by Chuck Salter
Kilar has hooked viewers partly by showing fewer ads—just 2 minutes of promotion for 22 minutes of, say, The Office, compared to 8 minutes of ads on TV. Limiting sponsorship to one advertiser per episode helps make recall rates twice as high as those for the same ads on TV, says Jean-Paul Colaco, Hulu’s senior vice president of advertising and a Harvard classmate of Kilar’s. According to ad buyers, that level of engagement has helped Hulu reach ad rates that are 50% to 100% higher per thousand viewers than broadcast rates.
Hulu also lets viewers control part of the ad experience. In some instances, they choose which commercials to watch: BlackBerry, Applebee’s, or Fancy Feast cat food? Viewers can also choose between one chunk of ads before a movie or several shorter segments. They can vote thumbs-up or thumbs-down on each ad, which gives them the satisfaction of providing feedback and helps Hulu deliver more appropriate promotions. (Sorry, voting thumbs-down on all of the ads won’t eliminate them.)
Along with ad feedback, users supply demographic information when they register at Hulu. The whole package enables advertisers to achieve far more precise targeting than TV provides. “I have a big belief that if you don’t have children under the age of 2, you don’t need to see a Pampers commercial,” Kilar says. “That’s not money well spent for an advertiser.”
And advertisers are responding. For the June launch of its new search engine, Bing, Microsoft ran a “Bing-a-thon,” a live 72-minute telethon parody featuring SNL’s Jason Sudeikis and G4 host and Playboy cover girl Olivia Munn. Every Hulu ad that day was a Bing-a-thon clip, and the infomercial was the day’s fourth-most-watched program. On average, viewers tuned in for nearly 30 minutes—the equivalent of nearly 60 30-second spots. While watching, they could also do a Bing search within the Hulu screen and tell friends about it. “This gave us the right audience, the ability to educate and entertain, and the opportunity for them to try out the product and then market our product for us,” says Sean Carver, Bing’s director of marketing brand integration. “No other ad platform lets you do all that.”
But there’s a rub to this success story—and it’s the reason Zucker and Hulu’s other parents continue to press Kilar. Compared to both broadcast and cable TV, Hulu remains small, both in viewership and in the volume of ad dollars it brings in. And the networks’ ad revenue threatens to fall faster than Hulu can make it up. Estimates for the 2009–2010 season are down by double digits.
Kilar acknowledges in an indirect way that the amount of advertising on Hulu shows will likely increase. He goes to the whiteboard walls of his office and scribbles the ratio of ads to content now compared to the 1960s: A half-hour show such as Alfred Hitchcock Presents worked with four minutes of ads, half as much as TV today.
That’s twice as many commercials as Hulu currently shows. Would that ruin the Hulu experience? Probably not. But it remains to be seen how users might react (even if the ads are more relevant to them) and whether another less ad-focused digital player could steal Hulu’s limelight.
LadyXanth: Hulu only has season 1 of Desperate Housewives? I just watched the season finale, I NEED season 2 *devastation*
KasieTierson: Oh hulu why won’t you let me watch my shows :(
—posted on Twitter in August
HULU FINDS ITSELF caught between TV’s past and future. As Zucker puts it, there is “a natural tension.” The sticking point is convergence—industry shorthand for making high-quality online video available on TV. Networks and cable companies fear that if people can watch Hulu streams of their shows on TV with fewer ads, they won’t tolerate the ads on TV. “I want to be very careful here,” Zucker says when I ask about convergence. He bridges his fingers, thinking. A moment later: “In some form, that’s clearly going to happen. It’s a question of how we navigate that migration.”
Even as they’re giving viewers more control over content through Hulu, the networks are trying to control the pace of change by limiting how much content they share. For Kilar’s team, getting every episode of a TV show is not as simple as asking for it. The networks, cable companies, and production houses are trying to maximize revenue from multiple platforms—broadcast and online ads, Netflix and on-demand licensing fees, DVD sales, syndication. They don’t want to make content available if it’s likely to damage existing businesses.
So far, NBC and Fox say they have yet to see cannibalization. Hulu may even have boosted the TV audience on some shows, such as Glee and It’s Always Sunny in Philadelphia. The networks put some season debuts on Hulu before broadcast to kick-start interest. But in general, the content providers are conservative. Their default on Hulu is to provide exclusive rights to only the five most recent episodes of current shows. But there are no rules. The first season of Arrested Development is available; previous seasons of The Office are not. Lost fans can watch the first four seasons, but only part of last season. American Idol is a no-show altogether; Hulu couldn’t secure the rights from its multiple owners. It’s all a mystery to viewers, whose typical rant/plea is “Where the hell is episode 5 from season 2?”
“Hulu was a breakthrough service, but people are never satisfied,” says Will Richmond, a veteran analyst with Video-Nuze, a website and newsletter. “It was a desert and Hulu provided water, but now the people also want food and table settings. On the web, people are accustomed to access, and they don’t take kindly to restrictions.”
