TheFutureofHuluintheGlobalTVMarket TermPaperAbbreviatedVersion Author:IddoShai CMGT558TheInternationalEntertainmentMarketPlace Professor:JonathanTaplin USCAnnenbergSchoolofCommunicationandJournalism November30,2009

Abstract In1997Hollywoodseemedunbeatable.FoxjustreleasedthemovieTitanicthatwouldgoon andsmashboxofficesaroundtheworldlikenoothermovieeverbefore.Itmadeabout$600millionin theU.S.marketaloneandtherestoftheworldwasresponsibleforanunprecedented$1.2billionin ticketsales(Imdb,1997).Justthetelevisionmovierightswereworth$50milliontoHBO. Televisionindustryexecutivesbeganreceivingprojectionsin2005aboutpossiblerisksposedby onlinevideositesafterthereleaseofaclipcalledLazySundaywhichoriginallyairedonSaturdayNight Live.Simultaneouslythemusicindustrybegantankingduetoillegallydistributedcontent.NBCsCEO JeffZucker,wouldlaterrecallthatthatwasthemomenteverythingchanged.(the)InitialideaofHulu wastonotsufferthefatemusicsuffered.WehadthesamefeelingasNewsCorp.,andthatswhywe cametogether.Wewantedtocreateoneaggregation(TV)sitethattrainedpeopletolegallyviewit online(Kafka,2009).NBCteamedwithFoxanddecidedtobuildacompetitivemodelthatwould revolutionizenewmediaHulu. WhatthefutureofHuluisstillyettobedetermined.Thefutureoftheglobaltelevisionbusiness isalsostillunknown.Thefollowinganalysiswillexplorethesequestions.Itwillfocusonthecurrentstate ofHulu,itscurrentchallengesandfutureimpactsontheworldsleadingtelevisionmarkets.Thefinal portionofthepaperwilladdresspotentialcurrentandfutureconsequencesofHulubeingdistributed internationally.

HulusSuccessandThreats Onlinevideosarebooming.2009maygodowninhistoryastheyearwhenthemainstream viewersjoinedtheearlyadoptersinwatchingTVontheweb.InOctober2009morethan138million U.S.Internetuserswatchedmorethan11billionvideosonline,accordingtoNielsen.Thesenumbers accountforabout60%ofthetotalU.S.Internetmarket. Huluhasgrownthisyearmorethananyothersite.ArecentreportbyComScoreshowedthat Huluspikednearly47%inOctober2009comparedtojustthemonthbefore.Thatwasthebiggest singlemonthpercentagegainofthepastyear.Uniquevisitorswerealsoupnearly10%to42.5million, from38.7millioninSeptember.Minutesperviewerwerealsoupsubstantially,to123minutesfrom92 minutesinSeptember1(Learmonth,2009).ThatgrowthwasmainlydrivenbytheupandcomingABC andFoxseriessuchasGleeandVthatpremieredthatmonth.Suchasuccessisbothablessinganda curseforHulu.Inordertounderstandwhywemustfirstunderstandthecircumstancesinwhichthesite wasborn.

*Rankingsbasedonvideocontentsites;excludesvideoservernetworks.Onlinevideoincludesbothstreamingandprogressivedownloadvideo .

Inthesummerof2006,FoxandNBCwerethinkingprimarilyoftheirownneeds.YouTube,was beginningtolooklikethefutureoftelevision.Initiallydesignedasaplatformtosharehomemade
1WhilethenumbersbetweenNielsenandComScorevary,thegrowthpercentageisverymuchthesame(Sterling,2009).

videos,itwasquicklyappropriatedbyuserssharingTVhighlights.Onlinevideowasgrowingfasterthan cellphonesandhighspeedInternet.Inanattempttoavoidthemusicindustrysfatethetwo broadcastersdecidedtobuildawebsitethatwouldkeepthemincontrolovertheirownshows.By makingitfreeitwouldbeamajorcompetitiontoYouTubeandlimitpiracy(ChmielewskiandJames, 2009).NBCandNewsCorp.backedthenewsitewith$100millioninfundingfromProvidenceEquity Partners.Thesitescrewquicklystartedworkingontheinterface.HuluwasbasedinWestHollywood. However,likemostofthecomputersitrunson,thesitewasmadeinChina.ThesitesCTOEricFeng hiredsevenyoungdeveloperswhospokemostlyMandarin.FengwasinHollywoodbuthiscrewstayed inBeijingandtogethertheybuiltHulu(Rose,2008). InMarch2008,Huluofficiallyopenedforbusinesswithmorethan250TVshowsand100 moviesfromFox,NBCUniversal,theircablechannelsandnewpartnerslikeLionsgateandtheTVarm ofWarnerBros.Thesitealsomadeitveryeasyforuserstofindshowsthatwerenotonthesite,making itaonestopshopforallTVcontent.Twomonthslater,HuluedgedaheadofESPN.comtobecomeone ofComScore'stop10U.S.videosites.ItsgrowingpopularityledViacomtoofferrecentepisodesof ComedyCentral'smostpopularprograms.Recently,WaltDisneyCo.,whichhadbeenreluctanttojoin theproject,becameanequityownerofHulu.WithDisneysABCshowslikeDesperateHousewivesand Lost,Hulubecamestrongeranditsfuturemoresustainable. Hulussuccesscanbesummarizedinthreewords:freepremiumcontent.Acloserlookatthe siterevealswhatthatmeans: TVwheneveryouchooseOnlineviewingallowsuserstowatchTVontheirownschedule, catchuponmissedshowsandfocusontheirfavoriteprograms.Asaresult,about20%ofconsumerssay theirtraditionalTVviewinghasdeclined.(TNS,2009).

