Hulu: Here we go again

You may recall that in June of last year, Hulu put itself up for sale, in part because of strategic disagreements between joint venture partners Disney and News Corp. (NBCUniversal, the third partner in Hulu, is prevented from taking an active management role as part of the terms of Comcast's deal to acquire NBCUniversal.) In October, Hulu's owners cancelled the sale because of "disappointingly low offers." That didn't solve the strategic differences between the partners, however. Today, All Things Digital reported that Guggenheim Partners, Yahoo and Amazon, possibly among others, are considering making offers to acquire Hulu--even though the partners haven't announced that it's for sale. The smell of blood in the water is just too strong.

I'll keep this brief: The reason that the offers for Hulu were disappointingly low last year was that the partners were unwilling to offer Hulu's buyers long-term access to their content. Exactly the same issue will arise if Hulu is put up for sale again. Hulu is effectively worthless without its content. With the exception of Guggenheim Partners, all of the potential bidders already have their own video infrastructure, players and apps. There was a time when Hulu's player was head and shoulders above anyone else's, but that's simply not the case anymore.

The purchase price of Hulu will have to include three to five years' of the partners' content, along with assurances that their content will continue to be available after that time at a price that Hulu's buyer can afford. If the content isn't there, any potential deal will fall apart.

This could turn into the Mergers & Acquisitions equivalent of Lucy pulling the football away from Charlie Brown at the last minute every year. Fox Sports could broadcast "Who Wants To Buy Hulu?"--just put Cleatus the robot into an Armani pinstripe suit, give the play-by-play to Fox Business, and you're all set. For now, all we can do is sit back and watch the action.

Who buys Hulu? Most likely, no one

Silicon Alley Insider is reporting that, now that Hulu's auction is completed, the company's owners have some hard decisions to make. Comcast, News Corporation, Disney and Providence Equity Partners were looking for well north of $2 billion for Hulu, but they didn't get it. More accurately, they got it, but not in the way they wanted.

(Update, October 13, 2011: AllThingsD has reported that Hulu's owners have called off the company's sale and will continue to manage it themselves.)

The top bidder for Hulu was Dish Network, which bid around $1.9 billion dollars, more than either Yahoo or Amazon. Google apparently offered far more--around $4 billion--but the company wanted guaranteed access to Hulu's owners' content for much longer than the two to three years that had been offered. Without that kind of concession, the Hulu deal is really a two to three-year non-exclusive license to its content, not an "acquisition" in any real sense.

That's why Dish, Yahoo and Amazon weren't willing to spend even $2 billion for the company. Hulu's partners could more than double Dish's bid overnight by accepting Google's terms, but I don't think they will. They believe that their content, and the investment they've made in the Hulu platform, is worth more than $1.9 billion, and they're not willing to extend longer terms, given the rate of change in the online content market. Therefore, it's most likely that they'll cancel the auction and keep Hulu themselves.

Google (plus Microsoft, Yahoo, Wendy's, Pep Boys, etc.) are in talks to buy Hulu

The Los Angeles Times reported today that Google is in preliminary talks to buy Hulu. More precisely, as the newspaper reported in the very next sentence, Hulu's investment advisors have arranged to make presentations to Google, Microsoft and Yahoo, and probably any other company that has money in the bank. Whether Google is seriously interested, or is simply "kicking the tires", remains to be seen.

Hulu has a very nice technical platform and semi-exclusive distribution rights from its existing owners (Comcast, News Corporation and Disney), but it doesn't own any content. It has no permanent exclusive rights to anything, but it recently renewed its distribution rights with News Corp. and Disney. Comcast, which acquired part of Hulu when it acquired majority control of NBCUniversal, is prohibited by the terms of that acquisition from exercising any control over Hulu, so it's required to license its content to Hulu on the same terms and conditions as its other partners.