Kilar is sympathetic. “Users deserve to have whatever they want to watch,” he says, “whenever they want to watch it, however they want to watch it.” He and his team try to manage viewers’ expectations without going into the rights issues. They post expiration dates on episodes, and email alerts to registered users. If Kilar learned one thing at Amazon about changing an industry, he says, it’s patience. Bezos used to say, “Online commerce is the worst it’s ever going to be.” Online video, Kilar knows, can only improve.
StewartRogers: I watched a bizarro movie last night (something low budget and free from hulu.com), but am closing in on 4 weeks without cable.
jonrog1: Hulu on a laptop using sprint. The networks are screwed.
—posted on Twitter in September
THE NETWORKS DON’T tell Kilar what to promote. His team decides on the slot atop the home page, and users determine the columns that list the most popular shows and clips. Except for major changes, Kilar says he doesn’t need network approval to modify the site. He didn’t ask permission to start including names with user comments to discourage inflammatory anonymous posts. “No, no, there is no call,” he says with a laugh. “They know we’re a separate company. They find out about new features the same way our users do.”
But there are limits to Kilar’s independence. Last February, in a blog on Hulu called “Doing Hard Things,” Kilar explained that its content providers had asked to remove programs from a service called Boxee. For a company that espouses liberating content, the decision seemed out of character. Boxee’s free open software lets users access music, photos, and video on their computers and online through a single application. With a device like Apple TV, you can transfer that content to a standard TV. In other words, you use your HDTV or your home theater to watch shows on Hulu, with far fewer ads than you’d see on broadcast or cable channels.
Although Boxee had been delivering up to 100,000 Hulu streams a week, Hulu instructed Boxee to end the practice. It’s the only company to have done so.
Kilar insists that Hulu’s Amazonian mission—to help people find and enjoy the world’s premium video content—hasn’t changed. “Boxee had no right to do what it was doing,” he says. But he admitted on his blog, “This has weighed heavily on the Hulu team.”
There’s also pressure from Hulu’s network parents on another front. At a conference in early September, News Corp. chief operating officer Chase Carey warned, “Ad-supported only is going to be a tough place in a fractured world. . . . You want a mix of pay and free.”
There’s little question that the next big ch
ange in online video will be paid-subscriber sites, particularly those offering access to more cable shows. Currently, episodes of fewer than 20% of cable shows are online, compared to about 85% of offerings from the four major networks. As part of an initiative called TV Everywhere, cable companies, including Comcast and Time Warner, are developing sites restricted to authenticated paying cable customers.
“I’ve had conversations with them,” says Kilar of the cable providers, whom he says he sees as potential partners, not competitors.
Could paid content work on Hulu? “We don’t think any one consumer model is the answer,” says Kilar. (Hulu is also exploring international expansion and, according to analysts, an iPhone app). The most likely option is adding a subscription service alongside free content. Think of it as Hulu Premium—an online version of what HBO did to distinguish itself from standard cable service. For a monthly fee, VideoNuze’s Richmond suggests, members would get ad-free content on Hulu, early access to programs, and more comprehensive archives. For a share of the fee, companies would make more shows available. Most important, Hulu could offer those subscribers Boxee-style access to TV, giving the networks a long-awaited convergence strategy with a steady revenue stream.
“I take from Carey’s comment that the horse is already out of the barn,” says Richmond.
But no one knows for sure what the next plot twist will be for Hulu. So far, as Anne Sweeney, president of Disney/ABC Television Group, says, “Hulu’s shown performance.” Two years ago, ABC, which was the first network to stream episodes of its shows on its own sites, declined to join the joint venture. Starting a new branded site didn’t make sense. Now, combining ABC’s more female audience and Hulu’s viewership, which skews male, does.
But the online video space is so volatile that one industry observer estimates that Hulu could cost the networks nearly $1,000 per viewer in lost advertising, while another worries that Hulu could be tomorrow’s MySpace. If Hulu’s corporate parents don’t renew their deals to provide the site with exclusive content two years from now, who knows what might happen?
When asked about all of these potentially dire circumstances, Kilar nods, as if he’s been expecting the questions. “These are perfectly rational arguments,” he says. “They just happen to be incorrect.”
How can you be so sure?
“It was the same at Amazon. I was there when people were calling it Amazon.bomb, and everybody was saying that once Barnes & Noble goes online, the game is over.” At Hulu, he says, “we’re creating the kind of service we want. We’re some of the biggest media consumers on the planet. This is the way we think media should be.”
The most captivating glimpse into the future Kilar is creating is Hulu Desktop, where viewers on average spend twice as long as they do on hulu.com. The interface has a cinematic feel, displaying episodes and clips of the shows you’ve subscribed to, like TiVo, but with endless memory. It puts the cable companies’ guides to shame. As you browse the vast Hulu library—by popularity, recent additions, or other groupings—you can add video to your queue to watch later, Netflix style, and share it with friends. You control the sequence of shows, too, which play one after the other without prompting, like a playlist on iTunes or your own must-see-TV evening lineup.
Hulu Desktop is designed for more of a “lean-back experience,” Kilar says. He doesn’t mention watching TV from your couch. But he doesn’t have to.
__
Fast Company, November 2009
HULU: THE SEQUEL—CAN IT SAVE ITSELF?
