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LINDSEY VONN
CNBC.com web-only interview
Downhill skier Lindsay Vonn

Is Hulu Boxed In?

Picture this: TV anyway, anywhere.

Every sitcom. Every drama, documentary, reality show.

All of it — everything — Right Here Now.

This is the radical potential of the Internet. And this is the implicit promise of Hulu, the innovative Web site that drew the original borders of online television — the TV of tomorrow.

Hulu Plus on an iPad
Source: hulu.com/plus
Hulu Plus on an iPad

Hulu’s stated mission: “Help people find and enjoy the world’s premium video content when, where and how they want it.”

In the space of just four years, Hulu has done just that — to a point. Only now, with its industry in flux and the company up for sale, the divide between what is and what might be seems as daunting as ever.

This is the future of TV? Really?

Today you can watch some shows on Hulu in their entirety. But others you can’t watch at all. Most fall somewhere in between — bound by contractual handcuffs that hamper prospective viewers. Making it even more baffling, some episodes are free while others require an $8-a-month subscription.

“It makes catching up on a show or starting a new show very difficult,” complains Marta Garczarczyk, a fund-raiser for a science museum in Minnesota who tried to watch the ABC’s “Cougar Town” and Fox’s “Glee” through the site last season.

Hulu executives largely have their hands tied. Viewers want more shows on more screens. But Hulu’s partners — the big networks — want steady profits. And, for the moment, the networks seem to have the upper hand.

Hulu is a joint venture of NBC Universal, part of Comcast (*Note: CNBC and NBC Universal are both owned by parent companies Comcast and General Electric);Fox Entertainment, part of the News Corporation; and ABC, part of Disney. An investment firm, Providence Equity Partners, owns about 10 percent.

Partnerships of rivals rarely last. And so Hulu finds itself on the block this summer. Representatives of Google, Yahoo, Amazon, Apple and others have kicked the tires, although no clear buyer has yet emerged and Hulu has steadfastly declined to comment.

But no matter who ends up spending billions to buy Hulu, the trick will be satisfying viewers. As Jason Kilar, Hulu’s visionary chief executive, put it in a blog post last February, “History has shown that incumbents tend to fight trends that challenge established ways and, in the process, lose focus on what matters most: customers.”

"What is Hulu without content? An empty jukebox." -Co-Creator, "Modern Family", Steve Levitan

But — through no fault of Mr. Kilar — further limitations on the site’s bounty of free video may be on the horizon. For all the innovation that Hulu represents, the site also lays bare the gulf between what online viewers want and what TV companies are willing to give them.

“Customers always win,” Mr. Kilar has been known to tell his staff.

Maybe. But not always without a fight.

EVEN critics of Hulu concede that this company has accomplished something astonishing. It has helped to free television from the tyranny of the TV set.

For decades, people watched television one way: through a boxy contraption, tied to a schedule set by broadcasters. It was all supported by advertisers and beamed free over the airwaves.

As cable and satellite choices proliferated in the 1980s and 1990s, the business model changed: shows and channels were financed both by advertisers and subscribers. But the TV set and its TV Guide-era schedules still reigned. Not until 2006, when ABC became the first network to stream shows like “Lost” and “Grey’s Anatomy” on the Internet, did television programming truly roam free. A year after that, Hulu began taking mainstream the idea of streaming on TV, computers and cellphones.

The first hint of television’s unbundling actually came back in the 1980s, when viewers snapped up videocassette recorders. For the first time, they could record shows and watch them when they wanted. Once that happened, there was no going back. VCRs paved the way for TiVo and DVD box sets.

Each generation of technology met resistance from some in the television industry, a fact that Mr. Kilar knew at first hand before joining Hulu. While working at Amazon.com in the late 1990s, he wrote the business plan for the company’s VHS and DVD businesses. He witnessed skirmishes with TV studio chiefs who worried that direct sales of shows would damage the Blockbuster rental model. Over time, the studios came to embrace the sales model.

