HULU AND THE FUTURE OF TELEVISION: A CASE STUDY An Honors Thesis (HONRS 499) by Matthew Rodgers Thesis Advisor Michael Hanley Associate Professor of Journalism Ball State University Muncie, Indiana May 2011 Expected Date of Graduation May 2011 Abstract Understanding current media trends and adapting to ever-changing consumer desires is essential to success in advertising. Hulu is one of several new Internet-based services that deliver television content to consumers without using the traditional broadcast or cable channels used in the recent past. This document compiles information concerning this new service and presents it as a case study for the evolving television market, especially as it concerns advertisers. 2 Acknowledgements I would like to thank the following people for their patience, understanding, guidance and encouragement throughout the duration of this project: Michael Hanley Kevin and Karen Rodgers Katie Mathieu Nathan Holmes and Noah Judd microPR: Joey Lynn Foster, Kenzie Grob, Kati Ingerson, Ben Luttrull and Adam Merkel 3 Table of Contents I. Abstract ..............................................................,........................... " ...... 2 II. Acknowledgements ... '" ........... .. .. ........... ... ................. .... ....... .................... 3 III. Table of Contents ............................. ................ .... ...................................... 4 IV. Statement of Problem ...... ...... ............ .. ...................................................... 5 V. Methodology ............ '" .......... .......................... .. ...................... ....... , ... , ..... 6 VI. Brief History of Television and Consumer Viewing Habits ... ... ............ ............. .. 7 a. The Early Days and Rapid Growth of the Television Industry ................ ... ...... 7 b. The 1970s, Cable and the VCR ................................................................... 8 c. The Expansion of On-Demand Content and Streaming Services ..... ............ .... ... 9 VII. Hulu and the Competition ............... ...... .. ................................................... 11 a. Hulu ....... .... .. ... ... ........ .................... ... .... .... ..... .. ... .......................... .. 11 b. Primary Competitors ... ... .... ....... ............ .. ..... .. ... .... ................. .... ......... 14 i. Netflix .... ... ..... ...... ....... ... ..... ...... ... .... .. ........ .... .. .... .. .. ... ............ 14 ii. Apple's iTunes and iTunes Store ........... .. ......................................... 15 c. Up-and-Coming Competitors ........ ........... ...... .. .............................. .... .. .. 17 i. YouTube ..... .. .. .. .... .... .. ... ........................ ......... ........................ 17 ii. Amazon Instant Video .... ... ......... .. ... ................... ..... .................. 18 d. Potential Competitors ..................................................... ... .... .. ............ 18 VIII. Analysis of Current Trends and Issues .. ............................ ... .. ..................... 20 a. External Pressures ................. .... .. ..... ........ ........ .......... .. ....... .. ............ 20 b. Internal Pressures ... .. ................ .. ......................... .... ..... ... .................. 21 IX. Concluding Thoughts ......... ..................... ... ... ...... .. ....... ... .................. ........ 24 X. Works Cited ........................... ................ ..... .. .. .......... ............... .. ............ 26 4 Statement of Problem Television advertising has remained a main pillar of the advertising business ever since the widespread adoption of broadcast television in the 1950s. Despite changes both inside the world of television-the invention and expansion of cable and satellite, for example-and among the many new mediums available-social media like Facebook and Twitter-advertisers have relied upon the medium to relay messages and advertisements to a wide variety of target markets. Recent innovations on the Internet, however, have begun a shift in consumer viewing habits away from television - a change that has the potential to drastically alter the way businesses advertise. Services that deliver video content to television screens through the Internet challenge the traditional television model by providing consumers with alternative methods of accessing their content. This document analyzes Hulu.com, one of these new Web-based services, in an effort to better understand both the current media atmosphere and the impending changes to television advertising. 5 Methodology As this issue is being approached from the perspective of a retrospective case study, all sources cited herein are secondary by nature. They were discovered in major news outlets and databases, and were only used if they were deemed reputable academic or industry media sources. This method of media monitoring gleaned considerable information, both within and outside this particular subject. It is worth mentioning, however, that the field of Internet television is evolving constantly. Netflix and YouTube, Hulu's major Internet competitors, are mentioned in the mainstream media and on Internet blogs and social media nearly daily. Because of this, readers are urged to consult reputable media outlets for the latest news on this subject. 6 Brief History of Television and Consumer Viewing Habits The Early Days and Rapid Growth of the Television Industry The changes currently underway in the television industry must be analyzed in the context of television history in order to reach any beneficial conclusions. Although the history of television truly began back in the 1880s with Paul Gottlieb Nipkow's invention of the elecromechanical television system, the television industry in the United States began in 1939 at the New York World's Fair, where many Americans first viewed the relatively new technology (Shiers and Shiers 13). About a thousand people gathered around about 200 television sets distributed throughout New York City and watched President Franklin Roosevelt and Albert Einstein give speeches, then light the official fair lights. Although the first television advertisement-a twenty second spot bought by Bulova Watches for $9-ran in 1941, World War" delayed the widespread adoption of the television a bit further (Bulova). Despite the war, the latter half of the 1940s saw an explosion of TV developments (Shiers and Shiers 22). The American Broadcasting Company formed in 1944, and the National Broadcasting Company (an organization that grew out of the radio market in the 1920s) began the United States' "first scheduled commercial network a year later. The earliest popular television programs began airing shortly thereafter, with Howdy Doody, Meet the Press, The Ed Sullivan Show and I Love Lucy all premiering before 1952. In this brief eight-year period, the number of televisions available in the United States grew from less than 10,000 to nearly 6 million (''Television'' 119). That number would increase tenfold by 1960. 7 In the 1940s and 1950s, rather than have advertisers show their products and services in brief blocks of time, entire programs were sponsored by corporations (''Television'' 119). These sponsorships were too expensive for small businesses, but attracted large corporations. Midway through the 1950s, the so-called "quiz show scandals" caused both a decline in that sponsorship programming and a shift to 60- and 30- second commercials, the type of advertising seen today. These scandals were the result of sponsoring advertisers dictating the results of certain game shows. Once the public became aware of this practice, people quit watching shows in the genre and became wary of sponsorship advertising. Cable television also began in the 1940s, albeit as a method of transmitting channels available through over-the-air broadcasts to individuals located outside of the broadcast area rather than the source of original programming as seen today. That did not widely exist until government regulation shifted in 1972 ("Television" 119). The 1970s, Cable and the VCR The introduction of subscription cable and its cousin, satellite television, marked the next big shift in how people consumed television, forcing a change in advertising as well. Both cable and satellite television continued the trend of expanding the number of offered channels that had started in over-the-air television, but to a much greater degree. For example, in 1985, the average number of channels receivable was 18.8 (Mandese). By 2007 that number had risen to 118.6, according to the Nielsen Company (Marketing Charts). Each of those channels offers content that attracts different types of 8 consumers, giving advertisers the ability to more effectively target the segments they are interested in reaching. The 1970s also saw the introduction of home video recording, or taping as it was frequently called at the time. Both Sony and JVC produced Beta and VHS analog signal data videocassette recorder formats that allowed consumers to purchase videotapes and record and store content locally ("Television" 119). This VCR technology generated two trends that are still prevalent today. First, consumers were able to purchase content previously only available in movie theaters and watch it from the comfort of their own homes. Second, consumers could time shift live television programming by purchasing blank videotapes, recording live television content, and then watching it at a later date.