Peter Kafka

Recent Posts by Peter Kafka

Why $10 a Month for Hulu Is Too Much. And Too Little.

Is ten bucks a month too much to pay for “Hulu Plus”? Or too little?

Perhaps both.

The Web video site is getting ready to roll out its much discussed subscription offering of $9.95 a month, the Los Angeles Times reports. That jibes with chatter I heard earlier this week, though I’m not yet convinced this is a done deal.

But for argument’s sake, let’s say the report is correct, and the joint venture between GE’s (GE) NBC, Disney’s (DIS) ABC and News Corp.’s (NWS) Fox is about to test a premium plan. If they are doing so at $9.95 a month, it’s possible they’ve ended up with a price that will make both consumers and network TV guys unhappy.

How’s that?

$9.95 a month–$120 a year–is an awful lot to pay for free TV. Industry sources expect the initial plans for “Hulu Plus” to focus on access to a deep catalog from its broadcast TV owners. So instead of just getting the most recent five episodes of, say, “Family Guy”–those will still be available for free on regular Hulu–you’ll get an entire season or more.

If you’re really, really into a couple shows that run on ABC, NBC or Fox, then perhaps a Hulu subscription makes more sense than buying the shows on DVD or downloading them from iTunes.

But if you’re really into “Mad Men” on AMC or “Justified” on FX (which is great), or anything else on cable, Hulu Plus may not do much for you. And at the same time…

$9.95 a month doesn’t go that far once Hulu pays the bills. TV executives expect that Hulu will need to hand over something like $1 to $1.50 per subscriber to each of its network owners. Because that’s the same price the broadcast networks are trying to extract from cable TV operators in “retransmission” fights (see: ABC vs. Cablevision). And that money is worth a whole lot more to them than Hulu subscriptions. Which means the TV guys can’t undercut themselves on the Web.

So Hulu will need to pay out something like $3 to $5.50 off the top for every $10 it brings in. And then it has to shoulder the streaming costs, billing costs, customer service costs, etc.–figure a couple bucks a month more for that stuff. That gets you something like a 30 percent gross margin, which is nothing to brag about.

And what happens if Hulu wants to expand the service and add shows from other providers? It will either have to cut into its thin margin to pay for the programming or raise its rate above $10 a month. Which is already a lot to pay for free TV.

There are a few things Hulu and its owners can do to make Hulu Plus more attractive. Offer the service on more platforms, for one, like Apple’s iPad. And tinker with “windows,” so that Hulu subscribers get to see stuff before the freeloaders.

But moving windows is a good way to confuse/piss off most users, who don’t have any interest in digital/analog TV economics and just want to watch shows.

Also, access to Hulu on the iPad seems a bit less valuable given that Disney’s ABC, one of Hulu’s owners, is already giving away free access to its shows via a very popular app. Industry sources says Hulu CEO Jason Kilar tried desperately to get ABC not to introduce its free app for this very reason.

But while Disney is a minority owner in Hulu, Apple (AAPL) CEO Steve Jobs is the largest individual shareholder in Disney. If you want to connect the dots on that one, you’ll be doing the same thing everyone else in TV Land is doing.

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