TheinterfaceHuluhasdoneanexceptionaljobinimprovingtheonlineviewingexperience. Thesiteiseasytonavigateandsearch,thevideosstreamquicklyandtheusercanseethebuffering progress.Huluaddedoptionslikepopupscreen,lowerlightsandhigherresolutionuptoHDall designedforearlyadapterswhoconnectthecomputertotheirTV. ContentTodayHuluisaleadingaggregator.Ithasnearly150contentproviders:majorstudios, cablenetworksandevenpotentialcompetitorsfromotherTVstudios.Thesiteoffersmanyshows: drama,comedy,sportsandtalkshows.However,someofthecontentisavailableforalimitedtime.For mostpopularshows,Huluoffersjustthelast5episodes. ThesedaysthesiteismakingitsfirststepsinthemusicbusinessandadealwithmusiclabelEMI wassignedinNovember(Stone,2009). CommercialsInthespectrumbetweenTV(manycommercialbreakswithmanyads)andthe Internet(fewerbreaksandonlyonead)Huluhadclearlychosenthelatter.HulusCEOJason Kilar explained: Webelieveinthe`lessismore`approachwhenitcomestoouradvertisingservice.Inthis,we strivetodeliverauserenvironmentthatisdefinedbyitssimplicityandsparseaesthetic.Whenever askedabouttheissueofcommercials,Hulusexecssaidtheywanttogobacktotelevisionsgoldenage whenhalfhourprogramscarriedfourminutesofadvertising(asopposedtoeightminutestoday).That approachmadeHuluanattractiveplacetowatchtelevision(Dubner,2009). PriceThisisthemostimportantpoint.Huluofferspremiumexperiencethatissometime betterthanTVanditdoesnotchargeforit.TherecouldnothavebeenaneasierwaytoestablishHulu asamajoralternativetotelevision.WhilemanyofHulususersdohavecableorsatellite,theystilluse Hulubecausetheydonotpayforit. Hulussuccessisdrivenbytheseparameters.However,theyalsothreatenitsexistence.Hulu currentlystreamabout3.1%ofallvideosintheU.S.(aboutatenthofYouTube).Thesitesadstrategy

madeitimpossibleforitsrevenuegeneratedtoabovetheliabilitythatitincurs.Earlythisyear,analyst ArshAmelestimatedthatbytheendof2009Huluwouldgenerate$180millioninadvertisingandmatch orsurpassYouTube.Sincethenhehasloweredhispredicationto$120million(stilla95%increasefrom theyearbefore)afterhelearnedthatHuluonlysoldabout60%ofitsadvertisinginventory."Whatwe haveseenisrapidgrowthinconsumption,buttheadvertisingisnotkeepingup,"Amelsaid.ButHulu maysurpriseeverybodyafterall.AftertheadditionofABCsshows,HulustrafficinOctoberincreased by49%andthesitemanagedtosellmostofitsremainingadvertisement.CEOJasonKilarconfirmed thatHuluisnearingselloutinthefourthquarter(Leartmonth,2009). Itisstillearlytosayhowmuchthesitewillmakein2009,butregardlessoftheexactnumberit wouldbemuchlessthanwhattheTVbroadcastersareusedto.Hulusadvertisingstrategy,whichfueled thespeculationsthatthesiteisnotprofitable,couldnowbeusedtosayitdoesnotgainenough revenue.Consideringthemassivegrowth,thesitesmanagersmighthavetogiveupthelessismore approachandstartboostadloads.Otherwisethefreepremiummodelmaynotlastforlong. ThesecondproblemisgrowingtensionsinsidetheHulufamilyabouttheadsellingsystem.The wayHulucurrentlyworksisthatthesitessalesteamcannotsellspecificshowsornetworks.Instead theyoffervideospotsbasedongenreoraudiencedemos.Thisledtoconcernsbysomeofthepartners thatHulussalesstaff,attimes,deliberatelysellsagainstitsnetworkbrethren,promisinglowerCPMs thatcanendupdilutingthevalueoftheentirecategory(Shields,2009).Sofartheseissueswerekept, forthemostpart,outofthemediabutthefacttheyexistillustrateshowsensitivethispartnershipis. ThethirdandgreatestthreattoHuluinitsexistingmodelistherisingpressurefromcableand satellitecompaniesthatfearnewdevicessuchaswebenabledBlurayplayersandInternetSetTop BoxesasBoxeeandRoku.ThesedevicesstreamvideofromthewebdirectlytoTVandleveltheplaying fieldforthewebtotrulycompetewithtraditionalTVproviders.Otherthanarelativelysmallfeeto serviceslikeNetflix,manysiteslikeHuluandYouTubeoffercontentforfreeandcreateadilemmato