For Hulu to have any real value to Google or anyone else, the buyer will have to get Hulu's existing partners to grant semi-exclusive rights for much longer than three years. Most buyers would settle for a ten-year deal, but if Hulu's existing owners could take back the rights after just a few years, the company would have almost no value to an unaffiliated buyer.

If Hulu's current owners are willing to grant long-term distribution rights, an acquisition could happen fairly quickly. However, if, as reported elsewhere, Hulu's current owners and content partners are demanding that the company's distribution rights be renegotiated after the acquisition, it makes little sense for anyone to bid.

New media has to break its addiction to old media

People have been trying to turn the Internet into a new medium that can compete on an equal footing with television, radio, newspapers, etc. since the Netscape days of the mid-1990s. So, fifteen years on, what have we accomplished?

• Netflix has more subscribers than Comcast, but it lives or dies based on which television networks, cable networks and movie studios are willing to do business with it, what shows they're willing to supply, when they're willing to supply them and at what cost.
• Hulu has much the same problem, even though it's owned by three of the four major U.S. television networks.
• YouTube is trying to cut distribution deals with many of the same television networks, cable networks and movie studios as Netflix and Hulu.
• Pundits spend an inordinate amount of time discussing how much The New York Times and The Wall Street Journal are charging for access to their newspapers online, whether paywalls work, how to circumvent paywalls, etc.
• Hearst, Condé Nast and Time Warner will offer their eMagazines on the iPad if they can only get a business deal worked out with Apple. Meanwhile, News Corporation's "The Daily" is on the iPad and is losing money.
• Clear Channel is building its own clone of the Pandora streaming music service and plans to launch it this summer.

The "new media" has largely become a repackaging of old media for Internet delivery: Old wine in new bottles. Almost all of the content on the Internet that's economically viable comes from old media companies.

In order for content to be economically viable, it has to have two key attributes:

1. It has to attract a large audience, and
2. It has to be repeatable--audiences have to be willing to come back day after day, week after week

Content that repeatably attracts large audiences can be sold to national advertisers, which generates the revenues necessary to create more content and make the business attractive to investors. Viral videos, like those found on YouTube, meet the first criteria: A popular viral video can get millions of views. The problem is that they're not repeatable. The vast majority of viral videos are "one-hit wonders". Google has found that it's possible, but very difficult, to sell advertising against viral videos. Many advertisers don't want their ads to run alongside "objectionable" content, yet it's that same objectionable content that makes many videos go viral.

On the other hand, webcast networks like TWiT and Revision3 get audiences that come back week after week for original shows, but the audiences aren't big enough to generate a lot of advertising revenue. They make enough money to make a nice living for a few people, but not enough to attract investors.

That's why new media companies keep turning to old media companies to get their content. The problem is that old media companies don't want to risk their existing revenue streams, even if those revenue streams are already being eroded. If you're an Internet company and your business plan depends on convincing old media companies to license their content to you, you're starting with two strikes against you. Even worse, your biggest suppliers are in a position to become your biggest competitors, if they aren't already competing against you.

New media companies have to break their dependence on old media, and the only way to do that is to produce original content in new forms that old media companies can't, or won't, duplicate.

Hulu Plus begins testing, and it's an OMG experience

You may remember when the company that became Hulu was first announced by NBC Universal and News Corporation. Critics derided the company and said that two non-tech media firms could never build a compelling online video service. Google called it "ClownCo." But when Hulu actually began beta testing, virtually all of the critics changed their tune overnight. It was head and shoulders above any online video service available at the time.

Rumors have been flying for months that Hulu would introduce a paid subscription service, and yesterday, they did just that, announcing Hulu Plus. The new service will be priced at $9.99 per month, and it provides full access to all the current year's episodes of shows from ABC, Fox and NBC, as well as complete libraries of episodes of some series. One of the biggest complaints that users have had about Hulu has been spotty availability of episodes--some series would only have three or four episodes from the current season available, others would only have a single episode available for a limited time, and so on. By and large, Hulu Plus appears to eliminate these problems.

