… if Comcast has anything to do with it. An article in the LA Times yesterday went over the possibility that Hulu might make you pay to watch. This is all dependent on whether or not Comcast is able to complete a deal with NBC Universal. There is no guarantee that this happens and there are a few stars that need to align (Vivendi needs to sell of their 20% stake and then federal regulators need to approve the consolidation of media).

The thought of this makes me scared. I’ve previously written two posts on ways to use technology to either eliminate or reduce your cable bill: Connecting Computer to TV and Streaming Hulu Through Xbox 360 / PS3. I do both of these methods and Hulu is a focal point of the reasoning behind both for me. Hulu being free means that I no longer have to pay a $40/mo+ cable bill!

What is a “Hulu?”

For those of you who immediately imagine someone hula hooping:

1. Awesome.
2. But, no.

Hulu is a website that offers free streaming video, albeit commercial supported. It has both TV and some movies from a lot of networks and studios, the main ones being ABC, NBC, and Fox. They even have some programs in high-definition! If you have ever used Comcast’s Fancast, some of those videos are actually being streamed from Hulu. Hulu had 38.5 million viewers in August.

A look at their mission statement reveals their reasoning behind the name choice:

In Mandarin, Hulu has two interesting meanings, each highly relevant to our mission. The primary meaning interested us because it is used in an ancient Chinese proverb that describes the hulu as the holder of precious things. It literally translates to "gourd," and in ancient times, the hulu was hollowed out and used to hold precious things. The secondary meaning is "interactive recording." We saw both definitions as appropriate bookends and highly relevant to the mission of Hulu.

So that’s pretty much Hulu in a nutshell. Head on over and check it out.

Rocking the Boat?

But the business model is… what, again? Offer your customers content for free, but sustain yourself on ad revenues? That goes against the grain of the industry.

Cable subscription costs obviously have a basis in something. They aren’t just huge heaps of profit that the cable company then turns into CEO-grade toilet paper or private jets. From the article:

Hulu, a partnership between NBC, Fox and Walt Disney Co., has been a nagging concern among Wall Street investors, who see the site not as a hedge against Internet piracy or viral video phenomenon YouTube but as a threat to the economic underpinnings of the television business. The $22 billion a year in cable and satellite TV subscriptions paid to programmers underwrites the high cost of producing all forms of television programming.

So, the $22 billion per year in cable subscriptions helps to reduce the cost of producing television programs. I think that fact itself is pretty obvious, but I wanted to highlight the $22 billion part. So if subscription rates suffer, where will they make up the money?

What incentive do I, as a network, have to buy a show for millions of dollars if I know that I will lose a large target audience to the free online viewing of the program? The online option puts my ad revenues and subscription revenues at risk. So I’m not going to want to pay for the program, at least not at its current price. You can see how this will spiral out of control until we have even more horrible programming. Wait, what? You thought 80% reality TV was the worst it could get? Nope.

What’s the Financial Impact?

I already mentioned that the cable subscriptions help to offset the $22 billion per year in production costs. So, what’s the actual impact of the online model?

Last month, Soleil Securities estimated that Disney, Fox and NBC subsidize $33 million of losses at Hulu, which is only partially offset by $123 million this year in advertising. That doesn’t take into account the TV advertising revenue that media companies are losing as viewers increasingly watch shows on their PCs instead of their TV sets.

Soleil media analyst Laura Martin calculated that for every viewer who migrates to the Internet, the companies forfeit $920 a year in ad revenue. The long-term risk, she said, is that people would eventually cancel their cable or satellite TV subscriptions.

Right now Disney/Fox/NBC are making $90 million on Hulu without taking into account the lost TV revenues. I can’t find a figure on this opportunity cost, but I imagine it’s pretty large. Every investment they make into improving Hulu is done at the risk of jeopardizing their bread and butter… tv subscriptions. Is this kind of model sustainable? Not in it’s current form, in my opinion.

I Hate to Say it…

But the model will most likely change. How can a company give something away for free while it’s bleeding from its main revenue stream?

This is unfortunate for those of us that use Hulu as an amazing tool to save money. I guess we need to cross our fingers and hope Comcast doesn’t ruin it for us! Sadly, I think the future of Hulu has some sort of payment scheme regardless of whether or not Comcast gets in the mix. It just makes sense.

Do you use Hulu? Would you stick with them if they turned into a pay service like Rhapsody (stream as much music as you want for a monthly fee, downloading costs extra) or iTunes (pay per download)?