SUFFERING FROM "TECHNOLOGY ANXIETY"

For Mr. Kilar, who declined to be interviewed for this article, those skirmishes showed how some television executives suffered from a sort of technology anxiety. They wanted to maintain the status quo for one more season or contract cycle.

But other executives saw that TV was being freed from the Box. They also saw how the music industry was being ravaged by similar forces. And so Hulu was born.

hulu.com
hulu.com

By working together, Hulu’s network parents hoped to establish it as the go-to Web site for TV — a parallel in some ways to Apple’s iTunes, but controlled by the networks, rather than by an outside company, like Apple, that wanted more content so it could sell more iPods. It was both an alternative to Apple and a shield against the emerging threat of online TV piracy.

And it worked — boy, did it work. Visitors flooded Hulu upon its public opening in March 2008. Within a year, Hulu was serving up more video streams than any other Web site in the United States, save YouTube, the perennial No. 1.

What was there not to like? On Hulu, videos loaded quickly. New episodes were posted the morning after they made their premieres on television. And advertisements were limited to roughly two minutes’ worth during a 22-minute sitcom, versus about eight minutes on traditional TV — a huge differentiator.

In part, the light ad load was an effort by Mr. Kilar to prove the value of the service and to prove that having fewer ads would make each one more memorable — and thus more valuable. But it was also an effect of Hulu’s rocketlike liftoff. Its staff couldn’t sell ads fast enough.

A year after Hulu’s introduction, Walt Disney bought in, leaving CBS the only major network without a presence on the site. Some cable channels started to chip in content, too. The site branched into movies, foreign cartoons, news programs — anything to feed viewers’ insatiable appetite.

MEDIA, Mr. Kilar told Charlie Rose in an interview in mid-2009, “is an impulse business.” Viewers don’t need, say, “30 Rock,” the NBC comedy, the way they need food or water, he said, but “if you can make it easier to consume, people will consume more of it.”

He said he thought the “aha moment” for consumers was when they saw “that basically they could consume ‘30 Rock’ when they wanted — when it was convenient after the kids went to sleep, or in the morning when they had a break.”

“And that’s very liberating, it’s very empowering, and I think at the heart, that’s a big part of the Hulu value proposition,” he added.

Hulu’s users believed that, too, but some at the networks had their doubts that they were benefiting by giving away so much online. They privately cheered when Steve Levitan, the co-creator of the hit ABC sitcom “Modern Family,” wrote on Twitter last year: “What is Hulu without content? An empty jukebox.”

The site achieved profitability at the end of 2009, but the profit was split up among so many different content providers that it barely moved the needle for any of them. By then, Hulu had begun goosing the ad load, having up to four minutes’ worth in each 22-minute episode. At the same time, the number of episodes available for some shows started to ebb noticeably. Echoing other Hulu customers, Brandy Clabaugh, a food blogger in Poughkeepsie, N.Y., said she often found herself “very frustrated by the lack of episodes.”

But the networks wanted more. They insisted that Hulu add a subscription arm, creating the same kind of dual revenue stream that cable channels have.

Released last November, the resulting $8-a-month service, called Hulu Plus, provides a much wider selection of episodes than the free Hulu service does, and permits viewers to watch some episodes on mobile screens and Internet-connected televisions. Nearly a million people have signed up, ahead of Hulu’s expectations — but a small fraction of the 20 million subscribers to Netflix. Among Netflix’s advantages are that it came online several years earlier, has no interruptive ads and has a greater library of films.

Hulu’s advantage is its supply of TV shows from its owners and other partners. But both Hulu Plus and the free Hulu site come with an abundance of caveats that baffle customers like Sarah Scott, a Web developer in Chicago. Ms. Scott pays for Hulu Plus so she can stream shows to her iPad and to her TV set through her Xbox 360. "I don’t even mind the ads," she said.

"CONVULUTED AND OUTDATED"

But she does mind that she can watch “Fringe,” a sci-fi drama on Fox, only on her laptop, not on her iPad or through her Xbox. And that only five “Fringe” episodes are posted at any given time. And that episodes of “Burn Notice,” the spy thriller on USA Network, are only posted 30 days after they make their debut on television.