I've had a chance to try out the free preview of Hulu Plus on both an iPad and iPhone 4 (it's available from the iTunes App Store,) and like the original Hulu, it's an OMG experience. I tested it on a WiFi network, so I can't speak to its quality when viewed using AT&T's 3G network, but the video quality is superb and the user interface is well-designed.

Some reviewers are already calling it a cable or TV Everywhere killer, but Jason Killar, Hulu's CEO, is trying to nip those ideas in the bud. TV Everywhere has a big advantage in that it carries content not only from the broadcast networks but from the major cable networks as well. Hulu may well extend its array of content providers, but the company has to be careful not to over-expand and dilute the revenue shares that it has promised to its investors and primary content providers. Similarly, Hulu Plus is strictly an on-demand service; if you want to watch a live sports event, or see a series episode on the day and date that it's originally broadcast, you'll need a cable, satellite or IPTV service provider.

In any event, I wasn't particularly excited about Hulu Plus until I had a chance to try it out. I'm very likely to be parting with $9.99/month once the service becomes available.

$9.99/Month Hulu Plus service being promoted on Samsung TVs

A Bloomberg reporter who purchased a Samsung Internet-enabled HDTV last Friday got a special bonus: A promotion for Hulu Plus, a new HD subscription service for $9.99/month that will have “More episodes, more seasons, more shows,” according to an on-screen offer. A trial offer of 21 free video clips couldn't be accessed, and the offer was erased when firmware in the HDTV was updated on June 26th. Hulu refused to comment. Whoops!

What Hulu means when it says "We apologize for any inconvenience"

This morning at DEMO Spring, Hillcrest Labs released an interesting video browser called Kylo. Kylo includes links to many Internet video sites, including Hulu. As of yesterday, Hulu worked perfectly in Kylo, but when Hillcrest Labs tried to demonstrate it today, Hulu stopped working, in a very peculiar way. The Hulu site loaded and displayed, it could be navigated, but whenever they tried to actually play a video, they got the following message:

"Unfortunately, this video is not available on your platform. We apologize for any inconvenience."

Apparently, Hulu has confirmed that it deliberately blocked Kylo. It took them all of a few hours to decide that Kylo was a terrible threat that had to be neutralized. Perhaps Kylo was stealing Hulu's content, just like any despicable web browser like Internet Explorer or Firefox. In any event, Hulu demonstrated that when it says "We apologize for any inconvenience", what it really means is "F-ck y-u".

The Content Paradox

The "old media" Goliaths like News Corporation, Viacom, CBS, Disney, NBC Universal and Time Warner are often said to be doomed to extinction by the Internet, yet it's content produced and owned by those same companies that's the most popular on the Internet. Those of us in the U.S. may complain about Hulu's limited selection of and time limits on access to content, yet Hulu is envied by content consumers around the world. YouTube would never have gotten to where it is today without all the "old media" content that was (and still is) uploaded for free consumption. If YouTube had depended totally on user-generated content, it never would have reached critical mass.

We may not like the restrictions and limitations that the old media companies put on usage of their content, but they own it, and they have the right (subject to "first sale" rules and other restrictions in the U.S.) to control how it's sold and distributed.

No Internet "new media" companies have content that's in the same popularity class as the old media companies. Producer/Distributors such as Revision3 and TWiT have built very solid businesses. TWiT, Leo Laporte's company, is attracting bigger audiences than TechTV ever did, and judging from Laporte's own comments, it's making a nice profit. However, the audience for all of TWiT's programming is tiny compared to any of the old media sites. Thus the paradox: The Internet relies on old media to drive traffic to new media sites, but the vast majority of original new media properties can't find big enough audiences to sustain themselves financially.

The Internet has lowered the barriers to entry for content producers and distributors down to almost nothing, but making the content available and getting people to read or watch it are two very different things. Building a big enough audience that your content or site becomes attractive to advertisers is much more difficult, and getting people to pay to access the content is even yet more difficult. The old media companies have at least solved the problem of getting people to watch or read their content, but the new media companies all have to start from scratch to build an audience.

