Founded in 2007, Hulu has done a superior job, creating a great user experience for online TV. Unlike most big media-funded video sites, Hulu’s interface is clean and modern. Unlike Netflix, its TV offering is fresh and current.  Its ad products have been increasingly forward-thinking, and have penetrated the majority of major American brands.

Creating revenue in online content isn’t easy for anyone. It’s especially trying when your business may threaten the companies that own you. Hulu’s team has built a business while walking a tightrope… maintaining a free high-quality service while keeping the fears of its media owners (News Corp/FOX, Comcast/NBCU and later Disney/ABC) in check. The departure of both the CEOs (Chernin at FOX and Zucker at NBC) who approved Hulu in the first place, and the acquisition of NBCU by Comcast, added to the challenges they surfed.

Hulu is a fascinating company. I’d argue that it’s the most interesting company to watch in Over the Top, largely because it’s such a different animal. Compared to Netflix,Google, Apple and Amazon:

1. Hulu is the only one not publicly traded
2. Hulu is the only one owned by Big Media
3. Hulu is the only one not routinely floated as the Second Coming

As there have been for Netlflix, there have been a rough days. One occurred when Viacom pulled The Daily Show and The Colbert Report from Hulu in March 2010. This was not a surprise, and had more to do with the economics of traditional distribution than with anything Hulu could have controlled for. I presented the details at SXSW that year (email me if you’re interested) and summarized the economic threat that cannibalization of these big Comedy Central shows could have posed during Viacom’s renegotiations with its MSO partners.

A second drama occurred at the resolution of the Viacom standoff, when CEO Jason Kilar issued a very public, Jerry Maguire-like manifesto on the appropriate future of the TV in Feb 2011.  It included several reasonable arguments from an unlikely source… such as “Traditional TV has too many ads”, which were well-received by the public, but not so much by the folks who owned the company.

While tensions may have flared, Hulu’s viewership has continued to grow steadily – a fact reflected by New Corp’s COO Chase Carey’s public statements, which have moved from skepticism about free models, to a recent assertion that Hulu’s value “dwarfed some of the values that were being put on it”.

Hulu itself primarily a free service.  But Hulu Plus, a $7.99 per month subscription service (a price comparable to Netflix), was announced in July 2010, opening the door to new subscription-based revenues on the types of devices which Netflix has dominated. According to another blog post by Kilar, Hulu Plus was on track reach one million paid subs in 20011, and “on pace to approach half a billion in 2011 revenue”.

Another major asset for Hulu, I’d argue, is a widely unrecognized reality of the media buisiness itself.  This is that the most profitable area of the media universe – by far – are cable television networks.

Why does that matter for Hulu and Netflix?

Here’s why.  Netflix reported 21.45M streaming subs and 13.9M DVD subs last quarter.But Netflix controls virtually no content; it licenses the vast majority of its shows from the Big Six media companies – who could one day take a page from the HBO/TimeWarner book and decide to boycott Netflix.

Contrast this with Comcast, who have around 21-22M TV subs (roughly the same number, give or take).  But they control NBC, CNBC, MSNBC, Bravo Networks, USA Networks, Syfy, Telemudo, NBC Europe, CNBC Europe, NBC Asia, CNBC Asia, E Entertainment, Style Network, G4, the Golf Channel, Versus… plus Universal Pictures and its motion picture distribution assets: Imagine, Illumination, Mandalay, etc… as well as over 14 million broadband subs.

Now consider Hulu. It’s owned by Comcast, Disney and News Corp (Comcast ceded NBCU’s voting rights as part of the acquisition but still has the equity) and Providence Equity. This means that Hulu’s owners control all of the content sources listed above… plus ESPN Networks, FOX Broadcasting, ABC, Pixar, Disney Pictures, Marvel, Touchstone., 20th Century, FOX Searchlight, FOX Sports, FOX News, the SKY assets, STAR in Asia, Disney Channel, A&E, History Channel, Lifetime etc.

Not a bad place to be in a content war.

The recent big news for Hulu was this summer’s announcement that it was for sale. Breathless reports handicapped leaked bids from Google, Yahoo, DIRECTV, DISH and others. The truth was that an acquisition never seemed particularly likely.  As I’ve said before, if Comcast, Disney and News can get $2B for Hulu, it’s a nice payday for a company that has run (compared to YouTube or Netflix) very modest expenses… and which is still almost completely dependent on the long-term rights granted by the very people selling the company.

