Jumping Through Hoops with Hulu
Congratulations should go to News Corp., Disney, and NBC Universal for finally creating an online company so big and successful that tech industry giants may stumble over each other to acquire it. Does Hulu or its buyer get the short stick?
Amazon, Google, Yahoo, Dish Network, and DirecTV appear willing to pay big bucks for Hulu, reportedly up to $2 billion or more, for the privilege of owning it.
Given the painful history of Hollywood creating a salable online unit, this is a major accomplishment. It’s a more positive variant of what I like to call“Suck-Cess.” The more “successful” a business unit becomes, the more it sucks. In this case the Hulu owners create real value but can’t stand to hold onto their baby because it might grow large enough to eat their existing business.
Hollywood’s unhappy dance with online video typically starts with overheated expectations and results in shattered ventures. Here’s hoping they don’t screw the pooch again.
“Hulu has long been treated as the unloved bastard offspring of a doomed tryst among three aging TV giants,” said Robert Tercek, former digital head of Oprah.com and a veteran of several Los Angeles startup ventures. “Joint ventures are born to fail. When the partners disagree, management is powerless to take decisive action. Ultimately no TV network has had the courage to commit 100% to a new venture that could cannibalize its legacy business.”
Hulu is a decent and popular service that attracted more than 24 million unique views in July, according to comScore, which is roughly 10% less than the subscribers of decades-old HBO. Hmm. I wonder how consumption rates differ between the two. Hulu generates material revenue from ads as well as subscription fees for its premium service, Hulu Plus. But which analyst or media firm has counted how much value has been applied in free broadcast time pushing Hulu to its owners’ constituencies?
But Hulu also represents much of what’s messy about quality video content on the Web. Shelly Palmer, host of Fox Television’s Shelly Palmer Digital Living, quips, “Hulu is a business model, not a business. Take away its quality network content and it ceases to have value.”
Assuming Hulu gets acquired, it might end up like other ballyhooed Hollywood ventures, a limping zombie with few compelling shows and an operation suspended in perpetual animation in a bid to recover acquisition costs. That’s because Hollywood, like the music industry, is so busy protecting its old business models that it hasn’t figured out how to profitably nurture new ones in the online ecosystem. The inherent conflicts with a site like Hulu have not been resolved, even though it has blossomed beautifully. Such problems have in the past scuttled video sites such as Movielink, Screenblast, and the UK’s Kangaroo.
The big question about Hulu is what will be included with the sale and what’s left out. Given all the challenges Hulu has had getting full content licenses even from its owners, what will happen when Hollywood no longer has a stake in Hulu’s success? Les Moonves even said, “Are they buying two years of programs for $2 billion? I don’t know.”
Will a newly acquired Hulu come with rights to all the content it currently has? Will the partners sell it to the weakest competitor or to whoever is willing to strike the richest deal?
One analyst put it just right: “What matters is how long the content is locked up, what the rules around it are, and if they can change in the future,” said Rich Greenfield of BTIG Research. “Nobody is going to buy Hulu without answers to those questions.”
Hulu reportedly has annual revenue trending to $500 million, but a raft of competitors like Netflix now seeking similar content deals will challenge it. And don’t rule out Walmart with its online video service Vudu. It recently surged into third place in the movie-download business. A court ruling this month gave Wal-Mart a major boost in its effort to muscle in on Netflix’s streaming subscribers.
One possible hitch to the Hulu sale could be the insistence that viewers who are not cable or satellite TV customers would have to wait eight days to access a show after its initial broadcast. If that’s part of the deal, Hulu will sell for a handful of pennies on the dollar compared to what it is worth without that restriction.
There is a lot of risk and uncertainty involved here. If Hulu is freed from restraints studios have so far imposed, it could present other problems for Hollywood. A freed Hulu might really give cable and satellite competitors a run for customers and their fees. Does that create a new golden goose for Hollywood, or just pluck the old one?
All of this is going on against a backdrop of complicated issues affecting video delivery. As online video explodes, pipeline providers like AT&T are choking unlimited bandwidth with metered pricing. They are creating an artificial bandwidth scarcity with new metered pricing plans, even though the cost of delivery has plummeted. These plans risk making Hulu, Netflix, YouTube and other online video services far less attractive, right when consumers are embracing them heartily. The fact that Comcast is leading the push to metered data services is an example of the conflict that exists between its cable and media assets.
Throw in the festering fight over Net Neutrality, where pipelines owners, including Google, will charge premium prices for preferential treatment of video delivery, and you have increased the mess, as I previously wrote. And this doesn’t include the potential problems with mobile platforms and the booming popularity of smart phones and tablets for video use.
All this feels like a re-run of the fate of online movie-download service Movielink, which five Hollywood studios owned long ago. Its executives were flustered by interference from studio board members, who repeatedly fought over pricing and special offers.
Is bundling licensed content and distributing it to consumers the wrong business model? Larry Gerbrandt of Media Valuation Partners, long-time media and advertising analyst, asserts, “Over the top television is perfect for an explosion of long tail content, niche content, and foreign language content. Netflix on steroids. I recently spent some time with the folks at Google TV and they are starting with what is NOT available ANYWHERE, such as all of the college sports that don’t get on broadcast or cable TV + high school sports in major markets. But it will take a Google, Amazon, or Yahoo to combine enough eyeballs across all the niche content to make it of interest to advertisers. They still pay a premium for reach and you can’t change the fundamentals of TV advertising overnight.”
The result was a hamstrung service that eventually faded out. Movielink was acquired by Blockbuster in 2007. The chances of Hulu having a similar fate may not be quite the same, or maybe it will be. Despite creating a significant business that could project them toward a dominant position in the online video market, will Hulu’s backers jump through hoops to keep it from being too successful? That would be another tragic comedy. You have to love Hollywood.
So who will be the best group to own Hulu and how will consumers benefit? I will tell you in my upcoming paper. What do you think?