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September 01, 2016

Ready to Rumble

No longer content merely to compete with Netflix, Hulu is jumping into battle with pay-TV providers.

Daniel Frankel
  • Photoillustration by Todd Reublin

For the past few years, Apple has tried — and, so far, failed — to package a bundle of live-streamed channels just fat enough and cheap enough to coax consumers away from their cable or satellite TV company for good.

Technology isn’t the problem. The tech giant has been thwarted by program licensing issues — most specifically, the inability to stream coveted local broadcast stations in each market it serves.

But Comcast, DirecTV and other pay-TV companies shouldn’t breathe any sighs of relief just yet. An enticing new product, being developed by several major TV programming companies themselves through a widely known joint venture, threatens to cut out the cable middleman and truly revolutionize the television business — yes, even more revolutionized than it already is.

The source of this intrigue is Hulu, which already operates a leading subscription video-on-demand (SVOD) service touting 12 million subscribers.

Co-owned by Fox, Disney and NBCUniversal, Hulu has always vaunted its complementary role to the traditional pay-TV ecosystem, offering its customers on-demand access to shows that already premiered on the major networks — days, weeks, months or seasons earlier — just as Netflix does.

But now, Hulu is looking to replace your pay-TV provider.

The company confirmed in May that it is readying a live-streamed subscription video service that would deliver major cable and broadcast networks directly to your Apple TV, Roku box, iPad or Android phone, among other IP devices.

Leaked memos indicate that the upcoming “skinny” service could feature some 100 channels, including the major broadcast networks and top cable outlets such as ESPN, USA and AMC, all for some $35 a month. Hulu reps said this is but one of the pricing and channel configurations they are considering.

At press time, Hulu was finalizing its programming deals, and details were yet to be announced. But media business analysts are approaching the pending launch with breathless anticipation. They forecast that the new service will debut early next year, and they’re already using a fair amount of hyperbole to describe the event.

“There are a lot of things that make Hulu a game changer,” says MoffettNathanson analyst Craig Moffett, using a term that often gets pegged to the new service.

Hulu won’t be the first firm to market itself as a so-called virtual pay-TV operator. Since its debut in February 2015, Dish’s Sling TV has amassed some 700,000 subscribers, streaming channels including ESPN, TNT and AMC via a $20-a-month service that’s as easy to sign up for — and quit — as Netflix (no set-top box is required).

Sling TV recently introduced a new tier that adds Fox and NBC — as well as their associated cable channels — to the mix, and which also lets more than one household member stream simultaneously.

Sony, meanwhile, claims more than 100,000 customers for its PlayStation Vue, which also lets users stream most major networks for less than $50 a month. And AT&T, which bought DirecTV last year, is about to debut several streaming versions of the satellite TV service.

Still, Hulu’s live-stream offering — despite its lack of a launch date — has captured the imagination of TV tech pundits.

“Hulu’s package is the first of the [virtual pay-TV operators] that’s had me thinking ‘hmm’ as a consumer,” says Alan Wolk, an expert-in-residence with the strategic advisory firm BRaVe Ventures. “It seems to have all the channels I watch — including USA, AMC and ESPN — and I suspect I won’t be the only one who finds it intriguing.”

If Hulu can package its service with the same kind of user-friendly interface found on its SVOD service, and pull off the tricky task of live-streaming without being riddled by glitches and bugs, “they may indeed have something very interesting — and ultimately very game-changing — on their hands,” Wolk adds.

The intrigue doesn’t end with the service’s proposed channel selection. Notable is the fact that Hulu is owned by three of the major programmers themselves.

At Hulu’s Newfront presentation in May, CEO Mike Hopkins insisted that his company isn’t “declaring war” on the pay-TV industry, which pays Hulu’s owners billions each year to license programming from the same networks it now plans to live-stream.

But the waters are indeed murky. Comcast, for example, acquired a third of Hulu in 2011 when it purchased NBCUniversal. The cable conglomerate does not have voting control over Hulu due to regulatory conditions attached to the NBCU purchase. However, Comcast would still be competing against itself via the new Hulu service.

Fox and Disney, meanwhile, would also be undermining a pay-TV ecosystem that pays them billions annually in program licensing fees.

Which leads Bernstein Research analyst Todd Juenger to wonder: “Why would the [major pay-TV operators] agree to continue paying high and ever-increasing affiliate fees to networks that are actively and aggressively going around them?”

Beyond the fascination over the TV conglomerates cutting out the middleman and distributing their networks themselves lies this enticing notion: Hulu is in a unique position to license the networks required to get a cable replacement off the ground — specifically, the Big Four broadcast networks and their myriad affiliate stations

Any streaming service that wants to poach business from the major cable and satellite companies has to lock down the Big Four, which reach 41 percent of television viewers in any given week, compared to just 6 percent for all cable networks combined, according to Nielsen.

“With the backing of Disney and Fox, and the tag-along prospects of NBCU, Hulu has three of the four top broadcast networks lined up,” Moffett observes.

