CBS (CBS) announced today that starting next month, you'll be able to subscribe to its Showtime premium channel as part of a bundle with Hulu.
The interesting part is that you'll pay $2 less a month to get Showtime via Hulu than you will if you subscribe directly -- for example, via Apple (AAPL). It costs $11 a month to get Showtime from Apple, but only $9 with Hulu (although you'll also have to pay $8 a month for your Hulu service itself).
Is Showtime giving in on price?
No, Hulu is covering the missing $2 a month that Showtime won't get from consumers. The company hopes it'll get a flood of new subscribers that will make absorbing the $2 cost worth it. For every new subscriber that Hulu attracts, it'll essentially get $6 a month in revenue -- the $8 monthly Hulu fee minus the $2 that the company is paying Showtime. Seems worth it to me.
What's interesting here is how the TV bundle itself is evolving and the implications that has for other services in the so-called "over-the-top" (OTT) business space that Hulu plays in.
The old TV bundle was pioneered by cable -- you'd pay one big fee and get a bunch of channels in return. It was up to the cable provider to negotiate prices with different content providers, but the cable guys controlled the "pipes" and made sure they made money.
But in the OTT world that's evolving, the cable guys control the broadband, but the content providers are basically marketing themselves directly to consumers via OTTs.
Powerful channels like Showtime are likely to be the first to do this. The trouble is, the more channels that OTTs like Hulu offer, the less net revenue per subscriber they'll get.
As noted above, Hulu is only getting $6 a month for every new Showtime subscriber it signs up. But what happens if Hulu next offers HBO at a $2-a-month discount? The company would be down to $4 a month per customer, and so on until it's not worth it to offer any new channels.
What about Netflix (NFLX), the big dog in the OTT space?
NFLX could easily match or beat Hulu's Showtime deal and offer additional channels under its own bundle arrangement. But Netflix will ultimately face the same limits on how much of a discount it's willing to absorb to attract new business.
What seems most likely to me is that we'll simply see the old cable guys migrate to the OTT model instead. The old cable bundle will eventually go away and a new OTT bundle will take its place.
This won't happen overnight, though. The traditional cable companies are going to want to keep their cash cow going for a long time.
In the meantime, the two disruptive players who'll likely make the most headway in the next three or four years are probably Netflix and Apple -- or maybe Hulu if it really pushes things.
Apple is likely already delaying its TV until the computer maker nails down its own bundle of video offerings. But by the time the cable guys finally bid farewell to their old bundles, Apple may have already attracted a huge number of subscribers with a new approach.