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Mixing Ads and Paid Services

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A subsidy, in the Internet world, is a cost-offset to make some service or piece of content either cheaper or free.  The clearest example of this would be YouTube, which is a full-subsidy model where video content is ostensibly hosted for free (and viewed for free), and the way this is afforded is through advertising.  YouTube places ads in a few different places to do this: in banners on the outer margins of the webpage; in a transparent bar that overlays the video you’re viewing; or in a pre-ad clip that appears before a video is shown.  (The latter two are tied in with YouTube partners and Premium Content Providers respectively.)

The opposite would be a non-subsidy service, like Netflix.  A customer pays a subscription to gain access to streaming web content, and as such, there are no ads displayed because there is no subsidy.  The bill is footed entirely by the consumer, as it were.

These two models have dominated the Internet for a long time, but we’re starting to see the emergence of the partial-subsidy system, wherein a customer still pays for content or services, but is also forced to view advertising to further offset provider costs.  Now, this system is by no means new: cable television has been doing this for years.  After all, subscribers pay a monthly bill to gain access to those cable channels, but ads are still shown regularly throughout pieces of programming.

Nevertheless, this system seems awkward to me when applied to the Internet, if only because it’s different from how I’m used to seeing things work.  The first piece of news that made me realize the web was changing was Apple’s announcement of iAds.  At its face, iAds sounds like a great program for iOS app developers to take advantage of to help monazite their hard work.  However, Steve Jobs explicitly said on multiple occasions that the intent of iAds was to allow developers to offer their applications for free or for less money, opening the door for one of these developers to say, “Hey, I’m going to still charge you $0.99 for this app, but I’m also going to throw ads down at the bottom.”  In a way, that sounds like double dipping, no?

My gut reaction to this was that developers should pick one or the other: either charge for you application because you believe its craftsmanship and usefulness is high enough that people will gladly give you money for it; or, throw ads at the bottom if you want to go for volume and not cause customers to shy away because of a price barrier.

But this phenomenon is spreading beyond the iAd system: Hulu announced this week its intention to offer a premium version of its web-streaming service (Hulu Plus) for $9.99/month.  Customers get access to back catalogs of television shows and are now able to use the service on devices besides their computers (i.e. iPads, iPhones, PS3s, Xbox 360s, etc.).  That said, those customers are still subjected to exactly the same advertising as someone who logs into the unpaid website.

Again, this seems like double-dipping to me, but cable television has long done this, and I think that’s caused many tech pundits to accept these conditions without voicing grievances about the ad subsidies.

This system is probably fair because bandwidth is extremely expensive, and it’s conceivable that a $9.99/month subscription would not enough to support some customers who use this service often — at least, not with much of a profit.  After all, businesses are not in the business of breaking even, especially since they have employees to pay.  So this ad model probably helps with that tremendously.  Of course, the question is why Hulu continues to prevent customers from accessing the free content on their non-computer devices (like the Xbox 360, for example), and I think the answer is simply that even the advertising wouldn’t scale enough to support that level of access from so many extra viewers.  The $120/year price tag is enough to winnow Hulu Plus subscribers down to a manageable number and keep the droves of casual browsers restricted to the times they have access to a computer.

I thus realize the utility of double dipping, and yet it still doesn’t sit very well with me yet.  I suspect I’ll feel differently in time, and I know the democratic nature of the web will keep these services in check.  After all, if an iOS developer charges more than $10 for his app, he better not throw ads at the bottom or there will be hell to pay in the App Store reviews.  But shouldn’t services like Hulu consider reduced advertising to paying customers (i.e. fewer program interruptions)?

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Written by Michael

1 July 2010 at 12:31 am

Posted in Musings, Technology

Tagged with , , , ,