Your Hulu Questions, Answered

Jason Kilar

Last week we solicited your questions for Jason Kilar, CEO of the online video site Hulu.com, which just may remake the television industry.
You asked a lot of very good questions, responding with a gusto which suggests that Freakonomics readers spend an awful lot of time watching TV, online or otherwise. And Kilar provides a lot of good and interesting answers, although he doesn’t spill the kind of secrets you all were hoping for. You’ll find his answers to readers’ questions are below; but first, his answers to three questions we put to him:

Even just a year ago, and certainly two, Hulu was hardly an obvious choice to be the front-runner in the online TV space. What happened? Tell us about a few tipping points, or lucky breaks, or wondrous negotiations.

It is very understandable that so many journalists and respected bloggers felt that Hulu would have a very difficult time gaining traction. It is far more common for start-ups to fail, even without taking into account the unique dynamics that surrounded Hulu in the early days. But being the odd birds that we are at Hulu, we actually saw so many of these negatives as positives.
We had the luxury of starting with a proverbial clean sheet of paper, which allowed us to — among other things — create a culture that was ideally suited for the admittedly ambitious mission before us. That culture has enabled us to focus on our customers relentlessly and in ways that I believe are rather unique. Our culture gave us — and continues to give us — the courage to not settle until we’ve built a service that customers unabashedly love. And we’re sober about the fact that we still have a long way to go on this never-ending journey. We have been incredibly fortunate to have the support and conviction of leaders like Peter Chernin and Jeff Zucker in the mix. All this said, the Hulu team would be the first to say that we’re very much the recipients of good timing and good fortune. A leader I admire once said of his company’s execution: “50 percent of our success is good timing, 50 percent is good fortune, and the rest is brains.” Sounds about right for Hulu as well.
A final note is that Hulu’s original business plan did not include phrases like “and then Tina Fey will impersonate Sarah Palin and an online sensation will ensue.” We’re ever thankful for the wondrous and at times wacky things that helped get Hulu to this early point.

Tell us a bit about ad revenues. I have read that you “stomp” YouTube in terms of revenue per user and per program — easy to believe — but how much money is coming in? With only a few ads per program, it is hard to imagine that revenues are very robust — especially considering that digital ad rates in other media (newspapers, e.g.) are dwarfed by their traditional counterparts.

We have never commented on financials specifically and I won’t be breaking that practice here. We are, however, very happy as an organization with where we are financially. I make these statements based on our actual performance against an aggressive plan. We’ve been fortunate to exceed our plan in 2008, in Q1 of 2009, and we’re currently ahead of plan at this point in Q2. From the very first day, we were maniacal in our belief that an opportunity existed to create an online video advertising service that delivered unusually strong value for advertisers while remaining true to important user principles. We’ve been fortunate in our ability to deliver the Hulu advertising service to over 200 advertisers and fortunate in that we are receiving fair compensation in return. While it is early days, I believe we are planting seeds that in the future could enable Hulu to generate, on a per-user basis, market-leading advertising revenue per minute of content consumed. We are very disciplined fiscally and are neurotic about the fact that we have to earn the right to serve our customers for the long term.

Because a TV program on Hulu typically carries ads from just one sponsor, the branding seems to make a bigger impression than if that one sponsor buys one spot among many sponsors. What can you tell us about how this single-sponsor dynamic works, from both the user and advertiser ends?

We believe in the “less is more” approach when it comes to our advertising service. In this, we strive to deliver a user environment that is defined by its simplicity and sparse aesthetic. We believe this approach helps users to focus on the matter at hand, which is either the entertainment content or the advertising content. We also went to school on the golden age (from the late 1940’s to the mid 1960’s) of television’s approach to the amount of advertising units coupled with the programming. In 1959 for example, Alfred Hitchcock Presents carried four minutes of advertising units in that half-hour program. The ad load is quite a bit different in today’s current programs, where half-hour programs contain eight minutes of advertising units. As we’ve adopted a very retro “Hitchcock” approach at Hulu, we’re generating unusually high recall rates for advertisers’ brands and unusually high recall rates for advertisers’ messages. And we get paid by advertisers appropriately for that unusually high performance.

What are your plans to expand into cable programming? Will new technologies be needed? Is there support/interest from the cable/satellite folks? — Bladt

We’ve made meaningful progress, but we have a long way to go. For context, Hulu’s mission is to offer the world’s premium content. That’s a lot of content, most of which has yet to make its way to the Hulu service. Thus far, we’ve grown from 2 to over 150 content partners, including some very strong cable brands and very strong cable programs. But we have so much more yet to do. We believe that Hulu can be a major part of the solution for cable, telco, and satellite companies seeking to offer their pay TV subscribers valuable online benefits.