Old media isn't having that much easier a time of it on the Internet--just today, for example, Hulu announced that Viacom's Comedy Central is withdrawing its programming at midnight on March 10th, thus removing some of the most topical and popular content from the site. Hulu is widely believed to be unprofitable, and rumors have been flying for months that its parent companies (News Corporation, NBC Universal, Disney and Providence Equity Partners) have been pushing it to adopt a pay model in addition to its existing advertising-supported model. So, simply bringing old media content to the Internet isn't a formula for financial success.

This argument is going to continue until someone releases a breakout hit on the Internet, figures out how to make money with it and builds a profitable, growing media business. Until that happens, the Internet will remain primarily a distribution channel for old media, rather than a viable channel for launching new media.

NBC Universal: We make it up as we go along

In Congressional hearings today, NBC Universal and Comcast answered questions about how their merger would affect the supply of programming to competitive outlets, among other topics. During questions, NBC Universal Chairman Jeff Zucker was asked about Hulu's decision to block the ability of Boxee to display its programs. It's important to remember that at the time of the dustup between the two companies, Hulu was owned by NBC Universal, News Corporation and Providence Equity Partners (Disney subsequently invested in Hulu.) Therefore, any decisions that were made weren't Zucker's alone. However, responding to direct questioning, he said that the decision to block Boxee was made by Hulu's management because Boxee was "... illegally taking the content that was on Hulu without any business deal."

The problem with this statement is that it's wrong on both counts. First, Hulu's management has admitted that it was pressured by its joint venture owners, including NBC Universal, to block Boxee. Second, at the time that Boxee was displaying Hulu's content, it was using the same facilities that Hulu made freely available to anyone. Boxee wasn't stripping out any advertising in Hulu's streams or interfering with the streams in any way. Hulu specifically targeted Boxee in denying it service. Then, when Boxee attempted an end-around by using Hulu's freely-available RSS feeds, Hulu blocked them as well.

I wrote earlier about Zucker's cowardice in how he blamed Jeff Gaspin for the disastrous late night "musical chairs" plan at NBC. Now, Zucker is hiding behind Hulu's management (that acted at Zucker's direction) and is accusing Boxee of illegal behavior that never occurred. Boxee has responded to Zucker's charges and has linked to a video of the Congressional Q & A. I've given up on trying to comprehend how this man has managed to keep his job. All I can say is that Jack Welch is spinning in his grave, and he isn't even dead yet.

The keys to media aggregation success

Not too long ago, I wrote about a new wave of disintermediation, but I've realized that consumers don't inherently dislike middlemen; in fact, they appreciate them if they aggregate content. For an aggregator to be successful, however, it has to:

1. Have a comprehensive selection of content
2. Be easy to use
3. Its prices (if it sells goods and services) don't have to be the lowest, but they must be reasonable

The first key is to have a comprehensive selection of content. Record companies learned years ago that consumers won't shop in stores where they can only get one or two companies' music. They want a big selection. That was why Apple didn't launch its iTunes Store until it had signed distribution deals with all of the biggest record companies.

The second key is ease of use. There were plenty of online music sites before iTunes, but they were hard to use and imposed draconian DRM schemes on users. The motion picture companies had the same problems with their early attempts at making movies available over the Internet.

The final key is reasonable pricing. Early on, record companies tried to demand more money for digital downloads than they did for CDs, and they tried to force consumers to purchase entire albums rather than single tracks. Apple sold them on the idea of a fixed price per track and discounted prices for entire albums.  Now, Amazon is rewriting the pricing model for eBooks by selling almost all its titles for $9.99 or less.

