Hulu LLC announced yesterday that it was closing down its free video streaming service over the next few weeks, and would become a pure subscription-based service moving forward. It's not exactly a shock; Hulu has de-emphasized the free service for a while now, and that section is not easy to find on the site. It is also supported on fewer devices than the subscription service. Unsurprisingly, traffic has also been declining. (See Hulu Drops Ad Model, Yahoo Laps It Up.)
Hulu's Senior Vice President and Head of Experience, Ben Smith, said in an interview with The Hollywood Reporter that its investment in the subscription service, adding "new originals, exclusive acquisitions and movies" made the free service very limited, and it no longer "aligned with the Hulu experience or content strategy."
So is this an isolated incident or indicative of a larger trend in the OTT space? Does it suggest that ad-sponsorship is not a viable model for a streaming site? After all, when Hulu launched in 2007, it was the poster child of ad-supported, free online video. And even Hulu's parents, the major broadcasters, are questioning the ad-sponsored model by launching new subscription services. (See Free TV's Decline Has Begun.)
In a previous post, we reviewed a set of business models for OTT video and the kind of content they were best aligned with. In my opinion, the subscription model and the transactional model work best for the highest-value, or most widely popular content. And it seems that subscription seems to be the more successful one of the two. (See Finding the Right Video Service Business Model.)
When cable operators in the US launched VoD, it was subscription VoD that got the most usage. The Netflix Inc. (Nasdaq: NFLX) monthly subscription model was preferred over Blockbuster's late-fee ridden transactional model (though in this case there were also other factors involved). And in the UK, the Tesco pay-per-view Blinkbox service racked up losses of £40 million ($52.2 million) before shutting down, despite having newer movie titles than any other online UK service.
The reason is simple: It costs more. Usually a consumer can get an entire monthly subscription for the cost of two or three titles on a transaction-based service. There has also been more pressure on compressing release windows and more experimentation with release timings from studios, which helps subscription services. And there is just more high-quality, high-value first-run content being created which is overshadowing the impact movies have traditionally had on transactional usage and revenues.
The ad-sponsored or free model faces many of the same limitations that the transactional model does. It provides little revenue visibility compared with subscription models, and that's important when you are planning to commission original productions of high-value content.
Online advertising is growing, and video is an important driver. According to the IAB, US Internet advertising revenue grew 20.4% in 2015, to $59.6 billion. Video advertising, specifically, grew 20% from $3.5 billion in 2014 to $4.2 billion in 2015.
But that revenue is spread across a lot of different sites. The low barriers to entry for video streaming means that there are dozens of outlets, all struggling for advertising dollars. The site has to have extraordinary content to attract sizeable audiences in order for the ad-sponsored model to work. And I suspect that is what has happened to most streaming sites trying to be free: The audiences haven't built up enough to allow for investments in high-value content. But without that content, there hasn't been enough reason to keep visiting the site. It's your classic chicken-and-egg problem.
I think ad-sponsored models are going to more often be suited to content that is either offered by a powerful brand (i.e., a well-known broadcaster with high-quality content monetized via TV advertising as well as online) or a niche service catering to a small but passionate audience. And of course, for user-generated content, such as on YouTube. Production costs are low to zero, and there's an easy way to generate revenue via the platform.
In fact, I wonder if social video is the future of online video advertising. I would say it's quite logical to expect the confluence of live streaming (Periscope, Facebook Live, Snapchat Live Stories), improved profiling/targeting and programmatic advertising to drive online video advertising moving forward.
But the content offered will probably not be high-quality TV shows -- that will still be on Netflix, HBO, Amazon and maybe Hulu.
— Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation