by Chuck Salter
John Fithian, the head of the National Association of Theatre Owners, a trade group based in Washington, DC, called Iger’s suggestion this summer a “death threat” against his members. Fithian says that “if [release] windows were eliminated, what you would have would be fewer movies, fewer total dollars for the industry, and less choice for the consumer.” He thinks movies would become little more than commodities and that hundreds or thousands of theaters would close.
Wagner’s reaction to that kind of alarmism is typically suave. “I don’t view this as, ‘We’re taking on the studios or the theater owners,’ ” he says. “All we’re doing is experimenting to see if we can make our business model better. We’ll see where it takes us.”
Cuban’s reaction is no less characteristic: “I don’t give a s—t.” Innovators, he says, have always encountered doubters at points of transition. “You can’t find a great business where somebody didn’t say the exact same things at the beginning.”
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Fast Company, December 2005
CAN HULU AND AMAZON ALUM JASON KILAR SAVE TRADITIONAL TV?
By Chuck Salter
EVEN FOR HOLLYWOOD, where long odds and high stakes are staples of storytelling, the plotline is a doozy: A couple of old business rivals facing the threat of a lifetime agree to put aside their differences and join forces on a half-baked experiment that makes them laughingstocks. (We’re thinking Jack Nicholson and Warren Beatty.) And who do they put in charge? A young guy, a newbie to the biz. He promptly cleans house and hires an even younger guy who’s halfway around the globe. These renegades throw out the rule book—and they pull it off. Their idea kills. The naysayers feast on crow.
This pitch meeting would not end well. Cue Ari Gold: Nobody’ll believe it, not in a million years. Are you nuts? Get the %*#$ out of my office! Yet this is the tale of Jason Kilar and a company called Hulu, costarring the heads of NBC and Fox, with guest appearances by Andy Samberg, Tina Fey, Jeff Bezos, and Walt Disney. But we’re getting ahead of ourselves.
KaylaMosley: @hulu hulu i think has taken over my life just like crazy commercials said it would. YIKES.
MeGustaCountry: HULU, I’m gonna marry you.
—posted on Twitter in August and September
IMAGINE THAT The New York Times and The Wall Street Journal had gotten together and created Google News. Or that Sony Music and Warner Music Group had introduced iTunes. That’s Hulu, a daring attempt by would-be victims of the digital revolution, NBC Universal and News Corp., the parent company of Fox, to control their content—and their fates. In just two years, Hulu has become the premier broadcast video site on the web, featuring free instant access to full episodes and clips from more than 800 TV series—from 30 Rock to The Mary Tyler Moore Show—via 190 content providers. Not to mention 450 free movies. In July, Hulu had more than 38 million viewers (according to comScore Video Metrics) and delivered more videos than any site but YouTube (Nielsen). “If we didn’t do this,” says NBC Universal CEO Jeff Zucker, “we knew someone else would.”
The mogul-in-the-making who defied skeptics and at times shocked the networks is Kilar, Hulu’s 38-year-old CEO. He’s more Silicon Valley than Hollywood, a buoyant and boyish straight shooter with humble charm and an obsessive streak when it comes to site design. (Jason Bateman would play him in the movie.) Kilar made his mark at Amazon, building the DVD business from scratch. After nine years, he left and contemplated his next entrepreneurial move while traveling the world for a year—blogging from 19 countries and 56 cities, and taking nearly 12,000 photos—with his wife and two small children.
Meanwhile, Zucker and Peter Chernin, then president of News Corp., were collaborating on an unlikely joint venture that they named NewCo. In the spring of 2007, after Kilar returned to the United States, they approached him about doing for NewCo what he’d done for Amazon. Kilar wasn’t convinced the joint structure would work and worried that he wouldn’t be given true independence. He declined. A week later, at a Seattle Mariners game, he found himself revisiting the decision with his wife. The Mariners came from behind to win on a go-for-broke gamble, a suicide squeeze. By the end of the game, he’d decided to gamble too.
“The industry goes through moments like this every 25 years or so,” explains Kilar, a voracious student of media history. “It happened when the major networks started. It happened with cable TV. I realized I’d have way too much regret not doing it.”
Of course, it may be the networks that wind up with regret. Because even as Kilar set out to help NBC and Fox avoid the drift toward obscurity that threatens the music and newspaper industries, he began creating something that could contribute to their undoing: a new and better way to watch TV shows.
“My first Hulu experience made my head explode in a brain-spray of awesome.”
—Chicago viewer Marisa Wegrzyn’s comment on hulu.com, now featured on staff shirts
“NOOO!” the room groans at the stalled video.
On a recent Friday afternoon at Hulu headquarters in Santa Monica, California, several dozen employees, overwhelmingly young and male, are gathered for their biweekly wind-down in the Ping-Pong room—not to be confused with the video-game room called Dr. Horrible’s Lab, which is equipped with a beer tap welded to the refrigerator. With drinks in hand, department heads introduce recent hires (“He didn’t work at Microsoft, but he did get a perfect score on his SATs”). The crowd watches video clips projected on the wall, including a prank cologne ad edited to star a Hulu employee. When the screen freezes, the group razzes the poor guy manning the laptop. The mood turns marginally more serious for a demonstration of new features to the site and a clip of Kilar on Charlie Rose earlier that week.
Kilar, dressed in a T-shirt, jeans, and sneakers, sits on the floor sipping beer from a plastic cup and enjoying the frat-house irreverence. Only when the topic turns to online ad sales does he hop to his feet. He mentions new clients and cites a promising meeting with a major chief marketing officer. While ad revenue is plummeting elsewhere in media, Hulu’s is growing, with more than 250 advertisers and an estimated $120 million in revenue in 2009, according to analysts—from zero just two years ago. “In the early days,” Kilar tells the group, “advertisers wouldn’t even meet with us.”
Just two months into Kilar’s tenure, Zucker, Chernin, and the other board members paid a visit to these same offices. They walked across a carpet dotted with video-game icons from the previous tenant, past empty pizza boxes and employees in flip-flops, and into a conference room stocked with snacks from Costco. “You realize it’s not your father’s media company,” a deadpan Zucker recalls. That feeling was reinforced when Kilar unveiled a bombshell: The search engine his team had built would display results for all broadcast video across the web.
“There was this slight moment of ‘huh?’ ” recalls J.B. Perrette, head of digital distribution at NBC Universal. Why would a site owned by NBC and Fox allow you to search for, say, CSI: Miami—and then provide links to take you to the CBS site?
Kilar calmly explained that he wanted Hulu to be the online authority on TV video, just as Amazon is the expert site for books. If people are looking for a particular show—any show—Hulu should help them find it. As Kilar sees it, shows are the brands users care about, not the networks that air them. There was a “healthy debate,” he recalls. It was a debate that he would win, although he’s too diplomatic to put it that way.
Kilar’s office has the thrown-together feel of a dorm at his alma mater, the University of North Carolina at Chapel Hill, complete with a life-size cutout of vampire-slaying Buffy draped in a Tar Heels basketball jersey. A Fruity Snacks box from Costco serves as a computer stand, and the windows facing the parking lot are papered over for privacy.
Sitting at his desk, Kilar tells me that he’s trying to do at Hulu what his hero Walt Disney did when he reconceived amusement parks. “Going to Disney is like getting an MBA in product design if you know what you’re looking
for,” he says. Hulu has become a hit not just because of its wealth of content, which now includes current shows from Disney/ABC, the third network to take an equity stake in the site. Hulu is also a hit because of its graceful design and ease of use. The viewing window is a third bigger than its predecessors, and the resolution is TV quality, not grainy. Unlike Fox’s MySpace, with its cacophony of ads, Hulu is uncluttered. Most of its innovative navigation tools are hidden, “like a closed Swiss Army Knife,” says CTO Eric Feng, so as not to distract from the shows. (“On Hulu,” says Kilar, “the shows are the stars.”) And the volume of ads per show is one-quarter that of network TV.
“Consumer behavior is one of the hardest things to change,” Kilar says. “The gap between the existing and the new has to be so materially better that it shocks you into a behavior change.”
“It’s a testament to both the madness in the private equity markets and the hype around online video taking place right now that a company without a name, a website, or even a clear exit strategy has been able to raise $100 million at a market valuation of $1 billion.”
