Will Hulu make you pay?


Since Hulu launched early last year, its popularity has quadrupled as millions of people turn to the free online video site to watch episodes of such television shows as “Family Guy,” “The Office” and “Modern Family.”

Some wonder how long the free flow of online video would last if Comcast Corp. ends up a part owner of Hulu.

The nation’s leading cable company has made no secret of its disdain for Hulu’s approach of giving away the shows that Comcast and other pay-TV distributors spend billions for -- and rely on to retain subscribers. Comcast is in talks with NBC Universal about pooling their entertainment assets into a new company that would own 30% of Hulu in addition to the NBC network and cable channels such as Bravo, E! and Syfy. Comcast would control the new entity and possibly have the clout to push Hulu to begin charging for access to some of its most popular shows, including “It’s Always Sunny in Philadelphia,” “The Daily Show With Jon Stewart” or “Psych.”


“Would Comcast put an end to the Hulu model of using the Web to distribute free TV content?” asked Michael Nathanson, senior media analyst at Sanford C. Bernstein & Co. “Will Comcast continue to support Hulu?”

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.

Hulu already has limited users’ access to certain cable programs, including FX’s “It’s Always Sunny in Philadelphia,” in response to an outcry from the television producers and cable companies that object to paying TV programmers hundreds of millions of dollars each year for shows that are offered free online.

Comcast Chief Executive Brian L. Roberts is among the cable executives who have made their concerns known to TV programmers, both privately and publicly. He and other cable executives fear that Hulu could become the free alternative to cable TV subscriptions.

“If I am any one of these programmers, not just ESPN, but the Food Network . . . and I have a business in that 50%, 60%, 70% of my business comes from subscriptions, I want to think long and hard before I just put that content out there for free and not think through what it is going to mean to my business,” Roberts said at an investor conference in May.

Owning content would give Comcast some control over the matter.

“Arguably, their ability to shape online content distribution, and to recast windows for video on demand, would be an important attribute of any deal,” wrote Craig Moffett, a cable industry analyst at Sanford C. Bernstein.


Comcast’s interest in NBC Universal would dramatically expand its entertainment portfolio with such attractive cable channels as USA Network, MSNBC and CNBC as well as the Universal Pictures movie studio. The proposed Comcast-NBC Universal venture would also give the cable operator a much greater role in deciding how and when TV shows and movies are distributed online and at what price to consumers.

The proposed venture would combine General Electric Co.’s NBC Universal -- which includes a movie studio and broadcast network, a television station group and KNBC-TV Channel 4 in Los Angeles, the Telemundo Spanish-language operation and Universal Studios theme parks -- with Comcast’s entertainment holdings, including E! Entertainment, the Golf Channel and several regional sports networks.

There is no guarantee that Comcast and NBC Universal will come together. The deal hinges on whether a French company, Vivendi, decides to unload its 20% stake in NBC Universal. Vivendi must decide in the next two months, and then federal regulators -- already concerned about media consolidation -- would have to sign off on the venture of Comcast and NBC Universal.

If the deal is completed, Comcast would own 51% and GE would have 49%. This would give the Philadelphia-based cable operator a stake in Hulu, which has experienced explosive growth during the last year. The service’s online audience swelled to 38.5 million viewers in August, up from 10.2 million a year earlier, according to ComScore Video Metrix, which tracks online audiences.

Hulu’s growth and its elegant design drew Disney to join the partnership in April.

Wall Street isn’t alone in questioning whether Hulu is a hindrance to the TV industry. Entertainment executives have been agonizing over the conundrum of how to respond to viewers’ desire to watch video on their computers and portable devices without encouraging them to abandon their pay-TV subscriptions. The debate has caused tension between the various quarters of the industry, not only pitting programmers against distributors but also opening internal rifts within media conglomerates themselves.

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.

Martin and other analysts hope Comcast would champion a move away from offering so many shows online for free.

“It would accelerate the inevitable path of Hulu to charge for its premium content,” Martin said in an interview.

The departure in June of one of Hulu’s architects, Peter Chernin, the longtime chief operating officer of Fox parent News Corp., meant the site lost a powerful advocate.

Hulu Chief Executive Jason Kilar lauded Chernin as an executive who “learned long ago that it was never his or his teams’ job to protect existing businesses” but to maximize those businesses “while at the same time ensuring that the seeds were planted and nourished for new businesses.”

Absent Chernin, there is growing support among the site’s owners to embrace a pay model, according to people familiar with the situation.


Hulu declined to comment for this story.

Already, several media companies, including Comcast and Time Warner Inc., have been experimenting with their own video websites and with technology that would ensure that only paying subscribers get to watch premium cable shows on their computers at no additional charge.

Comcast has been testing the service, called On Demand Online, with 5,000 subscribers who type in their ID and password to gain access to video. The cable operator has a dual interest: to retain cable TV subscribers as well as offer a reason for people to sign up for Comcast’s high-speed Internet service or upgrade to speedier access. What better incentive than bandwidth-hogging video files such as movies?

Analysts have cheered the nascent efforts to extend the cable subscription model online through the use of “authentication,” the term for verifying a subscriber’s identity.

“Authentication is becoming a top priority for content providers as well as the cable operators,” said Charles D. Segars, a movie producer and chief executive of the Ovation cable TV channel. “Do they make Hulu a paid site? It’s going to be a very interesting debate.”