Hulu buyers, beware

Hulu buyers, beware

Summary: Starz decision to end its relationship with Netflix is a sign of the difficulties content companies are having making money through Internet streaming. This should give potential buyers of Hulu pause. Distribution brands like Netflix and Hulu may not be the future.


Yesterday, it was announced that Starz, the source of an important portion of Netflix's streaming content, had decided not to renew its deal with Netflix. As a blog post at the LA Times reports, this was likely due to questions on Starz part as to whether the deal was in their long term self-interest. They "conclud(ed) that they would lose even more money by giving consumers a reason to subscribe to Netflix instead of the cable channel."

A lot has changed in the three years since Netflix first signed its deal with Starz, as streaming video has catapulted from an idiosyncrasy of the technically sophisticated to a habit practiced by 25 million Netflix subscribers. Many believe this has contributed to the erosion of cable subscriptions, a source of revenue that constitutes the majority of the money brought in by content "aggregators" such as Starz. This is the reason HBO, creator of critically acclaimed content such as "The Sopranos," "Boardwalk Empire" and "Game of Thrones," has avoided a deal with Netflix.

Netflix, of course, downplays the ramifications of the loss. In their official response (see that blog post), they note that Starz-sourced content accounts for only 8% of media streamed by viewers, and believe that figure will drop by 2% in the next six months. They attribute this relatively small share to a diversity of content sources. Netflix believes that content provider diversity mitigates the power any one source of content has over the Netflix streaming library.

To that, I must respond with a resounding: Maybe. Granted, acquiring content from multiple sources is essential, just as it is essential that a pizza restaurant not become beholden to one source of tasty Italian sausage. Starz, however, was a useful content source because it created variety, particularly in films, which consumers find quite appealing even if they don't watch Starz content exclusively. Licensing content from individual studios can also make your selection seem somewhat narrow. Lionsgate, for instance, tends to favor a very definite style and budget of movie, and Hulu's deal with Miramax creates a decent selection of Quentin Tarantino films (among others), but isn't going to offer the variety of a Starz deal.

The bigger issue for Netflix, however, is the risk that more sources of content will shy away from Internet streaming due to fears over the erosion of pay TV revenue. The Starz defection, in other words, could be the tip of the iceberg. It all depends on whether the new streaming model, one that faces potential bandwidth issues in the near future, makes enough money to offset the loss in pay TV subscriptions. Trends certainly don't look good. NBCUniversal, Fox Entertainment and Disney-ABC aren't selling Hulu because it is making them so much money they can't find enough buildings in Burbank in which to store the cash.

On that note, Starz decision should be a hint of potential business model issues for the big companies sniffing around Hulu. The idea that studios like NBC, Fox and Disney would band together to create a distribution channel for their own content makes decent sense, as streaming is certainly a great way to distribute content in today's world of Internet-savvy consumers. The notion of Hulu as a sellable commodity, however, seems weird to me. Yes, they have a bunch of client software that works with various types of devices (PCs, Set-Top Boxes), and they have server infrastructure to support streaming (though they may outsource some of it to others), but unless they are happy to confine themselves to content from the venture partners (which clearly isn't enough, otherwise they wouldn't be keen to sell), Hulu will have to spend a lot of money securing rights to content.

As a company like Hulu gets more successful, the cost of content will only go up. Content companies hold all the cards, as they have the stuff that people want to see. That gives them one hell of a trump card in discussions with distributors like Hulu (or Netflix), which makes ownership of a brand like Hulu or Netflix quite risky.

Frankly, I don't know what Hulu is actually selling except some client software and a supporting server infrastructure. That's not a lot of "stuff" to justify a rumored $2 billion valuation.

Personally, I'm not sure if a distribution "brand" like Netflix has long-term viability (however much I enjoyed the service). They've demonstrated that customers want streaming content, to be sure, but their future is bound to the whims of content companies. Content companies can be your best friend if you are funneling gobs of money their way (as cable companies historically have), or your worst nightmare if you are making less money for them than other revenue models.

