Hulu Troubles Signal Networks Contempt for Internet TV

For a growing number of TV viewers, online services like Hulu are the preferred way to catch your favorite show. But the bad blood growing between Hulu CEO Jason Kilar and the studios that hired him may hint at the troubles the television networks are having getting online. Hulu and the rest of the online content industry might be guilty of being too successful.

When Hulu launched in 2007 it was an experiment of sorts. This was going to be a side-project, the television networks own little foray into web-distribution.

Hulu, owned jointly by Fox, ABC and NBC, was to head-off competing third-party services like iTunes and offer a viable alternative to piracy. You can’t blame the studios for wanting to sidestep the troubles faced by the music industry years earlier.

The TV-network partners hired a forward-thinking, former Amazon.com exec Jason Kilar to lead Hulu. Kilar, determined Hulu should operate independent of the studio system, took pains to create a progressive culture at his offices. They weren’t going to do things like a stuffy network. Instead Hulu nurtured a corporate culture you’d see in a Silicon Valley startup - with shoestring budget to match.

Hulu has been a success, although its primary competitor Netflix has made an even bigger bang in the streaming content market. Together with online distribution powerhouses like Apple and Microsoft, TV online has swelled like a flash flood that now threatens to sweep away the traditional and lucrative cable/satellite distribution model.

Televisions Shrinking Market

In 2010 the situation became critical for the traditional TV ecology. The number of households that pay for television from cable or satellite providers dropped for the first time last year. After decades of non-stop growth, industry analyst SNL Kagan estimates that 335,000 households dropped cable or satellite TV between the first and third quarters of 2010. According to Nielsen statistics, Q4 2010 saw a drop of about 1.3% for total number of viewers aged 18-49 watching any conventional TV at all.

Meanwhile - online content sources are booming! According to comScore, online television content viewing was up 95% last year from the year before. Hulu alone has doubled its available programming in 2010.

It doesn’t take long to do the math: The online side-show that provided supplementary revenue streams to the networks is now eating their golden goose. It’s an antiquated billing-system, but those annoying satellite and cable TV subscriber packages pay for those pricey HBO series we all know and love.

Hulu vs Netflix

But Hulu is still a relatively small player in the TV ecosystem. Unlike Netflix it uses ads to stream free-TV, but also has a premium subscription service. Netflix uses a monthly fee to pay the royalties to the studios and keeps it programming stream ad-free.

Hulu took in a breakthrough $260 million in 2010, more than double its $108 million dollar bankroll from 2009. But Hulu’s successful numbers were dwarfed by Netflix which estimates it took in $2.16 billion last year. Netflix has been around longer and has been distributing DVDs by mail, so it’s simultaneously pinching cable/satellite and your local Blockbuster.

The Online TV Experiment

But it seems the studio’s experiment with online content distribution has been too successful and Hulu CEO Jason Kilar has found himself butting heads with employers. Meanwhile the Hulu partners themselves, NBC, Disney and New Corp (Fox), can’t seem to decide on a strategy for the online market.

Disney, the company that owns ABC, has released its own iPad app that lets users access ABC television shows. Hulu had already planned its own service for iPad. This lead to Mr. Kilar telling his media exec bosses that he was prepared to leave the company when his contract expires if his proposals to streamline and bring greater competition to Netflix aren’t realized.

Kilar proposed dropping the monthly fee for the Hulu Plus service from $9.99 to $4.99. Netflix has made major inroads with hardware companies carrying Netflix compatibility on everything from game consoles to HDTV sets, Hulu is seriously lagging in hardware compatibility and needs a decided edge. In the end Kliar negotiated a $7.99 monthly fee for Hulu Plus, down just 20%.

But, his threats of impending competition aren’t being taken seriously by the networks and the subscription price drop might be a little too late. The very studios that own Hulu can’t resist licensing their TV shows to Netflix instead of giving Hulu an exclusive content deal.

The Hulu alliance goes from bad to worse: As part of the conditions of NBC Universal’s takeover by Comcast, it is being forced to relinquish its share of Hulu’s ownership. So, NBC is likely to strike more deals with Hulu competitors. Hulu’s advantage, being owned by the content creators, is nullified by their lack of a coherent business plan.

Last week, Jason Kilar dusted off his soap-box and gave a gutsy Knute Rockne speech on his company blog. In his willingness to speak the unpopular truth of his own industry, Mr. Kilar has shown rare intestinal fortitude and in my opinion, has ushered his name into the hallowed halls of tech-industry folk heroism. I won’t attempt to reiterate it here - you’ll just have to read “The Future of TV” for yourself.