Maybe Hulu Really Wants to Take over the (TV) World

New Desktop App Encourages Use of Computers as Set-Tops

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NEW YORK (AdAge.com) -- Hulu downplayed talk that its new desktop application will encourage more consumers to flip on their computers rather than their TVs. But network execs say they believe it's another chess move in the battle over the living room, which is about to get a whole lot bloodier.

ALEC BALDWIN: Spokesman for online video service.
ALEC BALDWIN: Spokesman for online video service.
Hulu executives insist the move is only "a natural extension of the Hulu service as we continue to be focused on innovating in the online, PC environment." But there's no denying that the new app simulates a TV-like experience -- with the added advantage of being able to also watch the shows you want, when you want and with fewer ads. It even works with a remote control. In Hulu, broadcast TV finally has a player in the sweepstakes to deliver on-demand TV.

"Does it come from cable video on demand or from internet delivery on your TV? Who owns that interface and that customer relationship?" asked one close observer, who, like most of those contacted by Ad Age, wanted to remain anonymous.

Right now, cable operators are in the power position: They own the billing relationships and control the consumer experience of TV. Meanwhile, they've put digital video recorders in more than 30% of American homes, undermining the advertising model that supports broadcast and, to a lesser extent, ad-supported cable. Now they're hoping to solidify that -- and possibly put satellite TV on the ropes -- by rolling out "network" DVRs this summer, which would allow subscribers access to virtually any show on-demand, immediately after broadcast. After that, the only question is how fast DVR use spreads and whether cable will allow ad-skipping. (Satellite doesn't have the bandwidth to offer such a service).

"If broadcasters don't do anything and let the DVR world get to 70%, what kind of world does that leave us in?" said one network executive.

Hooking into TVs
Enter Hulu. Hulu is restricted to computers, but just about every computer has an output jack to plug into a TV. Hulu's new app, much like one introduced by Boxee months ago, was deemed threatening enough to cable TV that Hulu's network backers stopped it from pulling their content. The only difference between the two is that the networks control Hulu, and Boxee can, theoretically, be downloaded to set-tops such as Apple TV, which virtually no one has.

And if Boxee was so scary, why would the nets want to encourage cable-cutting when (due to fewer ads) they take a revenue hit for every viewer that does so? Because in Hulu's world, networks are in control of the user experience, there is no ad skipping, and they can innovate a new generation of interactive ads.

It's true that Hulu shows far fewer ads -- usually two minutes compared to eight minutes per half-hour on TV -- but ad loads will slowly increase. And as DVR penetration increases, driven by the network DVR, it's not Hulu vs. linear TV -- it's Hulu vs. something much less.

"If this is not a wake-up call for the MSOs, I don't know what would be. This is the biggest threat to their business model that's out there," said a TV exec who, due to a relationship with Hulu, asked not to be named.

What's the likely next step? Network execs predict Hulu itself will enable downloads, converting the PC into a de facto DVR. NBC has already tested such a service -- NBC Direct -- which included unskippable advertising, and it would be an easy new feature for Hulu.

Giving it away
Hulu does nothing without the approval of its board, which includes execs from NBC U, News Corp., Providence Equity Partners and, soon, Disney. NBC U, News Corp., Disney and Time Warner are on the losing end of a court battle with Cablevision that clears the way for the network DVR.

As it stands, Hulu's equity investors are only required to provide broadcast shows to the service, and to make a "best effort" to provide cable TV content, meaning provide as much as you can without jeopardizing agreements with cable operators.

"We've been pretty clear about cable content: If you give it away online for free, you cannot ask our subscribers to pay for it," said Time Warner Cable spokesman Alex Dudley.

'BECAUSE WE'RE ALIENS': Eliza Dushku, from Fox's 'Dollhouse,' in one of Hulu's TV ads.
'BECAUSE WE'RE ALIENS': Eliza Dushku, from Fox's 'Dollhouse,' in one of Hulu's TV ads.
But Hulu's newest board member, News Corp. Chief Digital Officer Jonathan Miller, said cable networks need to push back against the operators to take control of online distribution.

"The broadcast networks had to push against their [local station] affiliates; cable is going to have to push to get their content where people want to consume it," he said.

The networks' "TV Everywhere" initiative, which would allow pay-TV subscribers to prove they've paid for content, is a boon for Hulu because it's a trusted brand and will be well-positioned to implement the system, as well as take web-only subscriptions for the new generation of viewers who want to watch on the web.

The party line at Hulu is that it isn't a replacement for anyone's linear TV, and it poses no threat to cable. Don't believe it. The battle is just getting started.

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