How  HULU  is  changing  the  TV  industry  –  competitive  analysis  

and  strategic  options  

 

[Author  Name]  

July 5th 2010

Deepak  Agarwal  

Brian  Charles  Winans  

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Table  of  Contents  

1.  The  Business  Models  of  the  Traditional  TV  Industry........................................3  1.1  Broadcast  Television ..........................................................................................................3  1.2  Cable/Satellite  Television.................................................................................................4  1.3  Current  Issues.......................................................................................................................5  

2.  The  Business  Models  of  the  TV  Industry  Online .................................................6  2.1  Hulu ..........................................................................................................................................7  2.2  TV  Everywhere .....................................................................................................................8  

3.  Porter  five  force  analysis  of  Online  Video  distribution  industry..................9  4.  Hulu  -­  SWOT  Analysis................................................................................................ 11  5.  Directions  for  Hulu .................................................................................................... 11  5.1  Current  Situation .............................................................................................................. 12  5.2.  Potential  Future  Opportunities .................................................................................. 14  

6.  Strategy  going  forward............................................................................................. 16  7.  Conclusions .................................................................................................................. 16  8.  References .................................................................................................................... 18  

 

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1.  The  Business  Models  of  the  Traditional  TV  Industry   The US television industry can be broken down into three segments, broadcast television, cable/satellite television1, and public television. Since the case primarily focused on cable and broadcast television, primary focus will be placed upon these two segments.

1.1 Broadcast Television Broadcast television, or commercial television, initially consisted of three major networks, ABC, CBS, and NBC. Recently others have joined the mix. FOX is the most notable of these networks. These networks are national. Their content is broadcast everywhere in the US. In order to accomplish this task, the networks rely heavily on local media markets to transmit content. These television stations are either owned and operated by the networks or are affiliated and privately owned. Based on federal regulation, the networks are only allowed to own a certain percentage of television stations. Those that are not owned by the networks receive payment for broadcasting the content. In recent years, the payment that affiliates have been receiving has been decreasing. These networks have their own studios to create content which viewers watch. This content can range from situation comedies to live shows. In addition, the networks sometime purchase content made elsewhere. It is not uncommon for a network to show syndicated programming which was initially created by another network. Other times content is purchased from movie studios. It is important to note that “content is king”. These networks must ensure that they offer their viewers the best possible content at the lowest prices. Without viewership, these networks’ revenue streams will quickly diminish. Since the networks freely distribute their content, it is free to view on any television with an antenna. Since the companies do not charge viewers, they must find alternative ways to make revenue. Therefore, their revenue streams come from advertising. According to a 2001 survey, broadcast television networks transmit 16 to 21 minutes of commercials an hour2. Essentially, up to a third of what is broadcast are commercials. The amount that networks receive for these commercials varies drastically. A commercial that is shown during “prime time”, the most-watched three hours of television, will have a much larger viewing audience than one shown at 4 AM when most people are asleep. Therefore, networks receive much more money for “primetime” commercials than other ones. However, it does not stop there. Certain programs are more popular than others and therefore capture a larger viewing audience. These programs clearly earn more advertising revenue. In other words, the networks that are most profitable are those that gain the most advertising revenue. The more viewers that watch a show, the more advertisers are willing to pay. Therefore it is critical that networks offer great content to attract a large viewer base. 1 Americans generally known use the word “cable” television indiscriminately when referring to either cable or satellite television. To avoid confusion, this paper will refer to both cable and satellite television as “cable” television. However, this word is intended to cover both categories of subscription television. 2 http://en.wikipedia.org/wiki/Television_in_the_United_States, date accessed 29-jun-10

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1.2 Cable/Satellite Television Cable television is private television that people must subscribe to use. It is either is provided through a cable or via satellite. When viewers subscribe to cable television they agree to pay for a bundle of channels. This bundle may include basic channels as well as premium ones. Cable operators provide a limited number of packages from which a user may select. In many instances subscribers are “forced” to pay for cable packages that include many unwanted channels. There are generally only a few cable operators in any region. Thus, viewers have limited options from which they can choose. Cable operators strictly provide cable channels. They do not create content of their own. In some ways, they can be viewed as the “dumb pipes” of the cable television industry. They link the cable channels to the end users. These operators pay for each channel that they provide to viewers. Viewers then pay for the entire subscription service. It is important to note that there are two kinds of cable channels that viewers watch. They are the following:

• Basic channels: These channels are supported by monthly viewer subscription fees. The popularity of the channel determines the amount that a viewer will be charged for a channel. ESPN, one of the more popular channels, charges over four dollars per subscriber per month3. Other channels charge fees as low as five cents, while the average for 2009 was twenty cents4. These basic channels generally do not charge high enough fees to cover their costs. As a result, they have an additional revenue stream. Like the network channels, they also have limited advertising in order to generate revenue.