Some smart people have been skeptical about Hulu. These include Barry Diller, who speculated FOX’s and Disney’s spawning of Hulu was the equivalent of “setting off a rocket and then running to where the rocket landed.” It’s a great image, but I disagree. In a landscape riddled with big media online plays that completely suck. Hulu is the lesding exception.  In spite of friction points, Hulu has built an admirable business and an attractive service.  And the economic variable we’ll never be able to compute for is how much bigger the pirate TV business would have grown, had the TV business not been willing to back at least one quality alternative.

Next time, we’ll begin to unpack  the 800 pound gorilla in the global video business: Google/YouTube.

As always, please send any questions to seth@newamsmedia.com.

So far, we’ve taken a deep dive on Netflix, looking at its rise to become the largest subscription service in America… followed by a loss of 800K subs and a massive decline in value  (a trend that continued this week with  the company’s announcement of a $400M cash raise).

As Netflix began to soar in 2007, another online video service was announced. As with Netflix’ launch, the venture was greeted with both enthusiasm and cynicism.  But unlike Netflix, the newco was a joint venture – of NBC, News Corp and Prividence Equity. It was a widely perceived as a defense play, and one that the ostrich-like TV networks were not qualified to build.  It didn’t have a name at first. Eventually, a press release mentioned that it would be called Hulu.

The original public mission of Hulu –as many forget – was to create a legal online destination for the “professional”online video of studios and networks.

To understand this, it’s essential to remember what was up at the time.  Business news was full of squabbles between the TV networks and a different startup. This one was called YouTube.

YouTube had been founded in early 2005, one of a slew of online video sites that cropped up as, after a decade of false starts, video technology finally matured and bandwidth improved.  YouTube had a better brand (“Broadcast Yourself”), a clean UI, and a relatively painless upload process. It took the lead in the UGC space, moving from a novelty to an astonishing #5 Alexa rank by 2006.

It also became a great place to post video that you liked, but hadn’t created. Things like the ten good minutes from a Saturday Night Live episode.  More importantly, it turned out to be a fantastic place to watch the ten good minutes from this week’s Saturday Night Live: someone else did the dirty job of wading through 60 minutes of meh for the good stuff, then came back with the jewels – the TV equivalent of a great DJ pulling breaks and beats.

This was the beginning (or the tipping point, depending on your seat) of something extremely big: the extension of the massive editorial value that the internet already brought to millions, now employed to reshape big media, to make its product more relevant, more useful and more entertaining. It was also the moment when it was became obvious tthat the audience was now smarter than the networks.

There was also a counter-argument: if YouTube uploaded clips of SNL, didn’t that really amount to a free commercial for SNL? Weren’t uploaders who promoted good shows doing those shows a favor? This argument got much more consideration than networks admitted at the time, as they grappled with the fact that YouTube undercut the advertising model that paid for both these shows and their salaries.

Then, in October of 2006, something happened that transformed the argument forever: Google purchased YouTube.  For $1.65 billion.

After this, in the minds of big media, YouTube went from being an annoyance to a terror, from the big weird home of cat videos to a well-funded threat to traditional television – financed by those two geeks with billions to play with.

More than anything, I’d argue that this was the moment that risk-averse Big Six Media had been dreading for fifteen years.  Even the laziest suits could see that the video business could indeed go the way of the music business. The assassin would be Google, and the bullet would be YouTube.

So at long last, the old guys started working on a way to play the new game. It would be a rocky road, but it would pay off.  Hulu would do its best to walk the tightrope between user experience (where its parents were horrible failures), and content strategy (where the tech cos it emulated were horrible failures).

Meanwhile, YouTube would embark a parallel tortured journey, to create a viable home for quality creative content. The challenge would be to do it, not as Chad Hurley and Steve Chen’s startup, but as part of a Google engineering culture with less expertise in content culture.

Next time, we’ll look at YouTube’s brand new channel strategy, the strengths of Hulu today, and where they’ll both go from here.  Then we’ll devote some time to discussing the pros and cons of dumping cable, and the best ways to do it.