Round One in Over the Top Video Battle— Free(ish); Round Two— Not Free(ish)

Perhaps in a slip-up of judgment, last week Walt Disney CEO Bob Iger suggested that one day Hulu may charge to watch its content, which today is free but advertising supported. Mr. Iger’s comment makes one wonder whether this was part of the secret plan for Hulu all along, and the reason the company finally added its content to the Fox and NBC-Universal venture in April (besides gaining 30% equity in the company). As we mentioned before, this was a huge deal and gave credence to the idea that smart people in New York and Hollywood feel that the over-the-top video (OTT) delivery mechanism for television programming and movies will play a big role in the future. It also tells us that we are really only in round one in the evolving business model for OTT, which will likely embrace a variety of revenue generating forms including ad-supported, subscription (for both TV programming and online video on demand), pay-per-view, and download-to-own.

The challenge for Hulu, similar to what Napster went through in the music business, will be finding a way to charge for content that consumers previously received for free— and do this without turning off its millions of viewers. What might work is a tiered structure that gives some content and services for free, while premium content and services (like catch up TV) would be provided for a subscription or on a per-view basis.

“Premium” could be defined in many ways. It could be based on content “windowing”, where fresher content, new movie releases or recent TV shows, are available for a fee. It could be based on the resolution quality of the content, with HD versions of shows and movies costing money while SD versions are free. Or it could be based on concepts of channels or programming line-ups similar to how cable works today. Or a combination of methods.

Regardless of which business model wins out, the Disney’s of the world will not allow themselves to “trade digital dollars for Internet pennies” which is what is most feared. There is already some evidence that their strategy is working. While still not equivalent to traditional broadcast programming revenues, Hulu is rapidly filling its advertising inventory. And I have heard through the grapevine that at least one major network has actually reached the point where they can make just as much money from an online viewer as a traditional broadcast TV viewer. This is because online viewers tend to watch every episode of their favorite shows (versus once a month when it fits into their schedule) and sometimes go back years to catch-up on old shows or watch them again. Online viewers also tend to expand their interests online, with 20-somethings becoming fans of programming that is geared to seniors for example. Of course, there is also the ability to do better targeted advertising online, which commands premium rates from advertisers.

So, as we suspected, we are still very early in the OTT revolution. Content houses are much wiser this time around than when they were caught completely off-guard by the Napster and iTunes digital media migrations. While round one of this battle might be “free-ish” (ad-supported), we should expect a much more varied set of business rules for generating revenue from OTT video in the later rounds.