consumerswhonowpayover$100forhundredsofchannelstheydonotwatch.Thismaybeextremely detrimentaltocompaniessuchasTimeWarnerandDirectTV.Judgingfrompastexperience,Hulus ownersdonotwantto(orcant)beinconflictwiththecompaniesthatmakemanyoftheirproductions possiblebypayingthecablenetworks.Thatwasdemonstratedtwiceinthepastyear.FirstinJanuary whenHulu,attherequestofFX,limitedtheaccesstotheshowItsAlwaysSunnyinPhiladelphiaafterit becameahitonthesite(andonlylaterontelevision).Shortlyafterthat,Hulumadeitselfunavailableon Boxee.Kilarapologizedtouserswritingourcontentprovidersrequestedthatweturnoffaccesstoour contentviatheBoxeeproductandwearerespectingtheirwishes. Soon,onceHuluwillbeprofitable,itsownerswillfaceadilemma:howtokeepthatrevenue streamwithoutthreateningoneofHollywoodsbiggestprofitcenterscablechannels?Todayitseems liketheheadsofNBCandFoxareleaningtowardssomekindofapaidmodel.Bothcompaniesarefaced withgrowingpressurebyitsowners:NewsCorp.CEORupertMurdochwhocontrolsFoxisleadinga processthatallthegroupsmediacompanieswillstarttochargeforcontent;NBCisabouttobe acquiredbyComcast,whichisalsotheownerofTimeWarnerCable.Furthermore,Comcasthasbeen developingacompetitortoHulubasedontheideaofTVEverywhere.Hulusownersarealso consideringthisapproachthatisbasedonauthentication.Thesitewouldrequireuserstoprovethey arepayTVsubscribersbeforetheycanwatchcurrentshowsonHulu.Thepartnersarealsodiscussing settingupatiersystemforonlinevideo,withsomeshowsavailableforfreesuchasprimetimenetwork offerings,whileotherswouldbereservedforexistingcableTVsubscribers."Everyoneiscoalescing aroundacentralareaauthentication,"saidTonyVinciquerra,chiefofFox'stelevisionnetworks."Ifwe canmovethisintherightdirection,itwillbesomethingrelativelyseamlesstotheconsumer,andgood forbusinessoverall"(ChmielewskiandJames,2009).

ButthereisalsoanotherscenarioforthefutureofHulu.Itcouldbecomeamuchbiggersiteand

thereforemuchmoreprofitable.Thatcouldonlyhappenifthesitemakesitselfaccessibletoviewers outsideoftheUnitedStates.Huluhasbeencontemplatingthisoptionforquitesometime,targeting EuropesbiggestTVmarketsintheUK,GermanyandFrance,whichtogetherwithJapanaccountfor 60%80%oftheonlinevideomarket.ThismayestablishHuluasoneofthemostpopularsitesinthe worldbutitalsomaychangethetraditional(andprofitable)waysinwhichAmericantelevisionisbeing distributedoverseas.

GoingGlobalPossibleMarketsforHulu HulusnaturalpathofgrowthcouldstartinWesternEurope,CanadaandAustraliawheremost peopleshareacommonculturaldominatorwiththeU.S.audience.Thebroadbandusersinthose countriesarethesamepeoplewhowatchAmericanfilmandtelevision.In2006,10outofthe10top grossingmoviesinAustraliaandCanadawereAmerican.InSpain,UKandGermanyitwas87(UNESCO, 2009).GiventhesizeofthesecountriestheyareidealmarketsforHulu.First,Hulushouldlookatthe broadbandpenetration,onlinevideoconsumptionandtheaudienceswillingnesstopayforpremium services.