“CBS will be negotiated with, and hopefully that deal gets done as well. But what Apple ran into last year — and what Sling TV and Sony Vue are running into now — is, it’s great to do a deal with the Big Four broadcast networks. But those deals won’t get you national coverage.”

Indeed, a deal with a broadcaster like Fox only gets a service access to the approximately 20 percent of the country covered by the network’s owned-and-operated stations. To reach the other 80 percent, it’s necessary to carve out deals with all of the companies that operate the network affiliates.

A year after Apple tried and failed to lock up national coverage of the Big Four, Moffett says, the networks have made significant headway in organizing their affiliates and getting them lined up to participate in big, unified streaming ventures.

“Hulu will launch with a large portion of their affiliates signed up,” he adds, “so their national footprint will be there from day one.” Pay-TV, of course, is built on bundling, and aspiring virtual pay-TV operators — like Hulu, Dish/Sling, Sony and AT&T/DirecTV — are trying to serve a sweet spot in the pay-TV market that doesn’t want to pay for unwatched channels.

If a cable operator wants to license ESPN, for example, Disney also wants that operator to pay for ESPN 2, Freeform, Disney XD and other lesser-watched networks in its portfolio.

That’s why cable service is so costly — and why creating more economical “skinny” programming packages is so hard. According to Moffett, Apple tried — unsuccessfully — to “cherry-pick” highly watched networks to create a skinny bundle, and “there’s no way Fox, Disney and NBCU would let Hulu cherry-pick its bundle, either.”

Hulu’s formula seems to be combining the full network portfolios of its three parents with key constituents like CBS Corporation, Time Warner, Viacom and AMC Networks. Niche channel operators are relegated to add-on tiers that carry a premium; independent networks are nowhere to be found.

Hulu recently sent out a description of the service to its SVOD subscribers. The basic package, at $34.99 a month, allows for one stream at a time per subscribing household, delivering just about every network in the portfolios of Hulu owners Fox, Disney and NBC — down to niche channels such as FXX and Chiller.

The bundle of approximately 80 networks also includes: CBS Corporation’s CBS, CBS Sports and the CW; AMC Networks’ AMC, WE tv, IFC and SundanceTV; Time Warner’s TNT, TBS, TCM, truTV, CNN and HLN; and Viacom’s MTV, MTV 2, Nickelodeon, Spike, BET and Comedy Central.

The package further includes a cloud-based virtual DVR that allows 20 hours of show storage. For $49.99 a month, customers may watch more than one show at once. Premium channels like HBO, Showtime, Epix and NFL Redzone are available as add-ons.

Meanwhile, the channels of smaller conglomerates, such as Discovery, are confined to so-called extra tiers. For example, Discovery, Animal Planet, Discovery Family, Science and ID are available in an add-on family package for an additional $9.99 a month.

Vanquishing niche-channel operators to bonus tiers, shunning independent networks and controlling the number of concurrent streams helps Hulu keep the service affordable, which is essential to enticing the younger generation, which has, for the most part, bypassed pay-TV.

Excluding many regional sports networks from the basic tier also helps keep costs down. For example, the SEC Network, which is controlled by Disney/ESPN, is part of the mix. But expensive local sports channels, such as southern California’s Time Warner Cable SportsNet, are left out.

So why are Disney, Fox and NBCU looking to undermine a pay-TV ecosystem that underpins their TV businesses?

Well, for one, that ecosystem isn’t what it used to be, as illustrated by the 7 million subscribers ESPN says it lost from 2013 to 2015. Second — and perhaps more important — is the opportunity to control information at a time when Nielsen is losing its grip.

“Those three networks are hopefully gaining access to some very valuable data about their users — who they are, what else they watch, what ads they respond to, what their credit card number is,” Wolk explains.

“In the long run, that is going to be very valuable, quite possibly more valuable than the carriage and retransmission fees they’re collecting from cable operators. Plus, if it works out, they won’t need an army of lawyers to negotiate their deals with pay-TV operators anymore. Lawyers are expensive.”

Pay-TV operators such as Dish Network, DirecTV and Comcast are already looking to monetize their collective audiences, using their latest set-top boxes to conduct advanced forms of advertising dubbed “addressable” and “programmatic.” Hulu would take this a step further.

“Hulu would have data about its subscribers, similar to the data the pay-TV operators have — email addresses, credit cards, home addresses, possibly social media log-ins if they enable that,” Wolk adds.

“Pair that with third-party data sources like Experian [a global financial- and information-services group], and they will be able to target specific audience segments.”

For Juenger, also, the advantages are clear. “If skinny bundles are gaining popularity,” he says, “the major network owners should take their product directly to consumers, capture the opportunity themselves, and ensure that their networks are part of the most widely distributed skinny-bundle offering.”

With Google also looking to enter the virtual pay-TV business through its YouTube division — while still other prospective competitors survey the field — the game could change a lot before Hulu gets around to transforming it. But Hulu is building a platform that will be watched closely in the months to come. Says Moffett: “They’re building a better mousetrap.”

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