That's why I think a more likely long-term model involves producers streaming content directly to customers. There would be some aggregation. Viacom has more than just South Park and Comedy Central in its arsenal, and the same applies to movie studios like MGM or Sony. However, a "direct to consumer" future would be a lot more "a la carte." Consumers could choose to, say, subscribe to the Viacom content source, as opposed to paying $100+ for 200 channels notable for how fast most viewers scan past them with their remotes. It would certainly result in a much wider range of content, and would level the playing field for content distribution to a level that has never been seen before.

Such a model would appeal immediately to this "cord cutter" (me) who hasn't had cable television since 2009. I am perfectly happy to pay $10 / month primarily to watch the Daily Show and the Colbert Report on Hulu (which, as a father of two young children, is about all I have time to watch). Yes, that's more than I would pay for that content as part of the 200 channel super-plan at Time Warner cable, but I save $90, which is a win for me.

Per unit costs, in other words, go up with "a la carte" video "channels" (which would really be silos of on-demand content). Instead of paying $100 / month for 200 channels most of which they never watch (an option which still may exist in some form), users of an "a la carte" plan would pay $50 - $60 for 10-15 sources of content. They save 40 bucks, and producers of those 10-15 channels get much more revenue per unit.

It's a "nice to have" if content companies could agree on common standards for content streaming and manipulation. This would lead to "aggregator" applications that make surfing across content sources easy (which constitutes much of the appeal of a Netflix or a Hulu). However, given that content companies will likely want more control over the customer relationship than they were willing to accept before (a result of the Internet), I think it could be more an iPhone "app" approach, where different sources of content create custom apps that stream their content in a custom fashion. If it works on mobile phones, it can work on the biggest display surface in the house.

The opportunity for a common payment gateway seems one area where third parties could get a cut of the revenue. Providers of streaming infrastructure will also make money, as lots of content companies are unlikely to want to manage their own streaming datacenter. Likewise, owners of popular distribution endpoints like the XBOX and Sony Playstation can also levy charges, much as Apple does with the iPhone. It's hard to get users to stick yet another "box" onto their TV. Companies like Microsoft and Sony have used the impulse to play computer games as a trojan horse through which to get high-powered computers attached to TV sets.

Most money would flow to content companies. However, the numbers who watch television are much larger than those who surf the Internet. Volume is the name of the game with television, and even small fees per subscriber can result in massive revenues.

Would that make more money than the current content relationship with cable television providers? If the market for cable TV is what it was ten years ago, that would be harder to do. Today, however, the current model is starting to fall apart. It's growing increasingly difficult to get large audiences for major budget TV shows, resulting in a rush to cheaper-to-produce reality TV shows. Plus, competition from Internet content - and not just of the video variety - is already cutting into TV watching time. Studies show that iPad owners end up watching LESS TV, opting instead to spend more of their time on Facebook or emailing friends than watching the "boob tube."

Starz decision to cut itself free of Netflix is a sign of the pressure companies like Starz are under to defend older business models. However, starving Netflix won't change the fact that consumers have ever more ways to entertain themselves at home in the evening. They'll have to find some way to reach customers over the Internet, even if the road doesn't pass by way of Netflix servers.

Topics: Hardware, Banking, Browser, Enterprise Software, Mobility, Networking, Telcos

John Carroll

About John Carroll

John Carroll has delivered his opinion on ZDNet since the last millennium. Since May 2008, he is no longer a Microsoft employee. He is currently working at a unified messaging-related startup.

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  • RE: Hulu buyers, beware

    The more they reject the Netlifx/Hulu business style, the more the numbers of illegal content downloads will increment. They cannot fight piracy forever, even when they are pushing the USA government to police for them and bribing politicians in the Congress to have their way with more anti piracy measures.

    They should understand that the Netflix model is what we want, and if they persist on their ways they are going to loose more, because either we might resort to download what we want or do something else besides watching their expensive content.
    • Best not to make sweeping generalities

      Just because you or even most people want something doesn't mean that everyone does.

