May 17, 2013

Whither Hulu? Time Warner Cable and the Future of OTT

Bloomberg reported a rumor this week that Time Warner Cable (TWC) is contemplating an investment in Hulu. If this comes to pass, TWC would join Disney, News Corp, and Comcast as owners of Hulu, and make an already-complicated ownership picture even more so. So what would attract TWC to make this investment, and what might it mean for the future of OTT?

Three things…

Broadband is the New Base
In the mid 1990s, cable TV providers began using their coax-to-the-home networks to provide high-speed Internet access. At the time, this service was marketed as an add-on to pay-TV service and an alternative to dial-up access over analog phone lines. (It would take several years for telco DSL services to be widely deployed).

Since that time, both subscribers and revenue from broadband Internet service has grown steadily at operators like TWC, while the pay-TV business has now stagnated. At TWC, in the first quarter of 2013, broadband revenue from residential customers surpassed 50% of pay-TV revenues for the first time, coming in at $1.4b (growing 17.3% year-over-year). By contrast, residential pay-TV revenue delivered a little less than $2.7b in the quarter (shrinking 1.5% year-over-year). The trend is clear, if not reminiscent of the transition in the mobile industry from voice to data. In a few years, TDG predicts that a majority of TWC’s revenue (along with other cable operators’) will come from non-video sources. As broadband becomes the new foundational service for TWC, partnerships with OTT providers like Hulu cease being taboo and start to look like smart business.

OTT is the New Bundle TWC web page
All service providers love to bundle, and for good reason. It works. Customers who subscribe to multiple services generate higher margins and lower churn. Period. In this context, Hulu (particularly in its Hulu Plus SVOD incarnation) becomes an interesting bundling opportunity for TWC, which currently offers six (six!) different tiers of broadband Internet service (see company web page on the right).

One can easily imagine TWC offering a Hulu Plus subscription “for free” as an incentive to choose (or upgrade to) its higher speed (and higher cost) Internet packages. The company can absorb the wholesale cost to Hulu in its pricing at the higher tiers, especially if it becomes a major shareholder of the OTT service and is thus (at least in part) sitting on the other side of the transaction as well. Rumors have circulated for years about Netflix exploring similar bundling arrangements with pay-TV providers. A TWC investment in Hulu could break the log jam and finally bring the OTT-broadband bundle concept to fruition.

Hulu Remains a Pawn in a Larger Chess Match
Since its creation by Fox (News Corp) and NBC Universal (now Comcast) in 2007, Hulu has been both a commercial success and a microcosm of the television industry’s love-hate relationship with OTT. Hulu has been both embraced (ABC Disney in 2009) and shunned (CBS) by the very industry it claims to serve. It has been both an innovator (Hulu Plus was one of first OTT services on the Microsoft Xbox and Apple TV) as well as an obstacle to innovation (Hulu still blocks access by Google TV and Boxee).i And perhaps most interesting, Hulu has tried to offer both a free ad-supported OTT service, as well as the above-mentioned Hulu Plus paid SVOD service. Disney and Fox are currently engaged in a very public spat over which of these two strategies Hulu should pursue.ii Disney apparently favors a free-with-ads future for Hulu, while Fox would like to see Hulu focus on subscription-based Hulu Plus and become more of a competitor to Netflix. This conflict probably had something to do with long-time CEO Jason Killar’s departure in Januaryiii, and may ultimately lead another of the media giants to sell its interest altogether.iv An investment by TWC may break the boardroom deadlock, or it could just complicate the picture even further.

As we remind ourselves around TDG every day, these are still the early days in what will be the decades-long transition in which TV is now entwined. As one of the early pioneers of the OTT space, Hulu continues to have an influence that transcends its size. Like Netflix, every move that Hulu makes (or doesn’t make) is bound to be scrutinized by all those (including us!) who seek to define the future of TV. An investment by TWC is just the latest chapter in this drama.

TDG members – please check the Analyst Insight area for more on this and other topics. If you are not currently a TDG member, come talk to us and see what you are missing.

Joel Espelien is former General Counsel and Senior Vice President of Strategy at PacketVideo, which was acquired by NTT DoCoMo. Joel is now a Senior Analyst for TDG and lives near Seattle, WA.

i“Hulu grew revenue 60% last year, still blocks Google TV and Boxee,” (Accessed May 16, 2013).
ii“Disney, News Corp discuss Hulu’s Future,” (accessed May 16, 2013).
iii“Some news to share,” (accessed May 16, 2013).

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