ABC's Hulu Strategy Could Cost Disney Millions Of Viewers

Instead of waiting several days for free Hulu access to ABC shows, consumers are choosing to download them illegally.

On January 6, Disney's DIS mainstream TV network stopped offering free access to its shows (via Hulu.com and ABC.com) the day after they air. Hulu Plus and pay-TV subscribers can still watch ABC shows the next day. Everyone else must wait an extra week to watch them online.

NBC, which is owned by the nation's largest cable provider, Comcast CMCSA, has yet to employ a similar restriction. CBS CBS still offers next-day viewing at CBS.com. And while Fox has been restrictive in the past, some of its shows (such as Brooklyn Nine-Nine) are available on Hulu the morning after they air, no subscription required.

ABC might have hoped that consumers would respond to this switch by paying for cable or Hulu Plus. But they turned to piracy instead.

Tru Optik, a company that provides real-time and predictive "audience intelligence" for the media, entertainment and advertising industries, released a horrifying infographic to illustrate how piracy increased after ABC implemented its new restriction.

Agents of S.H.I.E.L.D., the Marvel show from Avengers director Joss Whedon, was hit the hardest. "The Magical Place" (the first episode that aired after ABC implemented its new policy) experienced a massive increase in pirated downloads.

Andre Swanston, co-founder and CEO of Tru Optik, told Benzinga that 510,112 people downloaded a copy of "The Magical Place" during the first week alone.

"Only one other episode before (over the previous three months) even cracked 50,000 [downloads]," said Swanston. "That's how big it was. Remember, that's only the first week!"

When Swanston first saw the results, he assumed that the show must have had a cameo from Robert Downey Jr. or some other popular Avengers star. That was not the case. In fact, the TV ratings for "The Magical Place" were near a season low.

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The piracy increase did not end there. Tru Optik found that, after downloading one episode of S.H.I.E.L.D., they began to download older episodes as well.

"What we're seeing is that it's kind of sustaining," said Swanston. "The impact to ABC is not only going to be in that first week, but now they've kind of affected the entire way that people are consuming media. Episodes two through 10 got considerably more second week downloads than they've ever gotten in the past, even though you can still stream [some of] those episodes for free."

Snowball Effect

In the past, cord cutters may have streamed S.H.I.E.L.D. on Hulu or ABC's own website. Now they are more or less being trained to visit piracy sites to watch the show as soon as possible.

"I think people are saying, 'If I'm gonna download the new episodes, why bother then going to stream other stuff?'" Swanston added. "Or, 'Maybe I'll discover other things while I'm on here.'

Tru Optik also found that people are downloading illegal videos at a much faster rate than they were before.

Swanston blames this on the "follower effect." He said that people are attracted to things that are popular.

"Before, Agents of S.H.I.E.L.D. wouldn't necessarily show up on the torrent boards as one of the top downloads," Swanston explained. "People that maybe didn't watch the show or didn't torrent it or streamed it casually, because it's right in front of their face now -- because so many others are doing it -- we believe that there's kind of an effect of snowballing."

International Growth…In Piracy

Hulu is only available in the United States and Japan, but international users have found a workaround to view many of its shows (including ABC shows) online. After ABC began delaying shows for non-paying customers, Tru Optik discovered that international viewers had also turned to piracy.

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"Although the impact was higher in the U.S. than anywhere else, it was felt worldwide," said Swanston. "That kind of perplexed us. It shouldn't have affected everybody else."

Swanston said that he didn't know how much money ABC would lose in ad revenue from Hulu or its own website.

"It'd be hard to quantify from streaming," said Swanston. "But what I would say -- in terms of the number of viewers -- it will end up being, across all of ABC's own content, I believe, in the millions per month, potentially."

All episodes of S.H.I.E.L.D. have been downloaded more than 12 million times collectively.

"And this is just one show out of their 20 shows!" Swanston added.

Big Opportunity

No one in Hollywood is ever going to say that they like piracy, but Swanston said that there is an opportunity for ABC to benefit from S.H.I.E.L.D.'s international success.

"I think there's a lot more value for them to get from understanding the data around who's downloading and who wants their content (and when they want it), more so than they could possibly be losing from piracy and lost revenue on ads," said Swanston.

ABC could use the piracy data to determine how popular the show may be in a new market. The data could also be used to enhance product placement.

For example, Tru Optik found that pirates who download S.H.I.E.L.D. are 18 percent more likely to download Windows 8.1. While the correlation has yet to be determined, it is a notable statistic that could be used to Microsoft's advantage.

To be clear, Swanston said that he in no way supports piracy. But he believes that, since it already exists, ABC might as well use the download data to make better marketing, distribution, production and licensing decisions.

Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.