Hulu’s Sale Could Have Big Implications On the Future of the Web

July 20, 2011 - Openet

There has been a lot of speculation over what company will eventually buy premium video service Hulu. With the tenuous relationship between the corporate owners, it is not a matter of if Hulu will sell, but when and to what company. Consumers may not see any significant change to the service when it does eventually sale, but Hulu may hold the keys for the future of a wide range of technology companies and net neutrality.

When we looked at the possibilities of who could buy Hulu, the focus was on Web and Internet giants such as Yahoo, Google, Apple, Microsoft, Amazon or AOL. What about the network carriers? On an increasing scale, the cable and cellular networks are getting shutout of value on the content carried through their pipes. This could be a problem for the carriers, content providers and most importantly, the consumers in the not-so-distant future. What does a world of "dumb pipe carriers" look like? What is the optimal balance between "over-the-top" content providers like Netflix and the operators that carry the data?

Dumb Pipes and the Canadian Problem

Mike Manzo, chief marketing officer of software optimization firm Openet, believes we have seen what a world where the carriers are nothing but dump pipes.

It is called Canada.

Carriers in Canada have instituted hard caps for data use in the country. As such Netflix, which uses a disproportionate about of bandwidth in comparison to its user base, moved to offer lesser qualities streams of its content so bandwidth starved Canadians can have some service as opposed to no service. Manzo argues that if the network operators in the U.S. get shutout of adding value to the content being carried over their pipes then they will begin to lose profitability and be forced to charge exorbitant rates for bytes. Really, that helps nobody.

That is why Manzo advocates that the operators seriously consider buying Hulu. Essentially there are two business models that the operators have in front of them at this time - get a cut of the value over their pipes or become wholesale connectivity and quality of service purveyors. In an ideal world, the operators would become both, Manzo said.

"It is the Catch-22 in our industry that none of us have the crystal ball to see the pieces that need to be fixed," Manzo said in a recent telephone interview. "If they do not do it [buy Hulu or add value from content], what happens to the carriers?"

Importance of Carrier to Create Profit Out of Content

The operators have already been cut out of an important portion of content ecosystem by what Manzo calls "over-the-top" content providers. More or less, the operators have been shut out of the mobile app revolution.

"The carriers missed the boat on the app ecosystem," Manzo said. "They still have an opportunity on video content. If they do not get together they will be circumvented by Apple and Netflix."

Manzo can envision a world where the carriers lose out on any type of revenue from content and hence lose profitability. This is of concern to Openet since the optimization of content services would likely be a task for Openet. The better the carriers do, the better Openet does. So, Manzo has an agenda.

Could Apple or Google Swallow the Carriers Whole?

Yet, he makes some decent points. After the carriers lose profitability they become weakened business units and ripe for takeover. Both Apple and Google would love to control their own cellular infrastructures.

"It is not that hard to see Apple buying AT&T and Google buying Verizon," Manzo said.

To put that in context a little bit, Apple just reported its quarterly earnings with revenue north of $28.5 billion. The Cupertino behemoth is on its way to being the most valuable company in the world. Here is a tweet from GigaOm's Mathew Ingram that is a good indicator of where Apple stands in relation to the carriers.

Granted, the U.S. carriers are much larger than their Canadian counterparts. Verizon has a market cap of $103.52 billion and AT&T has a market cap of $1.23 billion. According to AT&T's attempted takeover of No. 4 U.S. carrier T-Mobile, the starting price for a network operator is $39 billion.

So, Apple or Google buying a carrier might be a stretch, but not outside the realm of possibilities. Especially if the carriers begin to lose their profit margins.

Crapware, Consumers and Net Neutrality

From a consumer perspective, an operator takeover of Hulu has negative connotations. Carriers are not known to do user interface well. All four of the carriers have some type of application store such as Verizon's V Cast or AT&T's App Center. Every gadget review of new mobile devices over the last couple of complains that the carriers have infected devices with "crapware" that cannot be erased. In addition the carriers do have content delivery services, such as AT&T's U-Verse. Consumers have a negative perception of carriers' attempts at software, mostly because they are naked attempts at monetization. Consumers have been burned by the carriers before, they would probably prefer that the operators became dumb pipes.

This is where net neutrality fits into the picture. If the carriers do not get value added from the content delivered along their pipes, do they in turn throttle the services that use a lot of bandwidth? Does it behoove the content distributors to cut the carriers in on the action to keep the status quo or is a major shakeup of the entire ecosystem necessary. As corporations chase deals, mergers and profits, do the consumers get left to pick up the tab?

These are big questions and, almost by accident, Hulu is in the center of the maelstrom.


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