It's Mission One for any network executive worth his Guccis, or her Jimmy Choos: making money from all the people watching warmed-over television shows on the Web. Network TV's two largest sites, CBS.com and Hulu—a joint venture among Fox (NWSA), NBC (GE), and ABC (DIS)—are streaming millions of shows or clips each month, but they remain miles away from profitability. And at least for now, they don't agree on how to get there.
For CBS (CBS), which streams shows to more than 300 sites besides its own, the plan is to emulate traditional TV by running as many ads as viewers will tolerate. By contrast, Hulu aims to show fewer ads but charge advertisers at least twice what a comparable TV spot commands. "We like TV back in the Alfred Hitchcock days," says Hulu CEO Jason Kilar, when, he says, a half-hour show had six 30-second ads instead of 16 or so now.
CBS's chief research officer, David F. Poltrack, is responsible for figuring out how many commercials viewers can stomach before tuning out. Poltrack runs Television City, a high-tech lab inside the MGM Grand Casino in Las Vegas. Every year since 2001, CBS has recruited up to 70,000 Vegas tourists, who sample pilots or upcoming promos for CBS shows in exchange for discounts on Nathan's Famous hot dogs and CBS kitsch. The testers twist a knob to the right if they like the show, left if they hate it. Over the years, the lab results have helped CBS muster a stream of hits.
These days, CBS's Poltrack is tracking consumers' online-ad saturation point as well. Infrared beams aimed into viewers' eyes tell CBS when people zone out after too many ads. The tests, says CBS Interactive President Quincy Smith, prompted CBS to hike the number of ads per half hour to five and will likely push that even higher. "What good does it do to charge twice as much for an ad," Smith says, "if every show only has two or three of them?"
Hulu, meanwhile, is using what you might call a Twitter focus group to help figure out its business model. Every day, Kilar and other executives log on to Twitter and check 2,000 or more posts of what viewers say about Hulu on the popular messaging service.
MORE MEMORABLE?Kilar says that based on a positive response from Twitter users, Hulu gave viewers the option of one commercial before a show, about two minutes long, or ads throughout. Hulu also hired a firm to test consumers' recall of the ads. The aim is to show that online ads are more memorable and worth what Hulu hopes to charge advertisers.
Hulu may be on to something. According to Rachel Mueller-Lust, executive vice-president at industry tracker Nielsen IAG, people are 31% more likely to recall a commercial online than they are on TV. Rob D'Asaro, a media buyer for ad agency OMB, has placed Visa and Pepsi (PEP) ads on CBS.com and Hulu. He says online viewers tend to focus more intently because they have specifically chosen a certain show. Also, they often watch alone on a laptop and so don't chat with friends and family. Better yet, they can't fast-forward through the ads. But D'Asaro adds that "how much more we should be paying for them is still the big question."
It's possible that neither model—more ads vs. fewer pricier ones—is viable. That's why media executives are starting to mull charging for online shows. "We're not ruling anything out," says Hulu's Kilar. "I'm not saying there is one silver bullet to creating a business model." CBS would likely demur. Poltrack says 96% of his Las Vegas testers would watch shows online even if they contained "the same amount" of ads as on TV, while only 4% would pay $1.99 to get a show without commercials. "People have gotten used to getting content for free," he says.