• Premium channels: These channels are said to offer “premium” content. This

content ranges from recent Hollywood movies to content produced in their own studios. These channels do not earn revenue from advertising. Instead, they charge viewers a premium for their content.

3 http://en.wikipedia.org/wiki/Cable_television_in_the_United_States, date accessed 28-jun-10 4 http://www.nypost.com/p/news/business/cbs_cable_cabal_MFkrDUA1hKAFJDe0YJPiYN, date accessed 1-jul-10

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Figure 1: Traditional value chain of TV industry

1.3 Current Issues When examining the two segments, the cable channels tend to fare better regarding profits. While it is true that overall cable channels receive more money than broadcast networks, they always receive a fixed subscription fee from their viewers. This subscription fee makes all the difference in terms of revenue. FOX, for example, operates both broadcast network as well as a cable channel. For the quarter ending in September 2009, its broadcast network had a 54% drop in operating income. During that same period its cable network increased by 41%5. It seems clear that cable channels are more profitable than broadcast networks. In fact, CBS’s CEO Les Moonves was quoted saying that moving to cable would be “a very interesting proposition.”6 However, switching from being a network operator to a cable channel is quite challenging. The networks have owned and operated stations that they maintain. ABC and NBC each have 10 while CBS owns 14. Determining what to do with these stations could be quite costly. In addition, the networks must think about their advertising revenue. It is estimated that 15% of US households do not have cable or satellite. This means that if the networks all switched to cable they would lose that viewership which would cause a drop in advertising revenue. While the broadcast networks accept their current position, it is also clear that they must begin searching for alternative revenue streams. One area where they have set their target is cable operators. In the past the FCC required that cable operators provide network channels as a part of their basic channel offering. In return, the networks would not demand a fee for those retransmission services. Recently, the broadcast networks have decided to start altering the rules of the game. They have begun demanding retransmission fees from the cable companies. Cable companies, of course, have the option of not showing those channels, but taking such an action could 5 http://filmtvindustry.suite101.com/article.cfm/tv_business_model_explained, date accessed 28-jun-10 6 http://www.businessweek.com/magazine/content/09_22/b4133076651151.htm, date accessed 29-jun-10

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cause a lot of unhappy customers. Although it is not clear how far the networks will go, they have been quite successful up until this point. CBS now boasts retransmission fees of fifty cents per subscriber per month and FOX is earning even more, somewhere around sixty cents7. It is almost a certainty that the networks will continue to grab as many transmission fees as possible. As the transmission fee battle continues, cable operators will search for ways to either cut costs or increase revenues in order to survive. The cable operators are faced with two tough choices. The first option is to increase subscription fees in order to make up for the increase in transmission fees that they must pay. If this happens, it is likely that some viewers will cancel their subscriptions. The other option that cable operators have is to renegotiate the fees that are paid to the different cable channels. Cable channels like ESPN have little to worry about. First of all, they make a large amount of money per user. So, even if revenue dropped a bit, they would survive. However, the big name channels are unlikely to be impacted by this. People subscribe for these channels in particular. Since these channels know that they have a large amount of bargaining power, they are unlikely to accept a per subscriber fee cut. Small cable channels that do not have a large viewership, on the other hand, have very little bargaining power. In addition, these companies make just a couple of cents per subscriber per month. They have no negotiating power and no revenue. Big networks’ demand for retransmission fees is likely to force cable operators to cut the small cable channels from their package. The result will be that only the most popular, most mainstream channels will survive. The cable channels that offer unique and creative content will die unless they find an alternative way to transmit their content.

