Martin: Does mobile video live or die with Hulu?

Any time a service cuts its price we are forced to pontificate as to why. So, when Hulu announced that it was out of beta (which it has been in since August) and reduced its price from $9.99 to $7.99 the critics immediately starting speculating. And they continued to do so until at least the publication of my pending Strategy Analytics report (in addition to this article) which will delve into the mobile video market, analyze key players, and determine which distribution and business model is most likely to succeed.

So, what does this all mean? First, it's important to note that a price decline does not necessarily dictate soft demand. Hulu could simply have determined that a price drop of 20 percent would expand their marketshare by more than 20 percent. It's simply the elasticity of demand. And for a company hoping to offer an IPO in the near future, larger subscriber figures will surely engender goodwill. But in this instance the market is almost certainly soft for various reasons. But what ails Hulu Plus and will all mobile video suffer the same ill?

• Netflix. Netflix is the bellwether to which all others will be compared--be it fairly or unfairly. With nearly 17 million subscribers, Netflix is a bonafide hit. But its success has been bellied by digital and has not been exclusively the result of it. So, if Hulu were to announce it had amassed 1 million subscribers, which would be truly excellent for the company it would still pale in comparison. Now, imagine if they announced they only had 100,000. 10,000? You can imagine the reaction. So, Netflix complicates the public perception of Hulu. But in truth Netflix only tangentially impacts Hulu and even then simply by siphoning the extra entertainment budget for potential Hulu Plus subscribers.
• Content. Content is king. We all know this and it's why Hulu is the king online. Hulu's website offers a broad range of content. Not surprisingly newer content such as Modern Family fares better than library content--despite the true genius that was Knight Rider (the original of course, not the remake). Currently, Hulu Plus lacks CBS programming altogether. The service lists 48 titles as "currently on the air" out of more than 200 programs available on Hulu Plus. Of those, only 28 are what I would deem popular broadcast hits still airing. So, of the total library, less than 15 percent of the content is high quality broadcast programming that users rely on Hulu for while 85 percent is comprised of the long tail that people often ignore.
• Price to usage ratio. Mobile is an inherently tricky medium to apply value to, especially in the United States. Fewer people commute via public transportation and those that do are often faced with conditions not ideal for watching mobile video (such as being underground without a signal). Others will use a service like Hulu Plus intermittently but never know when or how often those instances will be making a monthly contract a difficult value proposition. If Hulu offered a day pass, sideloaded content or ala carte offering they could grow the audience further.
• There are plenty of alternatives. Consumers are not wanting for entertainment options. Let's ignore the fact that users can sideload video, stream YouTube, or access content from home through the cloud. People looking to kill time with a device that supports Hulu Plus have the Internet, apps, games, video chatting, listening to music, reading an ebook, and dozens of other time killers at their disposal. Therefore the thought of needing to pay for an additional video service may be unnecessary. Especially when games like Angry Bird cost $.99 and are playable for hours and hours and hours.
• The emerging competition. Pay TV companies are also targeting mobile devices as a means to extend their services, enhance stickiness, and grow subscriber ARPU. AT&T offers U-Verse subscribers have the ability to sideload their DVR content onto the iPhone and surely other devices in time. Comcast, Cablevision, Time Warner and others are planning to follow suit and with an established billing relationship, a large walletshare, and bundled deals pay TV providers are in a good position to become very powerful mobile content distributors.
• An odd mix of users. Hulu also suffers from an odd mix of users. Netflix certainly catered to a more advanced audience when it launched but has since moved mainstream and provides its advanced users a value-add with streaming. Hulu however is appealing to an inherently more advanced audience of users who watch content on their PC, have smartphones and other connected devices, and want to consume media on the go. The trouble with those people is they already have found ways to access their content when they want it be it through a TV tuner card, streaming, DVD ripping, P2P, DVR, or they rely on other forms of entertainment. So, Hulu is stuck appealing to users who may not really need it in the mobile space.

So, what does Hulu Plus mean for the future of mobile video? First, Hulu Plus will not fail. While its current business model may need some adjustment and flexibility, the service has too many dedicated users, too many high profile backers, and too much cache to fail. But it does show how fragmented and competitive the mobile media environment is, especially if a big brand like Hulu must cut its price so quickly.

Furthermore it demonstrates that innovative business models must be tested--such as a day pass, ala carte rentals, and ad-supported mobile content. But most importantly it shows that garnering even $9.99 of a consumer's monthly spend on mobile entertainment is a herculean task. This should hearten carriers who are concerned about their network lode, embolden competitors hoping to win users, and concern content owners who may see the same players of today further consolidate their importance in distributing content to the masses. But one thing it doesn't mean is that mobile users don't want to be entertained. They want it--just not for $9.99.

Josh Martin is a senior analyst for wireless media services in the Global Wireless Practice of Strategy Analytics.