June 22 (Bloomberg) -- Hulu LLC is in talks with CBS Corp., Viacom Inc. and Time Warner Inc. to add their television shows to the video website’s planned paid subscription service, people with direct knowledge of the discussions said.
CBS, the only one of the four major U.S. broadcast networks without an ownership stake in Hulu, may begin providing programs after the TV season starts in September, said one of the people, who asked not to be identified because the talks are private.
Hulu, which now lets users watch programs for free and gets its revenue from advertising, is seeking new shows to attract paying subscribers. The Los Angeles-based website will also need to renew rights to programs from owners such as NBC at the end of 2011, according to Laura Martin, a Needham & Co. analyst. Hulu’s audience shrank in April after Viacom pulled “The Daily Show with Jon Stewart” and “The Colbert Report.”
“Charging a subscription is possibly Hulu’s best way to improve its library of TV shows and films,” said Tony Wible, an analyst at Janney Montgomery Scott LLC in Philadelphia.
Christina Lee, a Hulu spokeswoman, said the company doesn’t comment on negotiations. Keith Cocozza, a spokesman for Time Warner, declined to comment, as did Kelly McAndrew, a Viacom spokeswoman.
Much of Hulu’s TV programming comes from the broadcast divisions of its owners: News Corp.’s Fox and General Electric Co.’s NBC, the co-founders; and Walt Disney Co.’s ABC. The networks also offer shows on their own websites.
Cable networks, including channels belonging to Hulu’s current owners, have been slower to make shows available online because they don’t want to upset pay-TV operators that provide the bulk of their revenue, Wible said.
“In its current form, Hulu isn’t just a threat to the cable operators, but also to the cable networks,” Wible said.
The website, a distant second to Google Inc.’s YouTube in online viewers, would share subscriber income to encourage TV programmers to join, said the people, who have taken part in negotiations or were briefed on the talks. When the service begins, Hulu may offer paying customers a deeper catalog and also insert more ads in free shows, the people said. The company has expressed a willingness to increase commercial minutes.
To be successful, Hulu must meet the programmers’ financial demands and not exceed what subscribers will pay, said Barton Crockett, an analyst at Lazard Capital Markets Ltd. in New York.
Viacom, the New York-based owner of MTV and Comedy Central, and Time Warner, parent of TBS and TNT, are seeking arrangements that don’t threaten existing businesses or limit other opportunities, said the people. Time Warner, also based in New York, is focused on TV Everywhere, a service to let cable and satellite pay-TV customers watch shows online at no added cost.
Hulu, founded in 2007, hasn’t fully recovered from Viacom’s March decision to pull the two cable shows from the service. The site averaged 12.2 million visitors in March and 13.1 million in April, down from 14.1 million in February, before the programs were removed, according to Nielsen Co. data.
The $9.95-a-month service is expected to be called Hulu Plus, the Los Angeles Times reported in April.
New York-based CBS, home to eight of the top 10 scripted shows in prime time, including “CSI” and “NCIS,” would be likely to sign up if there are no demands for online exclusivity, one person said. Hulu and CBS have held on-and-off talks since the site started.
“We have a profitable, non-exclusive distribution strategy on the Web and in the mobile arena,” CBS said in a statement. “We’re in constant discussions with partners and entrepreneurs about how to generate incremental revenue for getting our content to consumers when and where they want it.”
In a May 5 conference call, CBS Chief Executive Officer Leslie Moonves stressed the importance of maintaining control over the use of its programs, including on its own TV.com site.
“One doesn’t know how effective Hulu for free has been,” Moonves said. “I know there have been some rumblings about some dissatisfaction with some of the partners, and we like to control our own content.”
Hulu CEO Jason Kilar has said the site’s ad-supported model is profitable on a cash-flow basis.
The website garnered $52.4 million in net revenue in February, with 72 percent going to the content owners, according to estimates from research firm SNL Kagan. That left Hulu with $14.7 million in revenue, $12.6 million in costs and a $2.04 million profit, SNL Kagan calculates.
A subscription fee would address concerns among investors that TV programmers are cannibalizing their businesses by offering shows for free online with fewer ads.
Martin, the Needham analyst in Pasadena, California, says Hulu shows have four minutes of commercials per hour, compared with 16 on broadcast TV.
“Consumers should not be retrained that premium TV content is cheaper on any platform, especially the Internet,” Martin wrote in a June 1 report.
A subscription would put Hulu in more direct competition with Netflix Inc., which supplies online and mail-order access to movies and past-season TV shows starting at $8.99 a month.
Older film titles provide Netflix’s streaming service with an advantage, said Crockett.
“You may still remember a movie that was released 20 years ago and still want to see it,” Crockett said. “Far fewer TV shows fit that description.”