2.  The  Business  Models  of  the  TV  Industry  Online   As content has become increasingly easy to distribute, more and more content providers are finding that they must have an online presence to stay competitive. This is the case with network and cable media conglomerates. The way in which they earn revenue is similar to that of traditional TV programming. The companies either earn revenue based on advertising targeted to the users or through subscription fees which viewers pay. In some cases, both revenue streams exist. Another less-popular revenue stream is actually selling the content online wherein viewers can download episodes of their favorite shows to their computers. Since the case examines both Hulu and TV Everywhere, the revenue models of these two companies will be examined in particular.

7 http://filmtvindustry.suite101.com/article.cfm/tv_retransmission_cable_subscribers_to_pay_more, date accessed 29-jun-10

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Figure 2: Online video value chain

2.1 Hulu Hulu’s revenue model is quite clear. Its revenue stream is based on advertising. In fact, Hulu’s advertising scheme is quite innovative. It ranges from the basic fifteen to thirty-second advertising break all the way to the user-controlled experience wherein the user could select the type of promotion he/she viewed from the advertiser. In addition, since Hulu captured a great deal of user information, it allowed advertisers to really target their customers. They could “target specific genres, demographic groups, geographies, day-parts or behavior.” By providing creative and targeted advertising schemes, Hulu was estimated to receive an average CPM rate between forty and fifty dollars. This was much higher than the twenty to forty dollars that networks received for primetime advertising or the fifteen to twenty-five dollars that cable operators received for original dramatic content. Hulu clearly has a successful revenue model. The exact type of content that Hulu offers is somewhat of a potpourri. It generally provides content that is shown on those networks that co-own the company, ABC, NBC, and FOX. A hard and fast rule is that if a program is currently shown on one of those networks, it will likely be shown on Hulu within a day or week’s time. In addition, Hulu seems to offer older shows from those networks, sometime entire seasons, in fact. However, this seems to vary from show to show. Also, some providers like PBS and Comedy Central share their content as well. In order to improve its site Hulu should try to create a set of standards so that users always know what they expect to see for each show.

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However, in order to create standardized content, Hulu must come to agreements with providers. Unfortunately, it does not seem clear that all content providers know exactly how to handle Hulu. While some are more than willing to share every episode of certain shows others are hesitant to do so because they fear that DVD sales will drop and/or rankings of that show may be affected. In order for Hulu to obtain content from these providers it must address two critical issues.

DVD Sales: Hulu must find a way to ensure that DVD sales for certain shows do not drop if their content is placed on Hulu. Or, if sales do drop, Hulu must find a way to monetize the high-value content that is now being offered on its site. TV Ratings: Hulu must ensure that if a currently popular show is displayed on its site that its TV rankings do not drop. Or, if the rankings do drop, Hulu must find a way to track that shows’ popularity on Hulu in order to create an aggregate ranking that accurately reflects that shows’ true popularity.

Once Hulu addresses the aforementioned issues, it will be able to better attract content providers. In doing so, it will attract users and then advertisers making the company’s profits grow.

2.2 TV Everywhere After examining TV Everywhere’s business model, it is unclear how successful it will be. In order to be sustainable, business models must clearly earn revenue. While it is clear that Hulu’s business model was based on advertising revenue, it is not clear that TV Everywhere’s business model was completely thought through. TV Everywhere does appear to be created in order to capture revenue. It is claimed that it was created to provide current cable subscribers the opportunity to watch their favorite shows on any number of different devices via authentication technology. In other words, the claim is that it is just another service that cable subscribers receive for free. In fact, one article stated that “some critics view this move as a defensive one as cable operators and cable networks fear that as more content makes its way online, legally and otherwise, that many viewers will cut the cable cord and watch TV via the Internet.” 8 Although this may be the case, TV Everywhere guarantees cable subscribers the chance to view EVERYTHING that they watch on television online. It seems like quite a lofty task considering the amount of content providers that must be involved. Based on the initial trial study it appears that users had countless problems with the authentication tools allowing them access to TV Everywhere’s site. Even if these problems are resolved, TV Everywhere has bigger problems to resolve, content. Although the site offers some content, it offers very little from recent shows. One critic laments

“[O]ther series, such as Six Feet Under or Deadwood, are notably missing. Perhaps more importantly, shows that are currently still on the air — like

8 http://news.cnet.com/8301-1023_3-10271895-93.html?tag=mncol;txt, date accessed 30-jun-10

