Are We Witnessing Hulu Pivot Before Our Eyes?

Sure, Hulu “failed” to hit the $500 million that it expected  to generate in revenues, but the $420 million it did generate was impressive.  The 60% growth was a result of a 40% spike in its core, free, ad-supported initiative and a 105% spike in its Hulu Plus business.  Hulu Plus is an online video subscription service that offers current season content from five of the six largest U.S. broadcast networks.  Hulu gets that access by way of the content licensing deals it has with its equity partners at NBC, Fox, and ABC.

(Disclosure: Hulu is one of our distribution partners.)

You’re Gonna Spend What?

Hulu forecasts that by 2012 it will generate half its revenues through advertising and the remaining balance via subscriptions.  During its state of the union update, Hulu stated that it will spend $500 million next year, prompting many to wonder where it would get the proceeds.  Shortly thereafter, Hulu announced that it would be raising fresh funds, effectively diluting existing equity partners to ensure its survival. 

This is a big reversal of strategy: in 2011 the traditional media company stockholders and Providence private equity investor were sellers -- and now, in 2012, they’re buyers.  What changed?

Reality Strikes

It’s worth noting that when Hulu was on the auction block, no one was willing to acquire the company despite its success in crashing YouTube’s party in online video.  Ultimately, buyers would have been buying an empty box with no long-term lock on the content that has made Hulu so successful. 

This reminds me on something I wrote in 2007 on the increased commoditization of distribution and scalability of content.  While the winner in distribution “wins it all,” all others are commodities; meanwhile, the premium content owner can scale through those various distribution outlets. With Hulu being the most premium of online content, no wonder it scaled fast.  But it’s now limited like all other distribution-only players.

As a result, it’s not surprising to see Hulu evolve before our eyes, just like the other aggregator whose business model has been hurled under the spotlight: Netflix.  For basis of comparison, Netflix did $822 million in revenue last quarter. Netflix generates nearly twice as much revenue in one quarter as Hulu does in a year. 

But Netflix is for all intents and purposes an e-commerce/subscription business, while Hulu is an advertising business that has recently added a subscription business.  In both cases, the companies license third-party content, aggregate it all and distribute it to users. 

Content May be Battered, Bruised, Spat On, Mocked, Cursed and Ridiculed – but It’s Still King

Interestingly, both companies are moving into original content.  Netflix has scooped up the rights to “Arrested Development,” and Hulu isn’t standing still, announcing that it will launch a “dramedy” called “Battleground.”

Whether or not these specific forays prove successful remains to be seen; after all, despite decades of experience and expertise, the TV networks can’t “manufacture” hits, but what is certain is that Netflix and Hulu’s survival is based on original content.  Along with YouTube, which is now opening up its wallet to finance original exclusive content, you are now seeing three of the leading aggregators bet their survival on content.

2 comments about "Are We Witnessing Hulu Pivot Before Our Eyes?".
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  1. Karma Martell from KarmaCom Inc., January 16, 2012 at 3:40 p.m.

    Been saying for years that the direction is new video content for new screens, in new formats. For instance: the 15-minute original programming format that has been widely adopted by Japan, where all mobile screens can get TV signal. (Gasp!) that country actually has a "socialized" technology policy. Those crazy commies. But I digress...Creating a new content/entertainment paradigm is very much where it is at, and is the direction I have wanted to take my business for quite some time. Hulu, what took you so long to figure this out??

  2. Mike Mcgrath from RealXstream PTY LTD, January 17, 2012 at 6:03 a.m.

    Doubtless Hulu's future is at greater risk since YouTube's recent foray into content investments.

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