By Nicole LaPorte
IT’S AN UNSEASONABLY WARM summer day, and Jason Kilar is “in the zone,” as he puts it, buzzing around his Santa Monica, California, headquarters, putting the final touches on a massive redesign of Hulu, the streaming TV and movie service he runs. Despite the heat, and despite a deadline that is only weeks away, the boyish 41-year-old CEO looks calm and collected. (He always looks this way, actually.) He’s dressed in his uniform of jeans and a dark blue T-shirt peeking out from under an über-starched button-down, and his thick turf of hair is cut in what looks like a $17 mow from Fantastic Sam’s. As he natters on about the new site, walking me through its tray-style layout and a feature that lets you pick up exactly where you last left off watching a show, it’s easy to see why people liken him to a grown-up Boy Scout. “This morning we had a 45-minute debate on the amount of gradient on the sticky header!” Kilar boasts, standing in a cluttered warren of darkened offices from which members of the design team periodically emerge, blinking like moles. Kilar’s obsession with user experience—one source says it borders on “maniacal”—is a large part of why Hulu has created a service that customers have deemed “brain-spray awesome.”
But as Kilar frets about the opacity of a tiny black line and the exact placement of a button, Hulu’s corporate parents—News Corp., Disney, and Comcast/NBCUniversal—are fretting about Hulu. The day before Kilar’s redesign was finally unveiled, Variety published excerpts from an internal memo that had been circulating among those owners. One of the bullet points: “Outline transition plan for new CEO. Discuss potential candidates and process.” Kilar, who just three years ago was the wunderkind of digital media, now appears to be on the verge of being dispatched by his bosses—after which they may dismantle much of what he’s created at Hulu.
The prevailing wisdom in business is that it’s best to disrupt yourself before someone else comes along to do it for you. News Corp. and NBCUniversal had the foresight to start Hulu as Internet video was taking off in 2007. Thanks to Kilar’s vision and leadership, the service has grown from a single website serving up last night’s episode of The Simpsons to a service featuring content from more than 400 partners as well as original series from filmmakers Richard Linklater, Morgan Spurlock, and Kevin Smith. Revenue soared 60% last year, to $420 million, and is on pace to exceed $600 million this year. And despite broad consumer resistance to paying for digital content, especially when it’s available elsewhere for free, Kilar has attracted more than 2 million people to Hulu Plus, a $7.99-a-month subscription service that offers full access to Hulu’s library on an array of devices such as mobile phones, game consoles, tablets, and, most recently, Apple TV. Even more remarkable: He’s serving ads to both free and paying customers, an industry-leading 46.4 ads per viewer per month, according to comScore’s July 2012 online video rankings. Hulu’s own stats suggest that 96% of those ads are watched in full.
Despite all that brain-sprayingly awesome news, the lords of television are having second thoughts about this whole disruption thing. The loudly noted woes of the entertainment industry aside, TV still generates more than $70 billion in advertising revenue annually. Cable companies still pay content providers like Disney (ABC’s parent) and News Corp. (Fox’s parent) tens of billions of dollars in licensing and subscription fees. Hulu’s revenues are but a speck by comparison; but its audience, which now totals around 25 million unique visitors a month, according to comScore, is threatening. Network television viewership is down 12.5% since Hulu’s launch in 2008, while approximately 3.6 million U.S. residents have abandoned pay-TV for Internet video over the same period. These metrics make studio and network people shiver, and Hulu bears the brunt of their alarm. “Half the people at those companies wish [Hulu] would go away,” says one source who, like many of the dozens of studio execs, agents, producers, and Kilar’s colleagues I interviewed for this story, asked not to be identified for fear of alienating any of the parties involved.
Hulu’s owners and Kilar find themselves at this crossroad after years of long-simmering tensions and occasional battles. In the past few years, Hulu has shelved IPO plans, backed out of a sale, lost its key corporate supporters, and seen its partners sell rights to its rivals. The leaked memo was the third rumor of the summer that Kilar was on his way out. First, he was reportedly a finalist to be Yahoo’s CEO; he killed that buzz by issuing a head-scratching statement that he “graciously declined to be considered” for the job. After tha
t, he was going to work for Facebook. Press Kilar about all this Sturm und Drang, however, and all you get is his game face: “We’ve never grown so much in an absolute way as we have in the last couple of years.”
Kilar will admit that his five-year journey at Hulu has “not been for the faint of heart.” More palpitations are in store. This fall, Providence Equity Partners, the private-equity firm that has a 10% stake in Hulu and has generally backed Kilar, plans to sell its stake back to Big Media, leaving Kilar more exposed than ever. (Of course, he might also become richer than ever, given that he’ll be able to liquidate stock options worth a reported $100 million.)
When I ask Kilar if Hulu is simply too successful for its owners’ tastes, he throws his head back and laughs. “I don’t know! You should ask them!”
I’d like to. No one at News Corp., Disney, or Comcast would comment for this story.
Hulu’s saga, which has only been told in broad strokes and not since its honeymoon days of 2009, is one that Hollywood trucks in all the time. Kilar is the willful maverick who rides into town with fresh ideas and no interest in playing by the rules. On-screen, Hollywood loves this tale. In real life, it’s a different story.