Hulu is actually video on demand, not online video

I want to formally suggest that we stop thinking of Hulu (and others like it) as online video and more as video on demand. Hulu competes with youtube in name only. The products are different. Hulu is selling video on demand. It competes with regular tv, timeshifted tv, dvds, and video on demand offerings from other sources (cable, netflix, etc).

Related: boxee is asking people to help them write their pitch to get Hulu back. Personally, I think too many of the users complain that the content owners should basically just give their shows away. They complain when there are more ads. They complain when they would have to pay for it. They talk about downloading shows as 'stealing' and make it sound like civil disobedience. I want free stuff as much as the next guy. But, I will not delude myself into thinking that because I know how to steal, it's ok. That's like walking into a bodega and stealing a pack of gum because the gum company was doing a free-sample promotion on the street the other day. These people are hurting their case and only making content owners more nervous about the internet.

Just to be clear, despite recently writing on the side of content owners, I do think that a lot of what they do is potentially not as valuable as it once was. The drop in costs of advertising and proliferation of outlets to reach consumers really should change the economics. It's hard to think that the networks were actually in the business of matching advertisers with receptive customers, rather than making the great content we've been enjoying for all our lives and selling it (that's the movie business). The content has always been a loss leader. If we accept that, it's lot easier to accept that people in production are probably overpaid. It's not as complicated as it once was: technology makes it easier to produce and the distribution is getting to be almost free. There is maybe not a good reason for an actor on a sitcom to make $1MM an episode in the future. Hopefully, the dropping cost of advertising leads to cheaper prices for our toilet paper. Though, it would probably also mean more scarce, and therefore an increased price for, good content.

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Content Owners Need to Make Money Too!

So, there is a tangled web of content owners, distribution partners, websites, employees, ad salesmen, actors and more that all have an interest in extracting the most value from their spot in the value chain.

Because traditional distribution (television) is still by far the most profitable (in that it provides the most revenue and cost per episode is basically a sunk cost), it certainly has a chance to influence where content is delivered. Ultimately though, the content owners should get to make the decisions. They are hopefully thinking about value per eyeball per episode in their decision making. Unfortunately, the OVERWHELMING majority of viewers will come from television. Online video sites would need to make a major case for substantially higher CPM for their viewing experience, which would probably be difficult to maintain if they were aiming to build for the 10-ft viewing experience (though with a wiimote or ipod touch as the remote, who knows!).

Hulu, as the leader (in my opinion) in the online video space, is going to be involved in probably every shitty thing that is going to happen as the content owners and distributors work to protect their legacy revenue streams/business models. This week, they removed their content from TV.com and asked to remove their content from Boxee. It's a major blow to the progress being made at the expense of cable companies, but that is how it's going to happen over, if I had to guess, the next 5 years (not to say that Hulu or Boxee will be around after that).

It just goes to show that being a web portal is not enough. There has to be some other differentiator. I think these guys need to focus on providing a superior interface, recommendation engine and innovative advertising model. It also makes me wonder who the ad sales guys are at Hulu. There really weren't that many ads from actual advertisers in there, in my experience. Obviously, they limit ads per show on purpose, but even the ads they have don't seem to be major advertisers. Maybe the low sales drove the content partners crazy? It's too bad really, because Boxee had potential to turn Hulu into the iTunes of streaming. Easy to use, slick interface with a deep library.

Well, if only Hulu had enough lobbying, we could have tried to use the stimulus to buy all the already laid cable/fiber in the US and nationalized the infrastructure, which would have created a real competitive environment. I have been meaning to research the history of the national highways, but I haven't yet (I'll opine anyway). I think the highways were once private, with a toll collector literally turning a pike (hence turnpike) to let people pass onto his road. At some point, we nationalized it (it's going the other direction now, but let's not think about that for now).

In the meantime, I have a suggestion for content owners. You made the choice to succumb to the large audiences that the cable companies can provide you. That is an understandable business decision. Just consider the impact of cableco provided DVR. People use DVR to skip ads, that costs you money. The cable companies provide these DVRs for super cheap. Maybe the case can be made (though I don't know the actual viewership figures) that you lose as much to people watching on DVR as they lose to people dropping cable in favor of Boxee. Not to mention how pissed off all the early-adopter, techies are. I hope you are putting pressure on them to build a channel like Hulu in the OnDemand section. In that channel, place unskippable ads or micropayments. Everybody wins (except maybe the Pirate Bay).

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What is going to happen to online video?

Currently, Hulu is my favorite online video site. Boxee is my favorite way to bring online video to my TV. Well, what is going to happen going forward? How do companies make enough money from online video? Trading analog dollars for digital pennies is a legitimate concern for these ginormous corporations.

ABC has an interesting strategy. They only allow their content to be streamed from their site, with their player (well, Boxee has it too). The user experience is crap. They make you click to continue the show after the advertisement plays, which makes it tough to watch from across the room. On top of that, they just increased the amount of ads they are going to show. But, if you are a fan of Grey's Anatomy or Lost or anything else on that network and you missed an episode, you can only go to their website. They keep the brand tight, rather than allow it become associated with another site like Hulu or Joost. Plus, if the ratings were one person lower because you didn't watch, they made less money. So, I guess they feel like you need to pay with attention for the show regardless of where you watch it.