Apple was the first company to get all three keys right, with the iTunes Store. Tight integration of iPods and iTunes helped the company get the ease-of-use part right. Amazon learned from Apple and implemented a similar model with the Kindle, which also gets all three keys right but is somewhat vulnerable due to the technical and ease-of-use limitations of the Kindle itself.

On the video/movies side, YouTube leads by far in the free content space. Hulu has gotten the ease-of-use key right and has the biggest selection of legitimate content from the US television networks, but many users are frustrated by convoluted policies that make episodes available for only a limited amount of time or restrict the number of episodes available. Netflix and Amazon are both working to make more movies and television shows available for immediate viewing, but they're not there yet, and both their ease-of-use and pricing models are "works in progress".

TiVo and Roku are both positioning themselves as "super-aggregators", in that they already offer access to both Netflix's and Amazon's libraries, plus content from an expanding number of producers and aggregators. TiVo got ease-of-use right a long time ago, but its Achilles' heel is its monthly service charge. Roku's user interface is less mature, but it doesn't charge a monthly fee to use its set-top boxes. However, its weakness is that its set-top boxes are only sold direct, not through outlets such as Best Buy and Wal-Mart. Without high-volume outlets, Roku will always be playing catch-up with its better-distributed competitors.

In music, Apple has locked up a dominant position, and Amazon is well on its way to doing the same thing in eBooks. In video, television and movies, however, the only truly dominant player, YouTube, is free. It's far from certain that YouTube can maintain its dominance once it starts to charge for access to some content, which is widely rumored to occur in 2010. For these media, the field is still wide open.

The Atomization of Media

Over the last fifteen years, I've worked on Internet software, streaming media, home video, telecommunications, and most recently, eBooks. Through that experience, it's become clear that the very nature of what constitutes media is changing. Singles have replaced albums as the primary way for people to purchase music. The six-minute short video, whether on YouTube or Hulu, is increasingly replacing the 30- or 60-minute television show (and those shows are increasingly looking like a collection of short videos). Newspapers are being replaced by their web equivalents, and by news aggregators like Google and Yahoo, enabling readers to go right to the topics and stories that they're interested in. 1Cast, a video aggregator that just launched, is doing exactly the same thing for television news.

I call this division of what used to be monolithic media "packages" into smaller, individually-searchable and selectable chunks, atomization. All media are subject to atomization in one form or another. eBooks, my current area of focus, are especially vulnerable...but I think that it's a good thing. The truth is that there are a lot of different book industries, segmented by categories, subjects and target age groups. Reference books and textbooks are particularly ripe for atomization, as are computer and business books, and other types of instructional works. These books are rarely read front-to-back; readers "dive in" at different points to get specific pieces of information. Users of these types of books rely on their indices and tables of contents in order to find what they're looking for. These readers would love to have a robust search engine on top of a collection of books, in order to find the information they need quickly. Some services are providing just such a search engine; after all, that's the idea behind Google Books.

Publishers, on the other hand, sell books, not topics or paragraphs. They're resistant to the idea of atomization--after all, how do you price a topic? Their contracts with writers and third-party content suppliers (image libraries, illustrators, etc.) are written on the basis of revenues from book sales, not sales of chunks of books. Nevertheless, this is the direction that publishing is going in. Books will be "exploded" into bits and pieces, aggregated with other titles, augmented with videos, audio and animation, stored in databases and indexed by search engines. The concept of individual books may eventually go away, to be replaced with databases from publishers focused on a single subject area or category, or from aggregators that combine books from multiple publishers into a single database.

There are, of course, some categories that probably won't be atomized in this way. Fiction and narrative non-fiction are intended to be read front to back, beginning to end. Some publishers and distributors are experimenting with selling these titles on a serialized, per-chapter basis, much like the novel serializations in newspapers of the 1800s, but that's probably as far as atomization can go with these kinds of works.

The point is that we need to stop looking at media forms as monolithic and start asking two questions:  "How can we break this into small, usable chunks?" and "How can we best monetize those chunks?".

