U.S. News

Success (and Some Growing Pains) at Hulu

Brian Stelter and Brad Stone|The New York Times

Hulu, the popular and free online video hub, has some things to celebrate as it heads into its third year.

The site, a venture of NBC Universal, the News Corporation and the Walt Disney Company , has been profitable for two quarters, Jason Kilar, Hulu’s chief executive, said in an interview on Monday. Hulu has successfully brought online TV into the mainstream. And now it appears set to move beyond standard computer screens with an application for Apple’s iPad , four people briefed on its plans said.

The Daily Show with Jon Stewart
Source: hulu.com

But there are signs of dissatisfaction in Hulu’s house.

It is coming under increasing pressure from the companies that supply its content. They want Hulu to earn more advertising dollars and set up a subscription service, asking consumers to pay a monthly fee to watch at least some of the shows on the site.

Though Hulu has resisted talking about subscriptions in the past and would not discuss details, Mr. Kilar seemed newly sanguine about the possibility of such a service. “Our mission is to help people discover the world’s premium content, and we believe that subscriptions can help to unlock some of that, including sports and movies and premium cable shows,” he said. “We’re certainly open to subscriptions as a complement to an ad-supported model.”

People briefed on Hulu’s plan believe it may test the subscription approach with its iPad app. They could not say when such an application might be available.

Mr. Kilar declined to talk about any future Hulu products, but he waxed enthusiastic about the coming wave of ultra-portable tablet computers like the iPad.

“Typically media consumption in the house was confined to the living room or home office,” he said. Tablets, he added, “allow consumers to serendipitously discover and consume media in every room of the house.”

Hulu’s 200 content suppliers, some big and some small, receive 50 to 70 percent of the advertising revenue Hulu generates from their videos. Some of the media companies complain privately about the paltry checks they have received through these deals, even as use of the site has grown. Monthly video streams on Hulu have more than tripled in a year, to 903 million in January, according to ComScore.

One major supplier, Viacom , withdrew its programming from the site after failing to reach a deal on revenue sharing, depriving Hulu visitors of popular Comedy Central shows like “The Daily Show with Jon Stewart” and “The Colbert Report.”

Mr. Kilar points to his company’s new profitability as evidence of the success of Hulu’s business model — collecting various types of video in one place and making it free, supported by ads. Revenue topped $100 million in 2009 and could reach that number this year by early summer, he said.

“Aggregation works for consumers,” he said. “It makes it easier to find and discover and enjoy premium content, and it works for advertisers, because with that aggregation you get greater reach.”

The concerns of the partners about revenue are clearly limiting Hulu’s ability to bring its service to other devices, and to satisfy all three of its sometimes conflicting constituencies: video-happy consumers, the content companies and advertisers.

Many consumers, for instance, would like to see Hulu available in their living rooms, where they now have HDTVs, video game consoles and Blu-ray players that connect to the Internet. But Hulu has blocked services like Boxee that try to bring Hulu to TV screens, because that would siphon away viewers from cable and satellite subscriptions, a steady revenue source for media companies.

family watching tv

Hulu, based in Santa Monica, Calif., has also failed so far to deliver an application for the iPhone, although consumers have been clamoring for that too, and such an app has been rumored for a year. Mr. Kilar explained the absence of Hulu mobile apps by saying he has focused on the core Web business.

To get permission to move content onto other platforms “takes a lot of wrangling,” said a Hulu employee who requested anonymity because the company did not authorize him to speak on behalf of the site. The employee said it was “like trying to pass the health care bill.”

Avner Ronen, Boxee’s chief executive, said Hulu would have to find new sources of revenue before it has the freedom to move onto other devices.

“A one-size-fits-all business model is very difficult to pull off,” Mr. Ronen said. “Media companies are much more savvy now about those deals. Everyone realizes now that free ad-supported content is not the exclusive model of the future; it’s just one part of it.”

On every platform, Hulu is only as good as its so-called windows for television and movie content — that is, the periods of time it must wait before it can stream programs after they have been shown on television. Viewers may find themselves waiting longer to watch for free.

Apple iPad
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Mr. Kilar acknowledged that Hulu had not done enough to explain windowing issues to its users in the past, and he cited the FX sitcom “It’s Always Sunny in Philadelphia” as an example of the tough spot Hulu finds itself in. The first window for “Sunny” is on cable television, which relies on subscriber revenue. Later windows include online streaming, DVDs and syndication. Hulu shows only five rotating episodes from past seasons of “Sunny” at any given time.

If Hulu can extract more ad revenue for an hour of viewing, the FX’s of the world may upload more shows onto the Web site. Already some of Hulu’s commercial breaks are a bit longer than they used to be, and some of its partners are eager to further increase the number of ads shown in an hour, but Mr. Kilar still believes that “less is more,” and he cites studies of the effectiveness of Hulu’s ads as evidence.

If consumers embrace a subscription service and an iPad app, it could make the company’s family gatherings a little less rancorous. But because of the continuing shifts in the media business, Hulu’s problems are unlikely to vanish entirely. Later this year, regulators willing, NBC’s stake in Hulu will transfer to its new parent, the cable giant Comcast — one of the very companies that is seeking to preserve the TV subscription model.