Country Broadband Users %Internet Penetration % Watching StreamedTV Programs %Consumers Interestedin Streaming Premium VideosFroma Connected STB? 49% n/a 64% Germany 54,229,325 29,093,984 227,719,000 65.9% 71.8% 74.1% 1722 (AllofWestern Europe) Yes HaveaTV Premium VideoService SimilartoHulu

Canada Australia UK

28,000,000 16,926,015 46,683,900

84.3% 79.6% 76.4%

22 n/a 29

Yes No Yes

Spain

39

No

USA

20

49%

Yes

Sources:ITU,ParksAssociates MOREINFULLDOCUMENT

 2020TVThreeScenarios 3yearsafteritcametobeingHulusfutureisunclear.Thegrowingpressurefromcableand satellitecompanies,theexpectedpurchaseofNBCbyComcast,therecentremarksbyNewCorp.s RupertMurdochregardingchargingforcontentandtheoverallfeelingintheindustrythatthe traditionaltelevisionmodelishealthyandstrongallareworryingsignsforthosewhoenjoyHulutoday anddonotwanttopayforittomorrow.Inallofthis,thereareHulusplanstoexpandinternationally. WhileHuluspaidoptionanditsexpansiondonotseemrelated,onecancertainlyinfluencetheother. Thefutureisalwayshardtopredictandinthisdigitalageitisquiteimpossible.Withthatin mind,herearethreedifferentscenariosforthenextchapterinHulusstorythattakeintoaccountall themainplayersandtheirdifferentagendas. DirectDistributionHulucoulddecidetogoaheadasplanned.Encouragedbythegrowing trafficintheU.S.,HulusownerswouldtakethebattleagainstYouTubetothenextleveloverseas.In suchacase,theAmericanbroadcasterswilltreatonlinestreamingasatotallydifferentdistribution mode.TheywouldonlydosoiftheyfeelthatoverseasmarketshavemuchmorepotentialthantheU.S. marketandwiththedeclineofDVDsales,thismaybeanalternativerevenuestream.Hulusowners wouldrealizethatthefuturetelevisionisonline.Theywouldthenstarttoprepareforthefutureinthe spiritoftwomen:Mooreslawwhichstatesthatthereisnowayofslowingdowntechnologyand Darwinsbasicidea:evolveordie.Intheyear2020cableandsatellitecompanieswillbehistory.Every viewercouldchoosefrommillionsofcontentsourcesandpayitdirectly:fromlocalTVchannelsto serviceslikeNetflix,AmazonandHulu.HulucouldnolongersayitisjustcatchupTVbecausethey wouldbecompetingwiththelocalchannels.Hulucouldmakeavailableitsentirelibraryandnotjustthe fiveepisodes,asithasbeendoing.Theycouldofferthreetofiveepisodesforfreeandthentherest couldbebasedonperepisodefee.Amonthlysubscriptionshouldbebetween$15$30(bothintheU.S. andaroundtheworld),inordertoefficientlycompetewithNetflixandhaveasustainablesite.However,

ifHulucontinueadsalestobeitsprimarysourceofrevenue,itisunlikelythattheygenerateaprofitof the$4billionthattheglobaltelevisionnetworkproducesinAmericanstudios.Thatsamajordeficiency. ThecollapseofthecurrentmarketstructurewouldlikelytoresultinlessTVproduction,atleastinthe firstfewyears,untilHulubecomesmoreprofitable.Thiscouldlikelyaffectthefilmindustry.Ifthat happensHollywoodwouldbemuchweaker,productionvaluewouldgodownandlocalcompetitors mightbecomemoredominant.InthecurrenteconomyandthefastgrowthinIndia,ChinaandBrazil thereispotentialforthistohappenregardlessofHulu.Takingtheinitiativeandcompetingagainstlocal companiescouldverywellaccelerateit. TVEverywherethisscenarioismorelikelyincasethatfollowingtheNBCdeal,Comcast togetherwithitsotherpartnersinHuluwouldstartchargingformostoftheservice(givingverylimited contentforfree).Thesitewillchargeonetimefeesforeachepisode,whichwillexpireafter24hours likeonAmazonandVODservices.Therewouldbenosubscriptionoption.Existingcableandsatellite costumerswillenjoytheTVEverywheremodel:theywouldnotpayextraandgettheirfavoriteshows onTV,onlineandontheircellphone. TheU.S.modelwouldthenbeappliedaroundtheworldtogetherwiththelocalcableand satelliteprovidersineachcountry.AswiththeU.S.market,Huluwouldmakesuretokeepitsonetime streampriceatacertainlevelofpricethatwouldkeepcostumersinthehandsofcableandsatellite companies. Insuchacase,piracywillcontinuetobeaproblemanditwilllikelytogrowespeciallyintheU.S. Thismaymaintainthestatusquointheglobaltelevisionmarketforthenext310years.Afterthat, whenwebenabledplayerswillbecomemorepopularandbroadbandwillbecomefaster,pirate downloadserviceswouldbeabletooffereasiersolutionsforitscostumers.Itwouldbeillegal,butmuch cheaper(orevenfree).Atthesametime,thelowproductioncostsmayencourageyoungprofessionals whoarentabletogetajobintheindustry(whichshrunksubstantiallyafterthecurrenteconomiccrisis)