Hulu Part 2: At war with everybody

Paul Yanez, a talented developer who had previously written a clone of Joost as a Flash application, recently released a program called MyMediaPlayer to provide a desktop interface for Hulu. This app uses Hulu's published, public specifications for accessing and displaying videos. It uses the Hulu player, doesn't strip out any advertising, doesn't introduce any advertising of its own and is free. Nevertheless, Hulu has repeatedly come up with ways to block MyMediaPlayer, and it appears that after five rounds of reworking the application in order to get it working again, Mr. Yanez has given up.

In the same vein, Boxee was able to reestablish support for Hulu by connecting to that company's RSS feeds, the same feeds used by Internet Explorer, Firefox and Safari. Nevertheless, in just a few hours, Hulu blocked Boxee's access to its RSS feeds. As I write this, Boxee claims that it has worked around Hulu's changes and can again access the RSS feeds. Perhaps the best thing that Boxee could do is to change its browser user agent to look like Internet Explorer, so that Hulu would have to effectively shut down the RSS feed to block Boxee.

I don't know why Hulu is doing this, but it's only making itself look idiotic. All of its blocks will eventually be worked around, and its content isn't so precious that it's only available in one place. As I've written before, its actions are encouraging, rather than discouraging, piracy. Every time I see one of its commercials, I see a company that doesn't get it trying to act cool. Perhaps the people who called the company "ClownCo" weren't wrong, just premature.

Hulu--get successful, shoot self in foot

It's a common story--start-up that initially isn't taken seriously by either its competitors or the industry in general, delivers a great product and turns the industry's perception around. In order to get distribution, the start-up cuts deals with some competitors, and makes it easy for others to redistribute its products. Once the start-up gets successful, however, those partners start to look more like competitors, and it starts pulling back on deals.

That's exactly what's happening with Hulu, the web video start-up that was derisively labeled "ClownCo" by executives at Google, only to become, in some ways at least, a more profitable and popular destination than Google's YouTube. Last week, however, Hulu started pulling the plug on distribution. The first was to take Hulu's content off of TV.com, a site that CBS purchased when it acquired CNET last year. The second was to take Hulu off of Boxee, an increasingly popular web video browser for Linux, OS X, AppleTV and Windows that turns PCs into set-top boxes. Hulu's distribution deal with TV.com was contractual, while there was no formal business arrangement between Hulu and Boxee.

In the TV.com case, Hulu merely stated that it had the contractual right to remove its videos, and was doing so. In Boxee's case, Hulu seemed to be more apologetic, stating that it withdrew its content at the request of its content partners. It's important to note that Hulu's largest owners, with equal control, are NBC Universal and News Corporation (Fox), and to my understanding, it would only take one partner to get Hulu to yank its content. I'm not going to speculate on which partner I think pulled the plug (NBC Universal), because they're both extremely well-run companies with top-notch management teams (and pigs can fly.)

What is happening is that Hulu's actions are getting people to reconsider The Pirate Bay and other sources for the content that's distributed by Hulu. These are unlicensed sources, and not a penny of revenue goes back to Hulu, its parent companies or other affiliated content providers. At precisely the time that Hulu is engaging in a promotional program involving commercials on NBC, Fox and both companies' cable outlets, it's taking actions that curtail Hulu's distribution and encourage piracy.

In Boxee's case. it's entirely possible that it was cable operators that forced Hulu's partners to take the action they did. To these operators, I say that taking Hulu off of Boxee and any other service will not in any way slow down the trend for consumers to drop their cable services. The only thing that will do that is an industry-wide switch to a reasonable a la carte pricing scheme, which will happen fairly close to the heat death of the universe.

In short, Hulu's actions are only going to hurt Hulu. They won't accomplish what either the content providers or the cable operators want--in fact, they'll accomplish the reverse. Joint ventures almost always suck massively--they're impossible to manage, because the participating partners almost always have divergent strategic goals and objectives. I chalk Hulu's behavior up to that.