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True Blood — have very few, if any, episodes available for viewing. And those that are available are from early seasons, which means subscribers won’t be able to catch up to what’s happening currently. A glance at some other content partners paints a pretty similar picture: AMC has the complete miniseries The Prisoner available, but no Mad Men; Discovery has no full episodes of Mythbusters; and Bravo only has two recent episodes of Top Chef online.9

All of the programs that are in bold are shows that the critic states are missing or lacking from TV Everywhere’s website. It is no coincidence that ALL of those programs can be purchased in DVD format. If content providers allow TV Everywhere to show episodes from past years, it would be directly competing with their own DVD sales. Essentially TV Everywhere would cannibalize any revenue that might be generated through DVD sales. Hulu’s business model is very similar to that of network television; it shows current shows or often-syndicated shows. This is content that users could generally acquire free of charge. TV Everywhere’s business model is different. The idea is to offer select content to subscribers who are already using this service. However, this “free” service not only competes with DVD sales, it also provides no incentive for premium cable channels to provide their content. A user that pays an additional fee for a premium channel expects high quality content with no commercials. If premium channels are offered on TV Everywhere’s site, one of two things will occur. They will be shown with commercial advertising, thus making them appears less “exclusive” and “premium” and possibly hurting the brand name. The second option is to offer the premium content with no commercial advertising. In this case, the brand is not damaged, but the content is not being monetized. The only thing it may be doing is offering more opportunities for the content to be illegally pirated. At first glance, the idea of TV Everywhere appears to be interesting. However, upon further analysis, one sees that that the company will find it very challenging to acquire content from cable channels. Using its current business model, it is unlikely that TV Everywhere will ever successfully provide content that is likely to be sold (for example, offered in DVD format) and premium channel content. If TV Everywhere expects to survive in the long run, it must change its business model.

 

3.   Porter   five   force   analysis   of   Online   Video   distribution  industry   Bargaining power of Suppliers – (Strength of Force—High) The term “suppliers” comprises all sources for inputs that are needed in order to provide goods or services. Hulu’s suppliers are content providers such as NBC, ABC, FOX.

9 http://newteevee.com/2009/12/29/hands-on-with-comcasts-xfinity-tv-everywhere-thats-not-all-its-cracked-up-to-be/, date accessed 1-jul-10

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1. Suppliers do not face significant switching costs from moving from one online

distributor to another. 2. Suppliers have the content ownership and they decide who should get their

content. Bargaining power of customers – (Strength of Force – Low-medium) The bargaining power of customers determines the strength at which customers can impose pressure on margins and volumes. Hulu’s customers are advertisers. However, the group that they must really cater to is paid and unpaid subscription viewers that access the online content. Without these subscribers, they will not earn advertising revenue.

1. Hulu provide the viewer with a large library of famous series from different networks. There are not many websites that offer such a vast variety of free content to viewers. Hulu gives the viewers an option to watch videos online anytime and anyplace.

Threats of new entrants – (Strength of Force – High-medium) Threats of new entrants determine how easy it is for other companies to enter into the same industry as the incumbent. The relative ease with which others can enter or leave depends on capital requirement, technological or organizational capabilities. It is quite easy to enter in online media distribution industry.

1. New entrants do find it difficult to negotiate content deals with different television networks. Networks may not be willing to share their content with new entrants unless they see the monetization potential of new website.

2. Online distribution of video does not require too much capital to start. As a result, most of the media companies having vertically integrated operations. Owners of studios and TV networks will find it easy to distribute their content online themselves rather than sharing it with third party distributors and will therefore likely enter the market.

3. Lack of product differentiation in online video distribution industry lowers the barrier of entry.

Threats of substitute products – (Strength of Force – Medium) A threat from substitutes exists if there are alternative products with lower prices or better performance products for the same purpose. They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players. Hulu being in the online entertainment business is competing against lot of different products.

1. Hulu’s business is competing against other broadcasting mediums such as TV and radio broadcast such as XM.

2. Online piracy of content is another threat to Hulu’s business model. 3. In good economic times other form of entertainment such as concerts, sports,

and tourism may steal attention from Hulu. Competitive rivalry within an industry – (Strength of Force – Low-medium)

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This force describes the intensity of competition between existing players (companies) in an industry. High competition results in pressure on prices, margins, and hence, on profitability for every single company in the industry.

1. There are few players in the online video distribution industry. Most of the players don’t have the size and scale of content that Hulu has.