—From the blog NewTeeVee, in 2007, alongside the logo “NewCo Wreck Watch: 112 days”
“LET’S GO TO the living room,” Zucker says. He’s kidding, but it’s only sort of a joke. We’re in his corner office suite atop Rockefeller Center, and there’s an elegant sitting area with a cream-colored couch and upholstered chairs. To his left, the Manhattan skyline stretches south into the distance, like a giant board game. To his right, three flat-screen TVs mounted on the wall play silently.
“The industry has gone through more change in the past five years than it has in the previous 50,” Zucker tells me. Despite the magnate-in-the-sky setting for our discussion, he means it. And Hulu grew out of that realization.
In December 2005, NBC aired the Saturday Night Live short “Lazy Sunday,” featuring Andy Samberg and Chris Parnell as a couple of deadly serious rappers extolling The Chronicles of Narnia, cupcakes, and Red Vines candy (“crazy delicious!”). It quickly went viral on the web, where millions of people caught it on YouTube. But NBC didn’t earn a dime. Along with TiVo, the illegal web videos were a wake-up call about just how powerfully digital technology could disrupt the TV business. Then, in late 2006, Google bought YouTube for an astounding $1.65 billion. “It seemed crazy to us,” Zucker says. “That value was built principally on the back of our content.”
Instead of suing YouTube for $1 billion, the way Viacom did, NBC and Fox founded NewCo to compete with it. Initially, they stuck to the corporate playbook, assigning teams from various departments at both networks to strategize. A few months in, more than 100 staffers met at the W Hotel in midtown Manhattan. It did not go well. What Mike Lang, a News Corp. executive vice president and NewCo board member, saw was a pileup of competing visions designed to protect existing turf. We’re dead, he thought to himself. The blogosphere came to the same conclusion, referring to the project as “ClownCo.” Soon after, the networks secured venture capital from entertainment veteran Providence Equity “to give some validation to this crazy idea,” says Zucker.
Kilar was brought in to provide a single vision and to do things in a different way. He pushed for stock for employees, like any other startup. He told his new bosses that he wanted to create a technology company like Amazon, not a traditional entertainment company. Of course, he had initially turned the job down. “We were a little concerned,” admits Zucker. “Was this guy flaky?”
Fox and NBC had agreed that they wanted an outsider not constrained by the conventional wisdom in TV, and Kilar wasted no time showing them just what that could mean. NewCo had some 45 consultants and network staffers when he arrived; he let go all but a couple of the people and rejected most of what they’d set up, with the exception of a distribution network and some data facilities. “There was a bit of ‘What does he know that we don’t know?’ ” acknowledges Lang.
To replace the original NewCo team, Kilar told the networks he wanted to acquire a startup in China. Accompanied by a pair of chaperones from NBC and Fox, Kilar scooted off to Beijing before his first day in Santa Monica and introduced them to 28-year-old Feng, a basketball and poker buddy he’d known in Seattle. The two had never worked together, but Kilar knew Feng had been a brainy researcher at Microsoft with an entrepreneurial bent. Kilar was determined to develop proprietary technology and, after studying Feng’s year-old online-video startup, decided that he was the one to do it.
One of the network escorts argued that Feng was too young and inexperienced for the high-stakes project. But the other network exec told Kilar, “It’s your company.” Feng became Hulu’s CTO, although he admitted to Kilar that he wasn’t sure exactly what a CTO did. At one point, Lang contacted NBC and said what everyone must have been thinking: “What have we gotten ourselves into?”
Kilar preferred to build the site with a handful of people he knew—“the Ocean’s Eleven approach,” he called it. He hired Amazon and Microsoft veterans and former classmates from Harvard Business School, folks who were willing to work long hours scribbling ideas on whiteboards and writing software code in a push to get the site up in less than 90 days.
Soon, Kilar was lobbying to release an invitation-only beta site to allow continuous iteration before the official launch. It’s a common web practice, but on TV, it’s akin to filming an early draft of the script. “Jason pushed us on the beta,” says Lang. “He said, ‘This won’t work perfectly,’ but we trusted the approach.” Kilar’s manner was consistently politic—and the board realized that rejecting his ideas would leave them with few options. When Kilar proposed an odd-sounding new name, Zucker’s first reaction was: “What the hell does ‘hulu’ mean?” (It’s Chinese for “holder of precious things.”) But he went along with it.
