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Hulu, Netflix Take Cable Bypass

7/12/2010 12:01 AM Eastern

The Internet is fueling a spate
of new entertainment options, delivered
directly to the TV — without the need for a
traditional cable or satellite-TV subscription.
But according to industry analysts,
pay TV providers shouldn’t panic yet.

Hulu, the startup owned by three of the four
major broadcast networks, is launching a multiscreen
subscription service with access to the
full seasons of more than 30 current TV shows
for $9.99 per month. Moreover, the “Hulu Plus”
service is offered not only on the Web but also
on HDTVs and mobile devices.

Separately, Netflix demonstrated a bit of
clout in obtaining “pay TV” rights to movies
through a deal with production company Relativity
Media. Under that agreement, Netflix
will be able to stream 10 to 14 movies per
year that otherwise would have been distributed
through premium channels like HBO, Showtime or Starz.

On Hulu Plus — given that the content is
entirely from broadcast networks and has already
been free to access — the disruption
to traditional distributors will be minimal,
according to David Bank, managing director
of global media and Internet research at
RBC Capital Markets.

“The participation of cable-network content
players [in Hulu Plus] would mark a major shift
in the ecosystem that we don’t expect, again,
depending on the windowing of content,” Bank
wrote in a research note last week.

Hulu Plus also provides access to archive
content from hundreds of older shows, and will
provide all native HD content in 720p high-definition
format. The service will be accessible
via the Web, Samsung’s broadband-connected
TVs and Blu-ray players, and Apple’s iPad and
iPhone devices, with more devices in development.
“It’s a treasure chest in the cloud for TV
lovers,” Hulu CEO Jason Kilar wrote in a blog
posting announcing the service in late June.

Hulu, owned by The Walt Disney Co.,
NBC Universal and News Corp., will run a
closed beta test of Hulu Plus over the next few
months .

Meanwhile, Netflix and Relativity touted
their deal as “groundbreaking” in marking
the first time an alternative distributor has obtained
rights to movies in the traditional pay
TV window. Films scheduled to be available
through Netflix in early 2011 include The Fighter,
distributed by Paramount Pictures, and Skyline,
released by Rogue Pictures and Universal
Studios.

Executives with premium networks privately
dismissed the Netflix-Relativity deal as
a nonevent. “This isn’t going to touch our product,”
said one.

Still, what’s noteworthy is that Relativity
believed it will get the best payback through
the Netflix partnership. “Netflix has certainly
made its mark, with a service that reaches
over 13 million people and allows consumers
to have what they want, when they want it,”
Relativity CEO Ryan Kavanaugh said in announcing
the deal.

‘Cord-cutting’ is still a marginal phenomenon:

Proportion of U.S. consumers with broadband but no cable TV was 3.9% in January 2010, unchanged from the year prior. (Nielsen)
Less than 1% of cable subscribers likely to drop service mention getting all the programs they want online as a reason for switching. (Leichtman Research Group)
Online video streaming accounts for less than 2.5% of total video consumption across all demographics. (Nielsen)

September