audience to reach mass scale.

I suspect that studio executives know all this, and that they have at least one other incentive to keep Hulu from becoming a compelling alternative to cable and satellite TV -- at least in the near future. In addition to selling programs to TV networks, the top entertainment conglomerates also sell bundles of channels to cable and satellite operators. The conglomerates can leverage the popularity of their hottest network (e.g., ESPN) to pressure operators into carrying several other fledgling, niche or spin-off channels (e.g., ESPN 2, ESPN News, ESPN Classic...). That’s why they’ve joined cable and satellite companies in resisting demands from lawmakers and regulators to unbundle their tiers and let customers order channels individually. Hulu and its ilk are the ultimate in TV disaggregation, stripping programs from networks and networks from each other. They also eliminate the cross-promotional tools that the TV industry has relied upon for decades (e.g., ‘must-see’ blocks of programs or rebroadcasts on sister networks), replacing them with more personalized or social ways for viewers to discover fare they might like.

Creating tiers on Hulu might restore some of the programmers’ ability to cross-promote. Curbing Hulu’s power to disaggregate, however, would also eliminate one of the site’s main benefits for viewers: the ability to consume (and pay for) just the programs they want, rather than being stuck with a package stuffed with content they’re not interested in. As the precipitous decline of the CD has demonstrated, consumers are rapidly losing interest in bundles of hits and filler. That’s what cable TV tiers look like, and Hulu would be ill-advised to replicate them.

-- Jon Healey

Healey writes editorials for The Times’ Opinion Manufacturing Division.