With Hulu’s pending launch of their premium service, let’s take a step back and theorize how the video content industry is changing. It is incredibly hard to get people to start paying for something that was previously free. While Hulu’s idea is to provide access to older episodes as part of the premium model, they are still asking people to pay to consume video online. In my view, the only way you can charge for content is to have access to some type of exclusive content that is not available on every other video aggregation site. Rather than trying to change consumer behavior to pay for online content, the more likely structural change will need to be on the advertising side of the equation, since consumers are already used to seeing ads.
Right now consumers create value in 2 ways: they pay a cable/satellite TV bill (the access fee), and they view ads. Online, they pay no access fees for video, and they significantly fewer ad spots. So of course more people are moving online, it’s basic consumer behavior! However, as this deteriorates the industry’s value, the structure of the business will need to change. Think about the value chain players: content creators, providers, distributors, and consumers. Providers ultimately get paid for ads, but those ads need to be seen by people, thus, the newfound power of the cable distributors to command higher fees from the networks. While there is a shift in consumer usage from the TV to a variety of online devices (PCs, gaming consoles, mobile devices), at some point content creators need to continue to be paid to actually be incented to create the content. But if people continue to cut their cable cords and too much value is taken out of the traditional distribution model, more expensive or higher volume advertising inventory will need to be created within online video streams.
Currently there are approximately 4 ad minutes per 60 minutes of programming online vs. 15 ad minutes per TV programming, so there is room to increase the number of online spots. I don’t see this as a problem since consumers are already used to consuming ads. There is no change in behavior required. Does it really matter to the advertiser if I watch an ad on my Panasonic TV vs. my Mac? And with the ability to suppress DVR capability during ads online, online ads have an advantage over TV ads in that I’ll actually have to watch them.
It’s unclear what the balance is going to be between rising cable/satellite prices and the shift to online consumption. Just as Apple has had to increase music pricing on iTunes to put more value back in the industry, at some point a structural change will occur in the video marketplace to continue to enable compelling content to be created.