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Hulu's tug of war with TV

As online TV viewership surges, media companies reconsider the wisdom of sharing their content for free.

May 11, 2009|Dawn C. Chmielewski and Meg James

Online video site Hulu trumpeted its ascension to the media big time a few months back with a dash of sardonic humor. In its debut TV commercial, in which Alec Baldwin mocks the audience's addiction to the very shows he creates as a fictional network executive, the site calls itself "an evil plot to destroy the world."

The joke is uneasily close to the truth for some in the television business.

Once dismissed as "Clown Co." by Silicon Valley critics who scoffed at the notion that old media giants could ever harness the Internet, the website with a name that sounds like a Hawaiian dance has quickly upset the status quo. Hulu's traction with users has entrenched entertainment companies worried that the video site's runaway success could undercut the financial underpinnings of the industry.

Those companies are fighting back, and the result could mean no more free passes for many signature cable programs that appear on Hulu.

NBC Universal and News Corp. publicly launched Hulu a little more than a year ago as a gamble on television's digital future. The website allows viewers to watch thousands of episodes of TV shows for free, from current hits like "Family Guy" and "The Office" to old favorites like "WKRP in Cincinnati" and "I Dream of Jeannie." Hulu's simple design, expansive catalog and no cover charge have elevated it to one of the most popular websites for watching video.

With 42 million viewers in March -- an audience nearly twice the size of TV's most popular show, Fox's "American Idol" -- Hulu whizzed past Yahoo and Microsoft's MSN, and is now nipping at the heels of Google's YouTube.

"Hulu has certainly exceeded all of our expectations," said Jean-Briac Perrette, NBC Universal's president of digital distribution. "We've come a long way from Clown Co."

Late last month, Walt Disney Co. overcame its initial skepticism and signed on as an equity owner of Hulu, which has nearly 150 content partners. That gives the video site even more star power with the addition of ABC's "Desperate Housewives" and "Lost," and cable hits such as ABC Family's "The Secret Life of the American Teenager" and Disney Channel's "Wizards of Waverly Place."

"Our feeling is that -- and some of this is instinct, by the way -- media consumption online is growing and will continue to grow," Disney Chief Executive Robert A. Iger said in a call last week with analysts who grilled him about Hulu. "It is really important for us to establish ourselves there."

But in making a bid for the next generation of Internet- attuned viewers, Hulu's owners have strained their lucrative relationships with cable and satellite operators. Companies like Time Warner Cable Inc. and DirecTV Group Inc. pay cable networks billions of dollars each year to carry programming. Believing that they should have exclusivity because their payments support the enormous cost of producing TV shows, such companies have been pushing back against the Hulu freebies.

Investors also are wary that the media companies' embrace of the Internet-content-should-be-free philosophy threatens one of Hollywood's biggest profit centers: cable programming.

"If you give away your premium content for free, you are basically hastening your own demise, signing your own death warrant," said Laura Martin, a media analyst with Soleil-Media Metrics. "There is a choice that companies have to make."

Hulu illustrates the quandary that media executives face as they weigh the potential of the Internet against their dependable, old-line businesses. If the television industry does not find a way to preserve its two pillars of revenue -- advertising and subscription fees -- the consequences could be dire. Analysts point to the rapid deterioration of newspapers, which traded paying print subscribers for the expectation of big bucks from online advertising that have not materialized.

The conflict has forced Hulu to make concessions that have hurt users who have come to expect a rich menu on the video site. In recent months, entire seasons of "It's Always Sunny in Philadelphia" were abruptly taken off the site, along with episodes of other cable TV shows such as "In Plain Sight" and "Psych."

Hulu even blocked access to a technology that lets its users watch content on their TVs. The move provoked outrage among fans of the software, called Boxee, drawing 385 angry comments on the company's website.

"Big Media had better come out of their hole and embrace the power of Internet streaming or they'll be in big trouble down the road," wrote one poster who identified himself as Lew Ciokiewicz.

Hulu's pullback in the case of "Always Sunny," one of the site's early favorites, underscores the tug of war within established media companies over the wisdom of placing TV shows on the Internet for free.

The quirky sitcom about a group of slackers has become a signature of the FX cable channel. (FX is a division of Fox, whose parent company, News Corp., is one of Hulu's founding partners.)

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