iPad, Hulu, and Ad Dollars

By Richard Menta 2/21/10

Rumors are flying around that the iPad will finally bring Hulu streams to the table when that unit ships next month. Hulu would have been accessible to the first iPhones had it not commited itself to Adobe Flash technology to stream television episodes across the web. Apple steadfastly refuses to allow Flash to run on the iPad OS, part out of general dislike for the technology and part because Apple wants as much control over media delivery to its products as it can acquire.

But it is not technology that is holding Hulu back from Apple's mobile devices. NBC, which owns Hulu, easily could have created an iPad or iPhone app just as CBS did with its competing, but inferior, TV.com service. NBC wants strong control over media delivery too and is wary of giving too much of it to Apple. It also comes down to money and how NBC and it's Hulu execs struggle to find that secret sauce that will bring in the biggest returns. One big hurdle is that despite strong viwership Hulu can't find enough advertisers to pay the same dollars for a commercial embedded in a Hulu stream than for terrestrial TV ads with an equal sized audience.

Richard Menta

Which begs the question of why? Why does it make any difference if a viewer catches a commercial sandwiched in-between programs on their TV set versus their laptop? It doesn't. In fact, where TV commercials come in packs of six on prime time fare, Hulu usually streams (so far) only a single commercial during any break in the action. If anything, shouldn't this exclusive presence make 100,000 eyeballs on a Hulu stream a better value for the advertiser than 100,000 primetime broadcast eyeballs of the same program?

There once was a time when the answer was a clear yes.

A quick anecdote; back in 1998 when I headed Internet marketing for the New York Law Journal we were pulling in a healthy $35 per 1,000 page views. Page views were measured by our ad partner DoubleClick whose methodology I was less than impressed with. I fastidiously followed the NYLJ site statistics with an application I acquired called Statistics Server to validate DoubleClick's numbers. Immediately I discovered that DoubleClick's numbers were grossly off. If I had 20,000 readers for a particular article, listed on my stats package as page views, I expected 20,000 ads delivered per ad spot when the spots were all filled. The numbers never matched. They didn't even come close. Sometimes the figures were significantly underreported, but more often they were sharply inflated. Repeated calls to DoubleClick to discuss their methodology got me the runaround as it was clear, at least to me, that I uncovered their dirty dark little secret.

Bottom line, the then dominant DoubleClick contributed universally to an innacurate delivery of ad charges to customers. This became apparent to customers as big money Net ad expenditures produced mediocre-to-poor results. Combine this fact with the downright cheating that went on with ad delivery back in the first dot-com era (i.e. web pages that would besige your screen with a flood of pop-up ads) and you can see why the value of Net ad deliveries plummeted. A year after the dot-com bust of 2001 ads earned between $0.30 and $0.60 per thousand.

Internet advertising lost immense trust and this was reflected in lower rates. The industry has never recovered from this and though rates are higher now they are still markedly deflated. Hulu, Pandora, and any other service that relies on advertising revenue are still paying for this debacle as their customers continue to distrust the efficacy of Net ads. Google does well, but only because it delivers the huge volumes that raise ad effectiveness. The end result of all this leads to NBC chief Jeff Zucker's oft-repeated quote "Trading Analog Dollars For Digital Pennies".

I would like to point out that the delivery of video over the Net is by far cheaper than through analog means. There are no large TV towers and transmitters to build, power and service. Lower costs means lower revenues can still generate equal or near-equal profits. The iTunes App store saved Pandora with a rush of new customers and thus ad revenue. Hulu for the iPad will almost certainly draw strong viewership gains.

But Zucker has already signaled that he wants more revenue than what additional eyeballs will offer at present ad rates. This is why there is talk that NBC will charge for Hulu iPad access. I'm not sure that strategy is pragmatic if it is indeed on the table. iTunes already sells episodes of popular TV fare for $1.99 and the word is that CBS may drop episode prices to $0.99 by the time the iPad launches to boost sales and generate greater revenue through volume. Can a low monthly all-you-can-eat price strategy compete with cheaper one off sales and the likes of free DVR/VCR recordings and Slingbox for iPhone? Possibly, but there are plenty of options for consumers, both paid and free, and this is before we come to the issue of file sharing. The biggest reason many flock to Hulu is because someone else right now (advertisers) picks up the tab. I could very well be wrong, but I am honestly not convinced a pay option will keep enough customers to be viable.

Money is guiding Zucker right now, which frankly is what should be guiding him in this case. But raising advertiser trust level to elevate both the number of ad placements and their related ad rates is where I think NBC should focus its efforts on. When viewers are already shelling out significant cable fees to watch television at home I suspect many are less inclined to spend additional funds to add mobile access. Especially in these sober times when TV viewers are watching their own pennies, whether real or digital.


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