toproducelowcostshows.IfthoseshowsarecarriedbyserviceslikeAmazon,NetflixorYouTube directlytothelivingroom,popularitycouldbegreaterthanthefirstgenerationofwebisodeswhich wereonly25minuteslong.SuchaprocesswouldeventuallyhurtHollywoodsincome. CombinedModelInthethirdscenarioHulupartnerslookatthefutureoftheTVmarketand theymaketwostrategicdecisions:tokeepHuluasavibrantwebsitebuttodoeverythingintheirpower tomakethetransitiontothenewmodel(webTV)asslowaspossible.First,Theadsperepisodeswould increasesubstantiallytomakeHuluabitlessattractiveandmuchmorelucrative.Thesitewouldonly offerthe2lastepisodesfromeachshowforfree.Simultaneously,anewsubscriptionmodelpayby channelwouldbeintroduced.Forexample,youcouldchoosetheABCpackage(Lost,V,Desperate Housewives)ortheFoxpackage(TheSimpsons,24,FamilyGuy).Thesepackageswouldalsoincludepast seasonsfromthebroadcasterslibrary.Thatcontentwouldincludefewercommercials.An authenticationoptionwouldbeofferedtocableandsatellitecostumerssotheycouldenjoytheTV everywheremodel.Inforeigncountries,themodelwouldbesimilar. Huluwouldbepricedinawaythatwouldencouragecustomerstostaywiththeircable companies.ThefreesitewouldonlybeforcatchupandthesubscriptionoptionwouldservemainlyTV connoisseurswhowanttowatchaspecificshowthattheircableorsatellitecompanymaynotcarry. ThatwouldinsurethatHuluwouldstaypopular(becauseofitsfreecontent)butwouldposelessofa threattocableandsatellite(itwouldhavemorecommercialsandlesscontent).Inthisscenariothe existingcarrierswouldbeabletooffertheircostumersbetterservicesusingHuluwhilethesitemakesa nameforitselfandgeneratesrevenuefromoldseasons.Intheshortrunitwillbelesspopularamong nonpayingTVcostumers.Eventually,TVwillbecomewebbasedandcableandsatellitecompanieswill losecustomers.Then,Huluwillbeinagoodpositiontobecomeanindependentdistributionarmforthe U.S.studiosthatcouldstartchargingpeopledirectly(Blodget,2009).

 Direct Distribution TV Everywhere

Price Monthly subscription $15$30 Satelliteor cableprice

Shows Available Full Library

Combined Model

Pricedby specific channels $10$15, Freefor Satelliteor cableprice

Free Ads Content 5last 8 episodes mins/ hour Whatever Very 4 airson Limited mins/ theTV hour service Whatever 2last Free airson episodes 8 theTV mins/ service hour, andfull Paid channels 4 with mins/ previous hour seasons

Local When Broadcasters Profitable Competition Farfuture

Probability Low

Partners

Immediately High

Partners

Nearfuture

Low

Inconclusion,Hulusfutureisamysterytomostpeopleandmaybeeventoitsowners.Itisclear thatHulushouldexpandtoothermarketsinordertoreachmorepeopleandtoaddmorecontent.That istheonlywayforittobecomethemostpopularvideositeintheworld.Suchamovelookspromising butitholdsmanyquestions.Someofthemwillbeansweredoncethepartnerswilldecidehowto monetizetheexistingU.Sservice.Huluinternationalwillbeborntofitthatmodel. Whatevertheydecide,thefutureofthetelevisionindustryisnotsolelyintheirhands.They mightstillbeattheforefrontofdeterminingtheoverallmarket,butitisimperativethattheynot discounttheenvironmentalfactorsofelectronicsengineers,computergeeksandthepublicdemand aroundtheworld. Note:Thisisanabbreviatedversion.ForthecompletepaperpleasecontactIddoShaiatshai@usc.edu