      But copyright enforcement costs do need to be factored in to determine whether one's business model is really viable. No doubt, this is why copyright holders are so anxious to push as much of that enforcement cost as possible on to the taxpayers.
      John L. Ries
      • RE: Hulu buyers, beware

        @John L. Ries - Dunno about you but I'm already paying thru the nose for cable tv and cable internet service. We pay for hundreds of channels we never watch, nor care about. We pay for internet service that's in use less than half the day. I took on Netflix because I appreciate the streaming business model where I don't have to go to all the different locations to watch shows/movies.
        The studios are complaining about piracy but they don't seem willing to do what it takes to stem the tide... sound familiar? The music studios have finally made content cheap and available through iTunes, Amazon and others, and now streaming through similar services. The impetus for piracy of music has waned. Movie/TV studios need to do the same. Netflix already has the infrastructure and user base, not working with them is just another sign of the greed of Hollywood.
  • RE: Hulu buyers, beware

    Why would I want to drop my inexpensive FCC mandated "basic" cable plan for $13/mo which gives me a good channel lineup. I don't need the extra premium channel package and my cable provider can't gouge me for the cost of the basic package since under the "basic" channel offering the: "local franchising authority (LFA) -- the city, county or other governmental organization authorized by your state to regulate cable television service -- may regulate the rates your cable company charges for the basic services tier. The basic services tier must include most local broadcast stations, as well as the public, educational and governmental channels." (source /
    • RE: Hulu buyers, beware

      @BambooKane - Enjoy your 10 year old DVR, lack of streaming, and the dozen or so other channels you pay for but never watch.
    • RE: Hulu buyers, beware

      @BambooKane - The local franchising authority (LFA) is a joke. They are in the palms of the cable companies and don't really regulate their rates or have much of an oversight.

      It's monopoly abuse all the way.
  • RE: Hulu buyers, beware

    Basic cable is inexpensive and then my Sony DVD player will give me a lineup of free streaming content. If I want a first run movie I can go to a number of nearby Rebdox movie vending machines for only $1 per night.
    • RE: Hulu buyers, beware

      @BambooKane : Sheesh - talk about an ostrich!!!! If you rent any more than 8 red box items in a month you already paid more than you need to get streaming. AND you have to drive there & back, which is a far cry from "instant access"... So '80's!!!
      • RE: Hulu buyers, beware

        @Willnott : What @BambooKane said is that IF his streaming service does not offer a particular title (a very common situation) he can rent it cheaply on DVD.
  • RE: Hulu buyers, beware

    Regarding Starz they have more troubles at Dishnet is giving the service away free. Why? Because the movie library sucks. It has for several years. Hence I won't pay for it and dropped as prime paid for service several years ago. Streaming is here to stay the producers & distributors just have to figure out how to make it profitable and affordable. Oh if you want the big four networks then basic works fine, but honestly there is not much fit watch on those channels.
  • RE: Hulu buyers, beware

    Cable TV is just too expensive! I agree with Bambookane. Luckily we both must be patient enough to wait for the latest to come to DVD.

    Look at the other side of cable's coin, especially Optimum. They ask for rate increases every single time they are allowed. Yet they keep buying sports teams and only as a last resort they remove some of the throttling they have on the service. I wonder how fast the internet would be if it wasn't?
  • Streaming directly from content provider...

    If you're going to have to pay each content provider to stream their content, the aggregated cost is probably going to be the same as the original charge from the cable company, so you're right back to where you started.
  • They're going to have to learn to get by with less ....

    The bottom line here is this: The content creators are used to making a large profit with their long-standing business models. But as cable and satellite providers do annual rate increases to cover those "rising costs of securing content from the studios", more and more people decide it's just not worth their money and they cancel.

    Services like Netflix provide people with an alternative to dumping all that content "cold turkey". It's a middle ground where you can pay a fair monthly price and get a fair amount of enjoyable content to view.

    If the providers don't want those "smaller profit margins" they see from working those streaming deals, their alternative is to demand more from an ever-shrinking base of willing customers for the traditional formats.