2. However, the potential market size of online video distribution is huge. In near term there is plenty of space for different players to grow.

3. Online distributors also have a few business models through which they can monetize the content which means less of a battle for revenue.

4.  Hulu  -­‐  SWOT  Analysis  

 

5.  Directions  for  Hulu   Hulu must address its present situation in the market and find ways to improve its current position. Upon doing so, it should consider the different threats and opportunities in the dynamic and growing online video market. Given the limited marketing dollars and human resources that Hulu has, it should then consider venturing into new opportunities.

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5.1 Current Situation While Hulu has been successful thus far as being a content aggregator, there are two major issues that the company must resolve in order to win over many content providers. They are the following: DVD Sales: Content providers look for every opportunity to earn revenue for their works. More and more often, old seasons of successful shows are being made into DVD sets in order that viewers can purchase the content. If Hulu begins offering the same content on its website, it is likely that DVD sales will drop. Therefore, Hulu must ensure that content providers are compensated adequately for this online programming. It is difficult to find any information regarding the actual production and distribution costs of making a season of a TV series into a DVD set. Recently, Apple has started negotiating its selling price of episodes with content providers. While Apple believes that individual episodes of a program should be sold for 99 cents, content providers strongly believe $1.99 is a fairer price10. Using this information, one can determine whether or not Hulu can offer a revenue model that content providers accept. Based on the case, average CPMs at Hulu are $40 to $50. In other words, the company earns $40 to $50 dollars per thousand individuals that viewed its advertising. That equates to be 4 to 5 cents per individual. While traditional TV broadcasts 16 minutes of advertisements for every hour of programming, the case stated that Hulu broadcasts 25% of that and may possibly grow to 50% in the future. This means that Hulu currently offers 4 minutes of advertising for every hour of programming. Advertising comes as either 15 second segments or 30 second segments. No information could be provided regarding the average segment length, so it is assumed that the average segment length is the average of the two, or 22.5 seconds. In addition, 70% of the revenue earned from advertising goes to content providers11. Doing a few simple calculations, one obtains the following information: Current Revenue from one hour of programming per user:

4 minutes of advertising = 240 seconds of advertising 240 seconds of advertising * 1 advertisement/22.5 seconds = 10.67 advertisements 10.67 advertisements * $.04 to $.05/advertisement = $.43 to $.53 of revenue earned 70% of revenue given to content provider $.30 to $.37

Now, Hulu predicts that it will eventually offer 8 minutes of advertising per one hour of programming. Even with this increase in advertising, the revenue returned to content providers would be the following:

8 minutes of advertising = 480 seconds of advertising 480 seconds of advertising * 1 advertisement/22.5 seconds = 21.33 advertisements 21.33 advertisements * $.04 to $.05/advertisement = $.85 to $1.06 of revenue earned 70% of revenue given to content provider $.60 to $.75

10 http://www.nytimes.com/2010/02/22/business/media/22itunes.html?_r=1, date accessed 1-jul-10 11 Oruganti, Rama. Hulu, to be or not to be. Vincent L. LaCorte Case Series, Tuck School of Business at Dartmouth, 2009.

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These calculations explain a lot about Hulu’s revenue model. Hulu’s average CPM is much higher than that of traditional network television, and therefore most networks are comfortable providing their current content to Hulu. However, if Hulu expects to attract the providers that are currently selling their content on DVDs (or willing to sell it for $1.99 on iTunes), Hulu will have to find other revenue models in order to compensate them. It appears that Hulu has done just that. Just recently, the company has begun offering subscription services which allow users to “watch every episode aired from the current season of top shows from ABC, NBC and FOX.”12 In addition, the site provides many episodes from past shows as well. Time will tell whether this stream brings in enough revenue to keep the premium content providers happy. If these subscriptions provide an additional $1.65 per user per hour of premium content, all will be good.

Content providers demand $1.99 per episode per user on iTunes. Hulu’s current revenue model provides $.30 to $.37 per user based on advertising. $1.99 - $.30 to $.37 = $1.62 to $1.69 additional revenue that must be earned from

Subscriptions ~ $1.65 Based on these numbers, as long as a subscription user watches 6 hours or less of premium content every month, Hulu will be providing content providers with the same revenue that they would from selling on iTunes.

