Hulu: You Absolutely Need to Start Charging Users. Or, Why News Corp. Is Right

(MoneyWatch)  Much was made of it last week when News Corp.'s Chase Carey said that Hulu would start charging soon for some content. While this may only be wishful thinking on News Corp.'s part -- Hulu's other partners have been mum on the issue, and Hulu itself threw cold water on the idea -- News Corp. is right. As it's structured today, Hulu has the potential to destroy the broadcast model, which solely depends on advertising to both finance programming and make money off of it.

So, I've been dong some math, and by one of my calculations, a show like Fox's "House" would have to have a Hulu audience on par with last year's Super Bowl -- which garnered more than 95 million U.S. viewers -- to make the same amount that the show does on broadcast. That's not for the entire season, but per episode.

I spent part of Monday tracking the commercial time one-hour dramas have when they appear on Hulu as opposed to what they have when they appear on broadcast. I knew it was going to be a big differential, but it was astonishing to see just how big. Below is a rundown of the commercials sold against Fox's "House" on Hulu Monday:

• One five-second announcement at the beginning of the show saying it would be presented with "limited commercial interruption" from Carefree.
• Three 30-second commercials for Toyota Camry, HSBC and Cadillac.
• One (presumably non-revenue generating) promo for the Fox series "Lie to Me."
• One 15-second spot for Dos Equis.

For one one-hour show that's not a lot of advertising. As "House" wasn't on broadcast Monday night, I tracked the advertising on "Lie to Me", which probably has a similar breakout in terms of commercials vs. content to "House." Here's the rundown:

• Thirty second spots for Dos Equis, Wal-Mart, Apple (two), Cadillac, KFC, Lincoln (two), iPhone, Aamco, Verizon (two), Toyota, Identityguard.com, the upcoming movie "The Fourth Kind", Kmart, Sprint, McDonald's, Charles Schwab, Jeep, Dodge, Microsoft Windows 7, T-Mobile, Sears and one movie whose title escaped me.
• Promos (many shorter than 15 seconds) for Fox's broadcast of the World Series, the local Fox News (two), "So You Think You Can Dance," "Fringe" and "Dr. Oz." (Yes, we can safely assume no money changed hands on these.)
• Two 15-second spots for the New York Lottery and the upcoming movie "The Box."

That list alone should point out that, Fox is a much better place for News Corp. to make money than Hulu, but let's crunch some numbers to make the point more clearly. Based on an ad rate for "House" of more than $183,000 for a 30-second commercial, per Ad Age, the total take for each new episode is almost $4.8 million. If you applied the television ad rate to the ads which ran against the series on Hulu you'd get just over $600,000, not including the upfront sponsorship from "Carefree" which I haven't been able to price, but which certainly did not go for millions of dollars.

You can also do the math another way, by looking at Hulu's ad rate and seeing how many viewers it would take to make $4.8 million in a single episode. Hulu is said to charge CPMs (cost per thousand viewers) of between $25 and $40. Supposing that "House" went for a $40 CPM, the series would have to draw close to 120 million viewers. That number does not include the Carefree sponsorship, so the actual number is probably a little lower, but it's easy to see that drawing an audience of even half that size per episode online is impossible.

Of course, the naysayers would point out that the audience for the series on Hulu is obviously much smaller than the broadcast one, and that therefore the comparison is unfair. that's true, for now -- last week "House" had 11.65 million TV viewers, per Nielsen, while August traffic numbers for Hulu show that the entire site had 38.5 million unique viewers, which streamed an average of 12.7 videos. (To my knowledge, Hulu doesn't break out viewership for individual programs.)

But its audience, and the audience for time-shifting viewing in general, is growing rapidly. This season, about 16 percent of the primetime audience has been watching their favorite shows via DVR. Hulu's monthly uniques in May of 2008 totaled 6.8 million. They've grown almost sixfold. And those numbers, of course, don't include the people who stream series at the Web sites owned by the various broadcast nets, which, like Hulu, undermonetize their video content.

All of which is to say that the model is unsustainable. It may help support Hulu, but as Hulu takes up a larger share of the viewing audience, and has to support more of the broadcast TV infrastructure, something's gonna have to give. News Corp. is absolutely right that a subscription model needs to be part of the solution, and it, and its partners, should pursue this model sooner, rather than later.

Previous coverage of Hulu on BNET Media:

Is There a Fight Brewing Over Hulu's Business Model? Seven (Often Stupid) Reasons Hulu Doesn't Have More Ads Hulu Is Starting to Show Itself the Money