The Twitter- and blogosphere got a case of the vapors yesterday over a report that News Corp. plans to throw up a pay wall around Hulu. Speaking at an industry event, newly installed News. Corp. president Chase Carey said, “I think a free model is a very difficult way to capture the value of our content. I think what we need to do is deliver that content to consumers in a way where they will appreciate the value.” In case that wasn’t clear enough, he added, “Hulu concurs with that, it needs to evolve to have a meaningful subscription model as part of its business.”
OMGZ! came the response from Hulu tweeters. “Sell out,” cried the bloggers. Guardian blogger Roy Greenslade saw it as part of a Rupert Murdoch paid-content propaganda campaign.
Maybe. But I suspect it has more to do with cable retransmission consent for Fox than it does with pros and cons of free content. While much of the blogosphere focused on Carey’s Hulu comments, John Ourand of SportsBusiness Daily caught the real news in his report from the same industry event:
Carey warned that retransmission consent battles may be brewing as his company tries to convince cable operators to start paying to carry the Fox broadcast channel. “It’s not about trying to pick a fight,” Carey said… “It’s about trying to get our business to a place where it can be a healthy, long-term business.” In the past, Fox has used retransmission consent rules to help launch its cable channels, like FX and Fuel. Now, broadcasters want to get paid for their broadcast networks so they can better compete with cable networks. Carey specifically singled out sports rights as “a real challenge,” adding that “it’s not rocket science” to figure out how broadcasters can compete with cable networks. “It starts with making dual revenue.
If you’re looking to start charging cable operators retransmission fees for your free broadcast content, you really can’t be giving the content away for free online.
As Deutsche Bank analyst Doug Mitchelson pointed out in a research note last week:
Fox is beginning to negotiate its retrans deals including, we believe, one with a top-5 cable operator right now. We expect Fox is asking for $1+/sub/mo given Chase Carey, Newscorp COO and former DirecTV CEO, knows how crucial broadcast carriage is to pay TV operators, especially sports programming (like the World Series), and also given Fox’s success getting about $0.65 for carriage of Fox News. Newscorp certainly has the balance sheet to tolerate ad losses if it has to pull its channel for some time.
In exchange for significant affiliate fees, we would expect broadcasters would dramatically expand VOD availability and place greater limitations on free internet availability of their shows. Ultimately, we expect the networks and TV stations to convert to hybrid local/national cable networks (think RSNs paired with programming from a national feed), and then sell or give back the local broadcast spectrum. With 100m pay TV households, $1/sub/mo would be $1.2b of revenue and EBITDA per network per year that could be shared among the networks and station groups (80/20?), making broadcast a viable business model.
That would be a much bigger pay-off to News Corp. than anything it’s likely to see from Hulu, with or without a pay wall.