$9.99 subscription fee / $1.65 subscription fee revenue/hour = 6.05 hours The plan just may work. The average Hulu user is currently estimated to watch 2.1 hours of video a month13. However, content providers are probably not making a direct comparison between Hulu and DVD and iTune sales. There is one critical difference that remains. While users purchase a DVD or an episode from iTunes, Hulu viewers do not. They simple watch the show using Flash. As soon as the program finishes, the content is gone. This keeps the content with the content providers. They continue to hold the power and can offer their content when they see fit. Piracy is a constant concern for content providers. The fact that their content is streaming to the users versus owned by them, keeps the power with the providers. This factor is very important and will likely what convinces premium content providers to allow their programs to be shown on Hulu. TV Ratings: Nielsen ratings is of critical importance to the US television industry. Those TV programs that the ratings find to be the most popular will receive the most amount of money for advertising placements. Some content providers (that also have their own channels) are justifiably concerned that placing their programming on Hulu will cause TV viewership to drop. As a result, their traditional TV advertising revenue will fall as well. Hulu must find ways to show to companies that their combined advertising revenues will not drop, but will actually increase. Finding ways to convince content providers of this fact is of critical importance. Hulu should partner with Nielsen to ensure that it effectively captures online viewership. If

12 http://www.hulu.com/plus, date accessed, 1-jul-10. 13http://www.comscore.com/Press_Events/Press_Releases/2010/1/November_Sees_Number_of_U.S._Videos_Viewed_Online_Surpass_30_Billion_for_First_Time_on_Record, date accessed 1-jul-10

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Nielsen can calculate aggregate ratings that include traditional and online media sources, content providers will be much more willing to make the jump to Hulu.

5.2. Potential Future Opportunities Experiment with different Business models – Hulu is currently supporting itself from the revenue generated through advertisements that are shown with online videos. The advertisements are delivered in many different styles: clips that play before, within, and after the video, banners next to the videos being played, and overlay text at the bottom of videos. A strictly advertisement-supported business model is not the best way to support a business in the long term. The media distribution business is becoming more crowded because most of the companies want to maintain the closed relationship with the users. Media companies are starting to put their content online bringing it directly to users without any aggregator in the middle. Low barriers to entry in media distribution coupled with increased competition will eventually squeeze the profit margin for third party distributors such as Hulu, YouTube etc. So it is important for Hulu to explore new business models to generate additional revenue. Some of the new business models that Hulu can try are listed below. Rental – Hulu can further supplement its revenues by offering video rental service. In this business it would be competing against iTunes, Netflix and Google online video rental services. Users can pay some amount to download the DRM protected content. The content will be available on a user’s computer for a fixed number of viewings or a fixed number of days before it becomes non-functional. In order to get the content providers on board, Hulu should share revenue with them. The rental business model can be applied to more premium content such as latest movies. However, the only drawback with this business model is that it might not fit Hulu’s business strategy of being a website that provides users with free entertainment that is supported by advertisements. Instead Hulu will effectively loose interactivity component with its online users. Download – The third revenue model is the download where users pay a certain amount to purchase and own the content. In this business, Hulu will be directly competing against big giants such as iTunes, Wal-Mart, Amazon. The a-la-carte download has proven very successful for users who do not want to buy an entire CD when they are just interested in few songs. With this new business model Hulu can capitalize on those users who are not interested in buying an entire series but interested in a few select ones. In this approach, the user owns the content, so the content download should be protected by DRM technology. Content providers would be willing to share their content only if they felt comfortable that Hulu had implemented necessary technology safeguards to protect the content from piracy. Again, this business model does not fit Hulu’s strategy of being a website that provide users with free entertainment that is supported by advertisements. In this model Hulu will effectively lose interactivity component with their online users. Moreover, downloading movies online may create channel conflict with existing offline retailers such as Wal-Mart who would likely find a drop in DVD sales. Therefore content providers may not be interested in creating any conflict with their sales partners.