And so Hulu was born.
Digeratti: Jason Kilar, just saw ur interview on Charlie Rose where u say u search twitter about 20 times a day for hulu … Whats up? U listening?
—posted on Twitter in August
LATE ON A WEDNESDAY afternoon at the Santa Monica College pool, Kilar can’t resist. While waiting for his 6-year-old daughter to emerge from the locker room after her swim lesson, he dives in. Not into the pool. Into Twitter, which he estimates has about 2,400 Hulu-related tweets a day.
At Amazon, he learned the importance of studying customer feedback. Twitter takes monitoring to another level. “It’s a transparency engine,” Kilar says. “I’ve always said that our brand is what people say about us when we’re not in the room, and this is the best tool for hearing what people are saying.” He “listens” often. Twenty times a day. Sometimes every 20 minutes. (Yes, the night that Kilar appeared on Charlie Rose, he replied to Digeratti, “I am.”)
At the pool, Kilar glances up from Twitter on his BlackBerry with good news. “Someone just commented on 21 Jump Street,” he says. The show, featuring Johnny Depp, ceased production in 1991. But with Depp starring in Public Enemies and the upcoming Alice in Wonderland, Hulu procured episodes and promoted them. To Kilar, the Twitter activity indicates that the move was a good one—and that Hulu is getting better at delivering programming that’s relevant to its viewers.
Between his four young children and the long hours at work, he has little time for the networks’ appointment TV. At night, he and his wife surf Hulu on separate computers in the study. “We live the product,” Kilar says. He admits he’s neurotic about quality. He studies the site for misplaced logos and grammatical errors, glitches that the team often fixes by midnight. He scans ranked results of the million-plus daily Hulu searches, looking for the fastest movers. That’s how Hulu noticed that users were searching by genre, which led to the creation of its science fiction and comedy channels. “Customers won’t tell you what they want,” Kilar says, citing a Bezosism. “But their behavior will tell you if you capture and analyze it.”
A month after the site went public in March 2008, Hulu ranked 10th on the web for video streams, with 63 mil
lion. Then Hulu capitalized on what NBC’s Perrette calls “lightning-in-a-bottle moments.” Kilar once cracked that “Hulu’s original business plan did not include phrases like ‘and then Tina Fey will impersonate Sarah Palin and an online sensation will ensue.’ ” But when Fey’s bit went viral, Hulu began encoding SNL video for the web immediately after each broadcast, getting a jump on the piracy sites.
Because Hulu’s player was easy to embed in other sites, users could spread its videos (and ads) to tens of thousands of places on the web, expanding a distribution network that included huge portals like AOL and Yahoo. By January of this year, Hulu had nearly quadrupled traffic, without spending a dollar on advertising.
“He always thinks about the customer and the customer experience,” Zucker says of Kilar. “That’s his singular focus.” Pause. “I wish he were as focused on the monetization.”
Zucker grins, backing off. “Which he is.” It’s another joke. Sort of.
FrigginGrawr: I love how hulu lets me pick which commercial i would prefer to view
—posted on Twitter in August
ZUCKER SAYS FLATLY that the amount of advertising and the ad rates on Hulu must increase. Which seems pretty harsh considering how successful Kilar’s model has been so far. Indeed, in many ways it has been so successful that it threatens the traditional TV model as much as YouTube’s viral “Lazy Sunday” did.
Broadcast TV remains the easiest way to reach a mass audience. The online audience for a given show is dwarfed in comparison. Consequently, online ad spending on video, though growing at a 43%-a-year clip, represents a pittance—around $1 billion in 2009, compared to around $46 billion in broadcast ad revenue. Yet the major networks have seen their audience shrink and become more fragmented since the 1980s, thanks to cable TV. Now that more than 60% of Americans have broadband at home, online video could further erode the networks’ audience. If that happens and broadcast ad revenue falls, the networks would struggle to pay for quality programs. That $120 million in estimated ad revenue for Hulu this year wouldn’t go far, with production costs for each episode of a typical TV drama running about $3 million. Hulu needs to do more to close the revenue gap.