Slowing up Hulu?

The U.S. online video ad market is growing at 30% a year. Still, it is just a small fraction of total U.S. T.V. advertising spending. The leader in the online market is Hulu. GE’s NBC Universal, News Corporation, and Walt Disney are Hulu’s owners. Hulu and some other video sites provide free professionally-produced videos from its investors. Hulu exists on an advertising business model. Hulu will place one or two thirty-second ad spots during a few commercial breaks for hour-long shows.

Since this market is showing so much growth, the leading cable firms, Comcast and Time Warner Cable, have decided to respond. Comcast has introduced OnDemand online and Time Warner has created TVAnywhere. These are cable trials offered only to existing pay TV subscribers. The paid subscribers get the professional video from cable networks for free. The cable programmers, though, may be putting the same number of ads online as they show on traditional TV, considerably more than Hulu.

What would be the effect of this development on Hulu?

Suppose we divide the world into two types of people: Comcast and Time Warner cable subscribers and everyone else. Clearly the Comcast and Time Warner cable subscribers are going to be better off. They have an online channel to view content for which they have already paid. They just have to watch commercials in the process. (See Audio Tip #64: The Objectives of a Performance Improvement Program on StrategyStreet.com.)

On the other hand, the part of the world that views Hulu will not be affected at all by these online offerings from Comcast and Time Warner. They will continue watching just as they have over the last few years. Hulu will still have its own exclusive content. Hulu’s growth will not slow.

In the long run, there was probably room for both models. Both the cable companies and Hulu offer exclusive content. They will continue to attract viewers who prefer their proprietary products, just as major network and cable networks do today. In this longer run, the market share prize will go to the company offering the most attractive proprietary content.

The addition of OnDemand online and TVAnywhere are good product and service improvements from the cable companies but they won’t slow Hulu’s growth in the least.