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Subscription – Hulu can start a subscription service where the subscriber pays a fixed monthly fee to view the additional content on the website. It will be a new, ad-supported subscription product that is incremental and complementary to the existing Hulu service. Current ad supported service contains just the few trailing episodes of current series and all episodes of the past series. With this new service, subscription users will have full access to current and past series. Sharing subscription revenue with content providers reduces their reluctance to share latest content on Hulu. In the future, providers will be more willing to share the content with Hulu if they see the monetizing potential. This revenue model appears to be most aligned with Hulu’s current business strategy. Add more content to the existing library - Hulu should try to acquire the content from as many providers and networks as possible. As a media aggregator and distributor, Hulu has to negotiate the content deals with each network separately. Hulu still does not have CBS' content in its libraries. Moreover, premium content from channels such as HBO, Cinemax is absent from Hulu’s libraries. Content availability will be a main factor that will distinguish Hulu from other online video distributors such as Joost.com, Netflix or iTunes. Television networks are forcing cable operators to pay high retransmission fees. This is causing cable operators to look for ways to save costs. The most effective way they can do this is by removing channels that are in low demand and cater to very niche audiences. This leave small cable channels with few opportunities to share their content. Hulu can take advantage of this market dynamics. Small networks will likely be more than willing to share their content if given a chance and niche subscribers will be thrilled to find their unique content available at Hulu. Experiment with different channels of distribution – Hulu is in media distribution business where it does not own the content. Successful and profitable business requires that Hulu reach all its potential customers. Hulu should explore different distribution channels such as mobile devices (smartphone, iPad, etc.) where users are starting to consume more and more videos. However to start any successful mobile business, it should form partnership with different players within the mobile value chain. The mobile ecosystem would consist of the content providers, Hulu, mobile carriers, mobile phone makers, mobile application developers, and billing service companies. Hulu would need the permission from the content providers to venture into a new channel of distribution. It would also require the collaboration of the phone carriers such as AT&T who would need to enable the high data transfer rates necessary for a satisfactory online video viewing experience. In addition, gadget makers such as Apple would play a key role in ensuring a crisp video rendition and reasonable battery life. Application writers on the gadget platforms could create apps that make Hulu more accessible and user-friendly on a number of devices. Finally, there would be a service for billing and sharing the revenue with members of the ecosystem. Move into social media space – Another option for Hulu is to forge stronger ties with its online community of users. Currently users play a prominent role in shaping the site. Users can express their views on content. They can also write a review for and rate each clip. However, Hulu may want to consider moving beyond being a video portal into social networking and create a unique relationship with the users. A

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move by Hulu into social networking might solidify it as a go-to place for both user- generated and professional content. A successful foray would help strengthen Hulu’s independence and power. It could also help NBC, Fox, and ABC networks to gain advantage over their rivals by learning more about their customer preferences. Hulu could create new monetization options or get active user feedback that would enable it to shape the programming that the media companies generate and distribute. This would also help Hulu to increase its share of the value chain by limiting the power of the cable and satellite companies. However, opening the door to user-generated content might offend some advertisers who do not want their brands to be associated with content that is not of professional quality. It might be a very difficult challenge for Hulu is to convince advertisers and professional content providers to share the platform with non-professional content providers. Therefore, this idea Forming a relationship with Comcast TV Everywhere initiative – Another option for Hulu is to form relationship with TV everywhere initiative. One way they can contribute to this initiative is to help the partners (Comcast and Time Warner) to test the authentication technology. However, at this point it is not entirely clear how the technology is going to be helpful to Hulu. Moreover, it seems TV Everywhere and Hulu are competing against each other in the same industry segment.

6.  Strategy  going  forward   In summary, after evaluating different options Hulu should focus on the following strategies:

1. Adopt the subscription business model in addition to free advertisement business model.

2. Form stronger relationships with content providers so that they share more of their content with Hulu.

3. Hulu should also form partnership with small networks that have small and niche audience base.

4. Diversify into different distribution channels such as mobile devices by developing applications for smartphones, iPads, and game consoles.

7.  Conclusions   The main sources of revenue for the television industry are advertising and subscription fees. TV industry concerns about losing control of the content through online piracy and brand dilution of cable networks by video on demand services are justifiable. However, the industry also acknowledges the online video trend and the consumer demand for easy access to videos as unstoppable. Some consider it better to strategically, and in a controlled manner, accept the changes in the industry. With the shifting consumer preferences and changing technology, broadcast TV industry has recognized the need to better control its distribution to cater to the fragmented and changing customer demand. Hulu with its simple and innovative business model can provide the solution that the entire TV industry desires. The cable networks should understand the new paradigm and either collaborate with Hulu or

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explore new and realistic possibilities of monetizing their content. If not, they are likely to be left behind as the online TV continues to grow.

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