As a consumer, I hate the strategy. However, I completely understand where they're coming from. It is a clear example of 'Content is King'.

But, here's where this could get interesting. It's not that the video I want to watch was created by/for the internet. It just happens that is where I can find it now. So, I plug my computer into my TV and use Boxee to get it onto the TV. If I was a cable company, I could cut this whole thing off immediately by just improving the on-demand content library. I cannot think of a good reason why they wouldn't (that's an exaggeration, but in a truly competitive market, it would likely be worth investment).  Putting ads into the show on the fly seems relatively trivial at this point (as long as you can sell the inventory).

Hulu and Joost, while great websites with deep content libraries, still don't control their fate, which is their biggest weakness, as evidenced with the hulu-baloo over the removal of It's Always Sunny in Philadelphia (aside: I love that show, but have no idea when it is on. I am without Sunny now. It doesn't seem like FX is making any money by taking it off Hulu). But, maybe what Hulu and Joost do really well is create fantastic user interfaces for quickly browsing through tons of content and choosing just what you want, and then suggesting what to watch next. Which could be the channel for discovery that I mentioned in my last post.

The current on demand channels on Time Warner Cable (in NYC at least) are pretty crappy. But, what's worse is that other than the premium channels (HBO, etc), most people don't even know they exist. There is a music videos on demand channel. Fitness on demand. A&E on demand. National Geographic on Demand. The list goes on. But, most of the channels have very limited selection and the browsing experience is designed to find something only if you know it exists. There is no serendipity button.

If the dream is 'anything at anytime', like I think it is, then this is the time for cable companies to invest in making their on demand offerings amazing.  You can even do 'variable pricing' by putting in more or less ads depending on how much people might want to watch. Limiting fast forwarding like on Hulu. And, of course, micropayments for ad-free episodes (not to mention my 'learn the message' free episodes). Cable companies, which already take payments for pay-per-view items, could easily add the ability to buy one episode of a sitcom for 24 hours for $0.20 (the price point obviously needs to be studied in more depth, again with variable pricing depending on how recent the episode is, how many people want to see it, etc.)

I have to imagine that ads placed into on-demand content on a Saturday afternoon when I'm just trying to kill time would be just as profitable as those inserted into whatever crappy show is on FOX.

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You like it? Pay for it!

The advertising supported model is fantastic. There was a period of time when it looked like everyone wanted their business to be ad-supported. It's a good idea because consumers don't feel like they are paying for your product, so they may use it a lot. But, in reality, consumers are paying with attention. It's a very small micropayment, but it is real.

The fact that it is so valuable to introduce people to a product which they might not have heard about is wonderful. But, when you think about it, if you buy Charmin toilet paper, you're paying for the ads they run on television. If they pay to advertise during The View, and you don't watch The View, you are subsidizing someone else's TV show.

That's why I love car manufacturers. I don't have a car. I don't need a car. I don't plan to buy a car. But, I love sports. I spent every Sunday this season watching the NFL. Car manufacturers subsidize the hell out of that. It's great to know that something so expensive, like the rights to broadcast the NFL, is not paid by me. It's paid by all of the people who need pick up trucks (Aside: Why do marketers think that everyone who watches football needs a pickup truck? Probably because Ford and GM thought everyone in America were in construction).

But, the ad-supported model is coming under stress now. I think it's rather funny. We were headed towards a place where everything in the country would be free except for toilet paper. But, toilet paper would cost $80,000 a year. Now that the ad markets have collapsed, people are re-evaluating. It was a crazy phenomenom, because most of the ad-supported tech companies targeted early adopter-types who, for some reason, have a moral aversion to ads. They don't see paying attention to an ad in this week's episode of Heroes as the micropayment for the production of that show. They see ads as annoying (despite the fact that they give us cliffhangers which actually increase the enjoyment many programs).

Well, I want to suggest that we stop this madness. As consumers, we should be much more direct about what we like and don't like. We should all start paying for our content. We do it with the movies. Why can't we do it with shorter form content at home? There should be more options for consuming content.

For example, I want an episode of 30 Rock. I can see a lot of ways to support that:

• Pay for it without ads (HBO)
  
• Pay less for it with some ads (Cable)
  
• Pay nothing for it with more ads (Networks)
  
• Pay nothing for it with a lot of ads contingent on passing a quiz at the end that proves you watched the ads and learned the marketing message(s)
  

That last option is potentially revolutionary. Imagine the CPMs you could charge if people had literally promised to learn your marketing message. Even if you haven't found the right person for your product (for Charmin, that would be an ass-less guy), you have guaranteed that he knows your value proposition. It's possible that he has friends with asses and one day they'll talk about TP, and he'll share his knowledge. It potentially could take the wind out of the sales (punny?) of ad-targeting. I mean, who really cares if you played the right ad to the right person if they didn't internalize the message? Hard to believe that would result in increased sales.

But, the bottom line is that it would be great for us as consumers to get past the hurdle of paying for the show we want directly and thereby direct our resources to the content that we like, not the content that advertisers think we like. We need to become the patrons to the arts that existed in a bygone era.

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