The Freemium Option Better For Video Sites?

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This week, I am writing a three-part series about business models for online video websites. Sites are changing. Online business is changing. Video is blowing up.

It's time we really thought about the best way to profit from creating and displaying video, while providing the best experience for the user.

Let's get to it.

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What's A Hulu Subscription Look Like?

In recent days, Hulu – the NBC/Fox/ABC-backed video site – released and then recanted news that it intended to charge for service via News Corp. Deputy Chairman Chase Carey.

Carey said that Hulu would need to incorporate a "meaningful subscription model as part of its business." But he didn’t go into any more detail than that.

Most pundits assumed this meant a firewall-blocked subscription model in the works – a slightly backwards-looking model that succeeds best in scarcity: scarcity of quality content and scarcity in access.

But we don't live in that world anymore. The online channel has tons of quality content and most content creators/publishers are tripping over themselves to provide online access to their work.

The old version of a subscription model would be met with great hostility considering 1) there is no lack of free video content online and 2) it reeks of a bait-and-switch to start charging for something that had already been totally free.

So how can Hulu make money?

The New Creativity

I had already been thinking about this in my review of old business models (easily or not-so-easily) moving into the digital space. I detailed the changing business models in my post Why The New Creativity Changes Everything.

I advocated what Joseph Jaffe dubbed "The New Creativity" in The Beancast episode #76 around minutes 37-38. The short version is this:

  • The old creativity was centered around innovative ways that advertisers and marketers could loudly/rudely/creatively interrupt a consumer's day in order to push their brand message.
  • The new creativity requires that the advertiser or marketer create an experience so compelling that consumers share it amongst their peer groups.

So, instead of a one-way marketer-to-consumer system, we now have a system where marketers try to influence the influencers, while also realizing that they are in a dialogue with all consumers and potential consumers as well.

Sounds simple, right? It helps explain why we’ve seen the boom in things like social media marketing and the downward trend in direct marketing and TV/radio ads.

The "Freemium" Option

If Hulu is to succeed, especially when in direct competition to Google-owned YouTube, it needs to be nimble and creative. They need to think beyond non-contextual ads and firewalled content.

Largely embraced by social networking sites, a freemium business model hasn’t been adopted by many larger, more traditional companies. But it has the potential to provide a great customer experience and differentiate Hulu from well-known competitors.

A recent eMarketer study reported on an Abrams Research survey in which social media leaders were asked the best way to monetize social media (note: it doesn't say how they determined who was a "social media leader," but just go with me for a second).

The most popular answer? 45.5% of respondents answered that a freemium model would be most profitable – more than double the next most popular response.

Chris Anderson defines a freemium business model in The Long Tail:

"Already, one of the most common business models on the Internet…is to attract lots of users with a free service and convince some of them to upgrade to a subscription-based 'premium' one that adds higher quality or better features."

It is roughly a business where most of the basic services are free, but a percentage of uses pay for more/better/quicker elements of that basic package.

Flickr is a common example. Anyone in the world can start an account and upload 100MB of photos and 2 videos per month. This satisfies a great (happy) majority. However, a "Pro" account provides unlimited uploads, archiving, high-res options, and expanded groups.

The key is that the paying customers – the committed 10% let’s say – cover the cost of the 90% using a basic service for free.

A freemium model isn’t for every business. It favors businesses that are tech-centric, start-up/new, agile, and almost exclusively offering an online service. But what model could be more perfect for the era of social networks?

Let's See It In Action

Tomorrow, I will outline seven ways Hulu could package technology they already have into a freemium model users would willing pay for (heck, I sure would).

Sites like Hulu, facing competition from Google and a number of start-ups, will need to be nimble and smart. I hope you join us tomorrow to gauge for yourself whether my suggestions would be worthwhile for sites like Hulu.

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(Image courtesy of (A3R) angelrravelor (A3R) via Flickr)