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An Evil Plot?

December 30, 2009

Hulu likes to advertise itself with a bit of tongue-in-cheek claiming that it is an evil plot to take over the world.  Something tells me that “Hollywood” thinks of these spots as less tongue-in-cheek than one might expect.  Recent data has shown that Hulu’s viewership is on a meteoric uptick, at a time when most of the traditional media consumption has flat-lined or even decreased.  With Hulu’s rumored subscription plan in the works, the Hollywood partners involved are probably hoping it’s going to really start raking in some dough.

Of course, the only problem is that Hulu is now competing in a market that is ultra-competitive: online distribution (note: NOT creation).  Online distribution approaches perfect competition because the variable costs of redistributing media is pretty close to zero; most people do it voluntarily, and the costs of hosting are almost negligible (as are the ad revenues).  The only significant costs actually imposed on media redistribution are the legal ones of complying with Copyright enforcement.  Of course, when the costs of enforcement are greater than the disparate revenues that hardly exist to begin with, the economics aren’t going to let a paid-subscription model run by Hulu replace free TV online from its myriad other sources.

Come to think of it, it’s fairly bizarre that Hulu spends any money advertising at all, since the competitive margins on internet distribution have to be razor thin, especially since the media companies always complain about how little revenue they see from Internet media anyway.  My guess would be that they’re hoping to lock up customers with name recognition and network effects.  The same principle is at work behind the iTunes Music Store: people know that iTunes is a reliable channel for effortless music acquisition, so they’d rather encounter mild drag on their wallet rather than their energy or effort. So, it’s pretty clear that Hulu’s best bet is to really play up the value and ease-of-use of its own service to gain the piddling advertising revenue it can, but also try to derive revenues in other ways that are not so freely competitive (e.g., promotional sales, hard-to-find content,premium subscriptions with added functionality, etc.).

By the way Hulu, this media consulting was FREE.  See how you’re screwed?

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