Hulu operates a business model often found in the media industry: that of platform business model where content is free to users and paid for by advertisers. These two groups are kept separate – advertising companies do not, nor could not easily themselves, target individual users – they do so through Hulu’s advertising algorithms. In this way, Hulu links these two groups in a way that earns Hulu (and the advertisers) revenue. Hulu also offers Hulu Plus, a product-based business model, in which customers pay a subscription for advertisement-free viewing and access to a more extensive movie and television show database. This write-up will focus on the free on-demand video platform.
HISTORY – THE EXEMPLAR FIRM AND OTHERS:
Hulu, founded in 2007, is an online video service that offers a selection of hit TV shows, clips, movies and more at Hulu.com for free, supported by advertising. Hulu also offers subscription based service Hulu Plus, which allows access to a larger catalogue of TV shows and movies in an ad-free viewing environment. Hulu accounted for 10% of shows streamed Q1 2013. The video on demand industry is a crowded one, with multiple players and business models. Players in the industry compete on price, exclusivity and range of content, as well as user experience in terms of personalization and compatibility with different devices. Some of the largest competitors include Netflix (over 40 million subscribers, the largest video on demand streaming company proving advertising-free service in exchange for subscription fee) and Amazon’s Prime Instant Video offering as a complement to their retail market place business.
CUSTOMERS – WHO THEY ARE:
Hulu has users and paying customers; the two are distinct. Firstly, users are viewers of Hulu’s VOD streaming service, most of whom access Hulu’s media catalogue for free. Secondly, Hulu sells screen space and video time to over 1700 paying advertiser customers. Hulu thus deploys a triadic business model: Hulu is the platform that connects paying advertisers to website users.
ENGAGEMENT – VALUE CREATION PROPOSITION (INCLUDING NETWORK EFFECTS):
Hulu engages differently with its users and advertisers: Hulu is a “bus” for users, offering access to the same catalogue of media content, and a “taxi” for advertisers, offering tailor-made access to specific user groups based on user characteristics and viewing selections.
Users: Hulu offers users legal access to wide range of premium content free of charge. Hulu partners with various TV networks to make TV show episodes available within 24 hours or less of their original airtime. Hulu allows different search options for its content, as well as non-personalised recommendations (such as “most popular”). The free version of Hulu only allows accessing content via a computer. Hulu does not let users skip pre-roll ads, while Google's YouTube does: viewers who opt out of the ads also opt out of the rest of the show they're watching. Hulu does offer users customized advertising viewing options, such as the ability to swap out an ad or choose one of three ads at the outset of a show.
Advertisers: Hulu creates value for advertisers by offering narrowly targeted high-performing advertising and highly customised service. The company keeps innovating in the ways advertising is delivered to viewers. It offers “instream purchasing” (such as option to order Pizza Hut); cross- platform interactive ads optimized for a user's current viewing device; and "Hulu 360 Ad," which will target mobile users. Hulu also uses performance-based pricing mechanism for advertisers (see Monetization).
DELIVERY – THE VALUE CHAIN:
Hulu licenses content from broadcast network and cable network providers, as well as select film studios. Hulu loads advertisements from its sponsors every time a user requests a video. These ads include short video spots that run before and after the video, and during the video's natural commercial breaks. Each sponsor also contributes ad banners and video overlays, which are displayed with the video and linked to the sponsor's site. Hulu offers its sponsors a complete list of these and other ad formats in its media kit.
MONETIZATION – VALUE CAPTURE:
Firstly, Hulu captures value through advertisement revenue: it sells ad space to more than 1700 advertisers. Whereas usually advertisers are charged when an ad begins playing, Hulu only charges when their ads are viewed to completion. Other companies using this monetization mechanism are platforms, which specialize largely in user-generated content or non-premium content, which is also sponsored by advertisers, such as Facebook and YouTube.
Written by Tatiana Mikhalkina and edited by James Knuckles under the direction of Prof Charles Baden-Fuller, Cass Business School, this case is designed to illustrate a business model category. It leverages public sources and is written to further management understanding, and it is not meant to suggest individuals made either correct or incorrect decisions. © 2014