    The way I see it? Content providers really don't "hold all the cards", because when the "card game" becomes too expensive to keep playing, people simply put down their hand and walk away from the table. There are plenty of other games in town to occupy people's entertainment time. The "Internet generation" is used to investing far more hours using the web and playing video games than passively sitting in front of the TV.
    • RE: Hulu buyers, beware

      @kingtj : TOTALLTYagree! Content providers seem intent on killing their own cash cows, and also seem to be so dumb they really do not realize what they are doing. It's time to advise them all to cut the greed and also renegotiate terms with origonal content as far as royalties. Royalties have been skyrocketing out of proportion and it's time to put a leash on them.

      BTW, as for STARZ - I seriously doubt it will have any impact at all on what I personally want to watch via Netflix. And even if it amounts to 2% or 10% of my fare, I can sure live without it - I surely will never consider any alternative cost just to regain that content. Let them eat their own arrogance!
  • RE: Hulu buyers, beware

    "That gives them one hell of a trump card in discussions with distributors like Hulu (or Netflix), which makes ownership of a brand like Hulu or Netflix quite risky."
    DISAGREE - I refuse to be held hostage over such a small item as streamed entertainment - it's just not THAT big a part of my entire life! I select from what's available, and do not even bother to worry about what I may be missing! It's high time to tell content "owners" to cut the greed and restructure royalties if they want customers to continue watching their product. It seems to be getting almost as bad as pro sports compensations!
  • RE: Hulu buyers, beware

    No one as yet has figured out how to get everything everybody wants in one place. I would gladly pay $50 a month if somebody could offer me the following: A simple interface that doesn't break, with expert recommendations on quality TV shows; a solid streaming experience that works even on older, low powered computers, iOS devices, etc; a one-click way to subscribe to a channel based on the SHOWS, not on the name of the distribution company; shows available from every content provider: a channel that has unusual/intriguing indie choices that I can select by theme; an intelligent recommending service ("Based on your selections, here are some others you might enjoy").<br>Even Jobs quietly gave up on renting TV shows out. It's a thorny problem to be sure.
  • Value of Hulu

    Well, the question is, how much would it cost you to build a network like Hulu, with all the custom software, server infrastructure, content management infrastructure, licensing deals that are already in place, year of expertise in video streaming and ad delivery, and team of people who have been with the company and gained a unique knowledge base. Could you put it together in one week, even with 2 billion dollars? I doubt it. 2 billion might be a bargain to acquire the technology and know how overnight.

    Not that any company has ever done anything but destroy the companies they buy, lay off the smartest people and devalue the product once they own it.
  • RE: Hulu buyers, beware

    Starz may only account for 8% of all Netflix streaming content, but it was more than that for the content my wife and I accessed before the price hike.<br><br>An awful lot of people who chose to drop the DVD plan in favor of streaming only are going to be ... steaming.

    As for Hulu, through TiVo we had a brief free trial for Hulu Plus, which we used just long enough for me to browse their library and conclude we'd be wasting money if we kept the subscription past the trial period.
    The One True Fnerd
    • RE: Hulu buyers, beware

      @The One True Fnerd You're right...Hulu's library is a lot smaller than Netflix. The ONLY reason I am paying for Hulu Plus is the Daily Show and The Colbert Report. I know, I am paying $10 for TWO shows, but it's still less than paying for cable, so it is worth it for me.

      I dropped Netflix because of Hulu, but only because they didn't have those two shows, and truth be told, I don't have time to watch as much TV as I used to. That could change once the kids are older and I'm working less obsessively at my startup.
      John Carroll
  • RE: Hulu buyers, beware