Sometimes, Ms. Scott said, she just gives up watching.

hulu.com
hulu.com

CONVOLUTED and often outdated contracts for the rights to shows and channels are the single greatest impediment to the growth of TV on the Web, on Hulu and elsewhere.

The contracts are designed to protect the core businesses, like cable subscriptions and syndication revenue. But they have suppressed the availability of shows on Hulu and have also slowed the implementation of “TV Everywhere,” the industrywide plan for anytime, anywhere viewing.

Because there are so many unknowns online, contract negotiations take longer than they used to. Sometimes content owners and distributors even haggle over what to haggle about.

“As an industry, both sides don’t know what we don’t know,” said Neil Smit, the head of the cable division of Comcast, which has a streaming TV site, Xfinity, for cable subscribers.

Mr. Smit was mostly upbeat about the undertaking, saying, “Everyone’s pulling in the right direction, but there is a ton of work to do in rights and audience measurement to bring it to life on every platform and every device.”

By audience measurement, he means the Nielsen Company ratings that are used to set pricing levels for ads. Nielsen now includes online streams in its ratings if the same ads are shown both on television and online. Only a handful of channels are taking that approach for now.

In the meantime, there do not seem to be standard answers about how much should be free online, and how much should not be — or for how long or on what Web sites. Hulu has to operate amid this uncertainty.

Consider ABC’s prime-time lineup. On Hulu, at no cost, anyone can watch the last five episodes of shows like “Desperate Housewives” and “Modern Family.” And paying subscribers can watch more. But from there, it can seem perplexing, often because of decisions made not by the networks themselves, but by the studios that make shows.

No episodes of the ABC sitcom “The Middle” are available online, even for paying subscribers. The show’s studio, Warner Brothers., declined to comment, but the studio is known for limiting the streaming of sitcoms and procedural dramas because those shows are especially valuable in the syndication marketplace. In the meantime, what pops up prominently when a fan of the show searches for it on Google? Web sites that link to illicit copies of the show.

BOARD members of Hulu anticipated from the outset that it would eventually be sold.

Would-be buyers like Google have been assured that Hulu would continue to have exclusive access to network shows for some period of years. But the spigot on free streaming appears to be tightening. The new deals that Hulu signed with ABC and Fox this summer are said to allow for more ads and longer periods between when episodes debut on TV and when they debut online. Hulu declined to comment, but it is possible that Fox might start waiting a days to post a new free episode of, say, ”Family Guy,” or that ABC might delay an online episode of “Grey’s Anatomy.”

What seems certain is that online TV will look more like a walled garden in the future, with cable and satellite customers receiving online access as an add-on to traditional TV subscriptions. This is the approach led by Time Warner, which coined the term “TV Everywhere” two and a half years ago.

Only a handful of channels have completed the work to set up the walled garden, known as an authentication model. Last week, the CNN unit of Time Warner became the first cable news channel to do so; subscribers to services like Dish Network and Verizon FiOS can enter a username and password and start watching the channel on their computers or iPads at no additional cost.

Hulu hasn’t ruled out an authenticated model for part of its site, and analysts expect it will happen eventually.

Perhaps the best glimpse into the authenticated future is the one provided by HBO, another Time Warner unit, which recently rolled out its version of Hulu, called HBO GO, for its shows and films.

HBO GO lets subscribers watch virtually every season of every HBO show — both new, like “Game of Thrones,” and old, like “The Sopranos.”

The Internet is not only revolutionizing the business of television, but also how we think about TV. On top of the shows themselves we now have what Eric Kessler, the HBO co-president, calls the “enhanced viewing experience.” People who watch, say, “Game of Thrones” on their iPads can click through character trees, story maps,commentary — on and on.

Tune in next week, same time? Forget it. The days of that old TV staple, the cliffhanger, may be numbered. If networks can cut through all the contracts, technology that lets us watch what we want, where we want, when we want could create a whole new viewing experience — which is exactly what TV executives say they want.

“The easier it is to access the content,” Mr. Kessler says, “the more they watch.”

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