Hulu, Boxee and the disruptive cable TV model

In October 08, an up and coming internet TV start-up (Boxee) announced proudly that they now supported popular online video aggregation sites like Hulu, CBS and Comedy central. This was great news for all those looking to break the shackles of cable TV to watch their favorite shows streamed on demand via the internet to their TVs. (Though Boxee was not the only one supporting Hulu they brought public awareness to this concept)

Hulu, an online video website which hosts full length TV shows from many cable networks including Fox, NBC & Viacom has been growing in popularity since its launch. Hulu moved up from being 20th position amongst online video sites when it launched in March ‘08, to being 4th in Feb ’09 behind YouTube, Google video and MySpace video.

Just when things were looking exciting for consumers owing to a disruptive combination of a client and a service that brought TV on demand to the tube for free, Hulu on Feb 18th abruptly announced that it asked Boxee to pull down its Hulu support.

Why on earth would they want to do something like this, just when they were ramping up viewership?

To understand this, one has to look at the cable TV business model in the US. The book “Media Selling: by Charles Warner, Joseph Buchman” has a lot of insights into this and I reference content from it in the following paragraphs.

In the 70’s cable networks (that acquired and produced programming) would provide it to its affiliates the cable systems, which would distribute it to subscribers. The cable networks would make money from advertising and compensate the cable systems for their distribution costs. For example ESPN would pay the cable systems about 5 cents per subscriber per month. This was considered a carriage fee. Soon, they realized that their expectations on advertising revenue were exaggerated and started accumulating losses. This was when the cable operators/systems were charging their customers $15 per month as subscription fees. Cable operators thus not only made money from cable networks but also from their subscribers without any cost to them for programming

In 1982, ESPN decided that they would turn the tables around and ask the cable systems/MSOs to pay ESPN 10 cents a month for every subscriber. After intense negotiations they settled on a 5c per month per subscriber fee that the cable operators would pay ESPN as carriage fee. This was a disruptive model. It turned out to be a win-win situation though as the additional revenue that cable networks received was pumped back into programming. This resulted in better programs which in turn could be used to increase subscription fees and add new subscribers as it was delivering a better quality product.

The cable business model these days is a little more complicated with different cable networks& systems working with different business models – must carry rule, carriage fees paid to cable systems, carriage fees paid by cable systems.

Suffice it to say that many cable networks such as Viacom, Disney, etc. that have their shows up on Hulu get carriage fees from the cable system operators. The problem is cable system operators are concerned that subscribers will turn off their subscription if they can get the same content for free streamed over the internet right to their TV sets. This of course is a legitimate concern but far from being threatening.

If stats are to be believed then the number of hours people watched TV has actually increased since the coming of on demand TV shows. According to Neilson’s Three screen report – “Average time watching TV, online video and mobile video all increased in the fourth quarter, showing a robust market for video content, and that online video has not yet proven to be a viable substitute for TV consumption, but rather an additive medium

The average American watched 151 hours of TV a month for the quarter, or roughly three hours per day whereas the average online video watcher takes in about three hours per month.

The ability of CDNs to scale delivery of HD content to millions of TV viewers simultaneously is also questionable. Consumers who have paid upwards of $1000 for their high definition 42” LCD screens will hardly be satisfied by the low resolution fare being pumped out by the likes of Hulu. Moreover real time sporting events will for the foreseeable future continue to be watched on the HD broadcast network.

That being said the networks are not taking any chances.

Hulu carries content from several networks and makes available an RSS feed so that other aggregators like Yahoo TV, MSN video etc. can make them available on PCs. If this is the case then it seems odd that they block only those devices that connect to a TV. What’s to stop me from buying a PC that connects to Hulu via a web browser and connecting the same to my PC? I can build a custom browser that makes the content watchable and usable on the TV.

Chatter in media circles is that cable systems are planning on building a Hulu themselves. They will let consumers enjoy the pleasures of TV on demand provided they are already subscribers to cable TV. Maybe this will be at an additional cost or maybe not. However it doesn’t seem like a practical solution as consumers have already been exposed to what can be and anything less will not be as appealing. Technology will find a way to beat the system.

In the meanwhile TV.com, owned by rival CBS has announced that it will offer selected shows to its international audience, which Hulu has been unable to do so far. Clearly this is a move trying to differentiate from Hulu. Are the big boys beginning to take the battle to a new turf?

There is no doubt that Hulu and a networked media adapter is a disruptive business model that is bound to shake up the broadcast industry in much the same way as Kazaa and P2P networks shook up the music industry. While the music industry has to some extent come to terms with reality and changed its business models (iTunes, DRM etc.) the broadcast industry’s journey of realization is only starting.

An interesting time, if you are tuned in to this saga…

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2 Comments to “Hulu, Boxee and the disruptive cable TV model”

  1. That’s true. Technology will find a way to beat the restrictions. Look at some of the fairly well written comments on Boxee blog:

    http://blog.boxee.tv/2009/02/22/collaborative-effort-to-build-our-pitch-to-content-owners/#comments

    Boxee is being used as a case in example, by both sides, to push their agendas. As long as the Internet itself remains fairly democratic and open, it is fair to expect that people will find a way to get their content.

    Cable networks and systems are better off spelling out a good revenue share deal with the online video tech/service providers, instead of being a spanner in the works. To borrow the much maligned term, the cable/content wallahs must look for a win-win deal. Else, they’ll invite the wrath of the geeks and hackers, ending up losing all their prized content to the torrent world.

  2. Good write up Vinod.
    Down here in India though, with measly b/w yields on typical broadband home DSL connections (2 mbit promised, may be a quarter of that delivered on average), even low-resolution Youtube is a stop-n-wait-n-start experience, not worth the time spent on the website.
    Funny though is the feature on NDTV where they broadcast key youtube submissions in the name of “reviewing” of latest web-browsing trends, thus allowing us to watch things we heard were a rage on Youtube. Talk of a hen harnessing and heralding the egg.
    Hopefully, in the coming years, internet TV will be an option in India and I would be able to apply your analysis to local happenings.

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