    I actually will be ditching cable TV in a few months when my contract expires. Nothings on when I want to watch it, So I end up going online to watch probably 80% of the TV I do watch anyway. and that's the problem movie and tv companies/content providers are faced with. We are solidly in the internet age, meaning that this generation of young adults are basically the first generation to grow up with wide spread, even pervasive internet access, and all that that implies. Such as wanting what they want when they want it. Not waiting till some company tells them to watch their show. They will NOT do that as a group. Staying in business, in ANY industry, requires that the companies providing the goods/services do so when, where and how the customers want it. Never before in the history of business prior to the TV/movie/music industries have the customers spoken so loudly about what they want and be totally ignored by said companies. What happened to providing what the customers want as a viable business model?
    I will watch what I want, when I want, how I want. The entertainment industry can either cater to my desires as they are supposed to to EARN my money, or I can and will continue to do as I have for the past few years....bootleg every song and movie that I want to watch.
    I have 1TB external drive basically full of movies from the net(all free) most are in the 700-800 meg range because I usually watch movies on my much smaller monitor instead of my TV so the smaller file size plays fine. If I find one I want to watch on the TV I DL a 4Gig version. I have no problem with my ability to pay....And will gladly do so when the entertainment industry gets off its butt and behaves like a company that wants my business. Two of the biggest problems they face are their own greed and the retarded amounts they pay actors. They want to pay 5 mil. to 1 person and make a movie that costs just 50 mil total don't expect me to pay a retarded amount for your product. If the movie is well written, directed and edited it will be a good movie regardless of that big actor. They have pushed those big names so hard because in doing so they make us want to see them and so can charge more for the movie. However it has backfired because now the big names can gouge them! And they use that excuse to charge even more. They should as a group stop paying that ridiculous amount and betting on making a few movies that gross insane amounts and instead focus more on ROI(return on investment) and produce better written movies, far cheaper, and in greater numbers to make their money instead of trying to make a decent movie, using big names and tons of expensive CGI to make a home-run and a few other crappy movies. Sure, I like the occasional WOW movie, but I would rather have, and would pay5-7 bucks apiece for, a steady stream of well written movies/shows that rely on a cast of decent actors instead of 1 great actor, meaning they will/have to focus mainly on that 1 person, taking away from the overall quality of the show simply because the story is told from a very narrow perspective. That worked in the old days. Now that we have the internet we have gotten used to multitasking on a scale never seen before and watching a show that tells a single story from a single point of view is, simply put, boring to most of us.

    So drop the big names or force them to take a lower paycheck. Lose your greed, everyone is feeling the pinch of the economy. you in the entertainment industry do NOT get to make the same profits you did before when almost every other companies revenue is down. And realize your product is a want, not a need, and your customers are also in a financial jam, and so have less money to buy your average product at the ridiculous prices you have arbitrarily decided they are worth. Your customers are the ones you get to choose what your product is worth, and they have spoken loud and clear. You can either listen to them and give them what they want, how they want, when they want, or ultimately you can and will fail as a company only to be replaced by another who will. An easy path to success....

    1)Lose the big names or pay them a fraction of what you do now.
    2)3-6 months after theater release it on DVD/Blu-ray for LESS than 10 bucks for dvd and LESS than 15 for Blu-ray(but only if you provide more content on the Blu-ray disc, otherwise same price).
    3)6-8 months after theater release, let ANY online rental/streaming(aka netflix/hulu etc) have it and collect 5 cents per rental/view forever(no greediness by charging them to use your content since your not doing any work on the rental/streaming side of things it is basically free money).
    4)12-18 months after theater release,always do extra scenes and especially alternate endings and if the movie had good sells then re-release it in theaters with another movie done the same way(not a new movie).
    5) If you get to number 4 and have good box office ticket sells then repeat steps 2 and 3 for both movies as a set with the extra scenes and alternate endings in place. Plus to help sells add in interviews now, not on the first run. Also on the 2nd run throw in the sound track on the same disc. You've made pretty much all your really gonna make from it by selling it separate so add it in and advertise it as a feature.

    Also to help make more money by selling a lot as a reasonable price(10 or less for 2 movies on the 2nd run), yes thanks to the net we now know it costs jack to actually make the disc itself. take all those deleted scenes and when making the movie make a few more key scenes and with the power of computers set them up in numbered groups to change the movie itself. That way your customer can slip the disc into their computer and choose 5 different versions of the movie by simply clicking on the correct play button.With minimal extra cost to you. You can also easily make it more interactive if they choose that option so that a scene comes up with alternate scenes they can choose which they want "on the fly"

    For 2 good movies, on the 2nd run with these cheap and easy to add in features, plus interviews and the soundtrack included I'd pay 25 bucks(remember they would be a year or so old). If you added these features in for a single movie on it's original release well then I'd probably be willing to actually pay 22-25 for long as it seemed interesting and got good reviews.