Hulu at a fork in the road

Hollywood's own online video service has been no match for its rivals. Now its owners are under pressure to pony up more money to expand the service.

By MSN Money Partner Dec 21, 2012 1:49PM

The Hulu website © Scott Eells/Bloomberg via Getty ImagesBy Christopher S. Stewart and John Jannarone, The Wall Street Journal 


Wall Street Journal on MSN Money

As Amazon.com (AMZN) and Netflix (NFLX) battle it out for dominance in online video, owners of the much smaller Hulu, Hollywood's own online video service, are under pressure to decide which direction to go.


Jason Kilar, the chief executive of Hulu, has asked the site's owners -- Walt Disney (DIS), Comcast (CMCSA) and News Corp. (NWSA) -- for about $200 million to fund more program purchases and an overseas expansion, according to people familiar with the situation. That is roughly twice the amount they contributed this year, one person said.


The request to sink more money into the unprofitable, 5-year-old venture has put the spotlight on differences between Disney and News Corp. -- the two voting partners -- over Hulu's business model, which involves both a free service and a fledgling subscription offering. (For regulatory reasons, Comcast, the majority owner of NBCUniversal, can't vote its stake.)


It isn't known how News Corp. and Disney will respond, but the request could prompt the owners to clarify the strategic vision for Hulu before increasing their bets on it.


News Corp., the parent of the FOX broadcast network, wants Hulu to evolve into solely a subscription service, whereas Disney, owner of the ABC network, favors the free, ad-supported approach.


A Hulu spokeswoman said, "We do not comment on continuing discussions regarding decisions that have yet to be made."


Betting on original programs

Hulu streams shows from its partner channels, as well from other networks, such as Viacom's (VIAB) Comedy Central. Over the past couple of years, it has begun to develop original programming, beginning in earnest with the documentary series "A Day in the Life," directed by Morgan Spurlock, and "Battleground," a 13-episode comedy about a dysfunctional Senate campaign.


Hulu already has incurred heavy costs for expansion. The company doesn't disclose profits or losses, but Disney for the first time gave some indication recently when it reported its fiscal 2012 earnings. Disney revealed Hulu had sustained larger losses for the fiscal year "driven by increased programming and marketing costs, partially offset by higher advertising and subscription revenues." Some number-crunching of Disney's comments indicates Hulu's quarterly operating loss was around $30 million.


Hulu had to borrow $338 million in October to finance the $200 million buyout of Providence Equity Partners' 10% stake in the venture, and a $134 million equity-compensation payout to employees, according to a regulatory filing by Disney. Of the employee payout, about $40 million went to Kilar, according to people familiar with the matter. Hulu's owners guaranteed the loan.


While Hulu invested more than $500 million in content in 2012, its competitors are spending far more.


Netflix has committed to spend $5 billion to secure movies and programming for online streaming over the next few years, with about $2 billion of that due in the 12 months through next September. The outlet has commissioned original series like "House of Cards," as well as paid for rights to an array of Hollywood content, as has Amazon.


Amazon declined to comment on the cost of its content, but Reed Hastings, chief executive of Netflix, estimates his competitor is losing between $500 million and $1 billion a year on building its subscription video-on-demand service.


Amazon this week said it had approved pilots for six original series including "Dark Minions," an animated series about workplace slackers written by stars of "The Big Bang Theory."

 

"If Amazon and Netflix are stepping it up, what are you going to do? That is the big question for everyone at Hulu," a person familiar with the matter said.


Tension over Hulu's purpose surfaced almost as soon as the site was unveiled in 2007. At that time, online video was beginning to take off and broadcasters were trying to respond. NBC and FOX, the two original driving forces behind Hulu, wanted to draw viewers away from Google's (GOOG) YouTube by making their content available on an array of sites including Web portals operated by AOL (AOL), Microsoft's (MSFT) MSN  and Yahoo (YHOO).


But Hulu has proved no match for YouTube. Hulu had 22 million unique viewers in November, including those visiting via partner sites like Yahoo, while YouTube had 152 million, according comScore.


And since 2007, Netflix's video streaming service has taken off. It had 23.8 million paid subscribers in the United States at Sept. 30. More recently Amazon began offering video streaming for subscribers to its $79-a-year Prime service, which gives customers free two-day shipping.


Anthony DiClemente of Barclays Capital estimates the number of Amazon Prime users is slightly less than half of Netflix's subscriber count.


By contrast, Hulu has just three million subscribers -- although it said this week the figure is double what it was a year ago. Both Netflix and Hulu Plus, the subscription service, are $7.99 a month.


Hulu's partners contemplated throwing in the towel last year when they put Hulu up for sale. But that effort was abandoned, with only Providence being bought out.

 

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33Comments
Dec 21, 2012 6:47PM
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Hulu is a great service for free but if you are a subscriber then that's were the problems begin. The commercials are short 30 sec. or so and I can deal with that for the price of $7.99 vs. $13 monthly per DVR. Hulu can be seen on any devise you own in you home with one subscription as well. Their original series are very good and worth watching for sure.  So those are all pros.

The cons are the MOVIES are so old or if you want to catch up on a series from the start-good luck. Some you can, some you can not. It takes way too long between seasons before Hulu releases them for viewing if at all. If you are following a current season show, sometimes you have only a month to 3 weeks to watch the episode before it is off the air and you are screwed! So you either have to wait for re-runs on Hulu out of order or on TV. I don't know why but I am sure it has something to do with the $$$$$$$.

If they could get their seasons up to date as well as newer movies or at least more current like some made in 2000 & up-LOL they would do better in the market place I feel.

Hey maybe they should read the comments on their own pages their viewers write about-that would be a good start.

 

Dec 21, 2012 6:29PM
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I tried hulu on my tablet. Could not get ANY video to play, even when I was sitting right next to the wireless router. Netflix and the CW play just fine, on the other side of the house. So I cancelled hulu and deleted it.
Dec 21, 2012 6:22PM
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I appreciate having Hulu...along with Netflix I have a healthy stream of entertainment.
I did switch to Hulu plus this month to catch up on some of the programs that I missed. Its been okay. I am hoping that if they get more content, that they get a deal with Cartoon Network.
That would be a huge win for Hulu...especially with the online crowd. It would also secure me as an ongoing hulu plus subscriber.

Dec 21, 2012 6:04PM
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 they should have commercials before and after  the shows. They will still get the revenue and apease the masses. 
Dec 21, 2012 5:24PM
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I will never pay for Hulu because even if you subscribe, you still have to endure commercials.  That is simply unacceptable to me.

I would be willing to pay for a commercial free service that lets me watch current TV shows, but only if there were no interruptions for the commercial garbage.

I have a DVR, and record everything.  HULU is going back a few years in TV watching.
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