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Pay TV giant Hulu becomes victim of its own success

Latest rumour of CEO's departure heralds end of stormy honeymoon

The latest rumour of Hulu CEO Jason Kilar’s imminent departure sounds like a good old silly season story designed to fill the void of empty news pages while people are on vacation. But the fact Hulu has been attracting such rumours while other big hitters in pay TV never seem to get them, itself provides a clue to a story of declining fortunes for the operator.

As the offspring of Disney, News Corp and Comcast, Hulu’s differentiator has been its range of popular TV shows, about twice as many as Netflix and far more from the current season. Netflix does have more premium movie content, but Hulu’s loss of exclusive current season content rights for Disney and News Corp channels would appear to rip its business model apart. This is the real sting in the memo famously leaked to Variety magazine, which would in effect make Kilar’s departure inevitable anyway. Dated July 2012, the memo covers various sensitive issues, indicating how two of the parent companies, News Corp and Disney, plan to transform the streaming service.

The memo appears to deliver Hulu three blows.

  1. Loss of exclusive current-season content previously shared online only with the Networks’ own websites.
  2. Loss of content parity with the Networks ABC.com and Fox.com, which will no longer have to make all content available on Hulu at the same time as their own sites, which previously ensured that Hulu at worst had content the same time as everybody else, whether exclusive or not.
  3. Hulu will lose exclusive “super-distribution” rights that enabled it to syndicate content to third-party sites like Yahoo and AOL. Such rights will now revert back to the primary sources, Disney and News Corp.

This all goes back to Hulu’s inception in October 2007 as a foil for Google and YouTube, which were seen then as a big threat to the big studios and content houses. Hulu was conceived as a focal point for its owners to exert greater leverage in rights negotiations for online distribution, rather than as a viable business proposition in its own right. In one sense Hulu has since become a victim of its success, tangling with the emerging online business models of its parents. With their focus on content they are most interested in maximizing their carriage rights from all sources, rather than giving them away free without restrictions on Hulu. They have lost their fear of Google, reducing their need for a single portal for negotiations, and as a result Hulu is no longer necessary for them and has become almost a thorn in their sides.

This means Hulu is entering a new uncharted and uncertain phase for which Kilar may be unequipped and unwilling to pull up his sleeves to defend a most likely shrinking position in the fast expanding OTT market. Either that or he is too ardent a fan of keeping his exclusive status with the content of Hulu’s parents. Netflix will now have the upper hand in the US through its superior movie content while being likely to gain parity for TV shows. Instead of being the primary place on the web to view TV shows from Fox, NBC, and ABC in the US, Hulu will become just one of many sites where the content can be obtained.

Its owners will continue to run Hulu as a subscription service, since from this they derive ancillary revenue. But it will not be a cornerstone of their online strategies as it has been, and they will no longer allow it to compete as a free service with their own sites, or to jeopardize their ability to obtain carriage fees from other online distributors.

In short Hulu has a smaller future than past, but still has the opportunity of remaining a significant player in the US market if it can strike the right balance between subscription and ad funded programming.

Copyright © 2012, Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of the week's events in the world of digital media. Faultline is where media meets technology. Subscription details here.

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