As a huge fan of Hulu and scripted television, I’m concerned that the revenue stream from internet video cannot support the budgets of non-reality network television. What is the future of big-budget original programming? — Michael

The vast majority of television program consumption occurs in the living room over traditional television sets. In fact, people are consuming more, not less, TV programming in the living room when compared to previous years, according to Nielsen. That reality is not going to be changing materially anytime soon. So questions about TV production budgets really need to be answered in the context of living- room economics, at least for the (what I think will be long) period of time when the vast majority of consumption occurs in the living room over traditional TV sets.
I believe that the biggest issue facing big-budget scripted television shows is how to find a large audience in the face of fragmented viewership in the living room. In 1950 when there were only three broadcast channels to choose from, it was a lot easier to attract 30 million people to a show in the living room. It is much tougher to attract 30 million people to a show in today’s world of hundreds of compelling cable channels. This is where I believe the internet can help, given that nearly everyone today spends material amounts of time on the internet each day. Hulu is increasingly helping shows connect to the broadest possible audiences given that we do so in ways that are unusually convenient and empowering for audiences. So a great show like It’s Always Sunny in Philadelphia can win the battle against fragmentation by leveraging Hulu. As I mentioned earlier, I believe we’re planting seeds at Hulu that will ultimately enable us to generate market-leading advertising revenue (per user per minute of content consumed). We are on a strong path economically, which means that content providers will be as well, given that Hulu is not successful unless our content providers are successful. I think Hulu is on a path to materially help the economic underpinnings of the content industry.

My question is simple: when are you extending Hulu to the U.K.? I guess tying up local advertising deals might account for the delay? — Nick

We are focused on expanding internationally, but we don’t have any specific news to share other than that. When it comes to new markets for Hulu, the first focus is always to ensure that we can offer consumers a content lineup worthy of positive remark. Aggregating great content lineups is what we’re primarily focused on at the moment.

Any plans to extend the availability of Hulu to TV sets, perhaps with a set-top box or something similar? That to me seems to be the final barrier to achieving massive growth that could make cable and satellite companies a thing of the past. — Dan Souther

We don’t discuss our product road map due to competitive considerations. I do think it is important, however, to recognize that we’re in business to serve our customers, where content owners are one of our three main customer sets (the other two being advertisers and users). Content owners derive significant value from their business relationships with cable and satellite companies. Specifically, a non-trivial portion of a consumer’s monthly payment for cable TV ends up going to the content owner. These pay TV revenues can at times account for 50 percent of a channel’s revenue (the balance being traditional advertising). It turns out that those pay-TV dollars help support production of some fantastic programs. As a team, Hulu respects that important economic reality in our content partners’ businesses. As I mentioned earlier, we also believe that Hulu can be a major part of the solution for cable, telco, and satellite companies seeking to offer their pay-TV subscribers valuable online benefits.

A couple of months back, the content providers, who are not coincidentally your owners, ordered you to block the Boxee application from accessing your streams. Boxee is trying to take the battle to the content providers and make sure they “get it.” Why do you think the content providers would try to dissuade a large audience who would willingly watch ads from using their service, when they must at least have a passing inkling that it would drive users to torrent sites for commercial-free (and, might I add, higher-quality image and sound) versions of the shows? — Craig Stacey

This isn’t a situation of who gets it or who doesn’t get it. It is about content providers earning enough dollars such that they can cover the salaries of the actors and crew for the next episode of It’s Always Sunny in Philadelphia, for example. As I mentioned in a response earlier, our content providers’ ability to fund the creation of shows like It’s Always Sunny in Philadelphia is heavily influenced by the revenues they receive from their portion of consumers’ monthly cable TV bills. It’s a fact of the cable channel’s economic life. In the living room, advertising alone cannot support a show that attracts a few million viewers each week, which is the case for Sunny (compare that with American Idol, which attracts roughly 25 million viewers per airing on the Fox broadcast channel). Thus, cable channel content providers are naturally very careful to do what they can to help their shows find an audience while fighting piracy (put them on Hulu) but they also are careful not to put themselves at risk of not being able to fund the production of future episodes (and so they keep their shows from living room environments that promote themselves as substitutes to their analog cable TV business).

How interested are network executives in the numbers that shows get on Hulu? Does that make any difference in whether or not a show gets renewed? I do almost all my TV watching there and was wondering how much networks value viewers like me vs. traditional viewers who sit down and watch the show at the scheduled time? — Dan

Their interest has grown substantially in the last six months. I think that is a good sign. The number of streams for a show on Hulu is starting to get weighed in the decision to renew a television show, largely because the numbers are starting to get interesting. Peter Rice at Fox Broadcast and John Landgraf at FX are very savvy on this topic, for example. Ben Silverman at NBC is focused on this space as well.

What is the advantage of only showing, say, the most five recent episodes of a show? If Hulu already has had older episodes available, wouldn’t keeping them up allow new viewers more of a chance to get into a new TV show and old ones more time to catch up on and/or rewatch recent episodes? On a similar note, why are only select seasons of some older shows available? If Hulu is competing with DVD/iTunes sales of the same material, what’s the advantage in having any season up at all? — Allison

Great question. How does a content owner decide how many episodes and seasons to put up on Hulu? It is an imprecise science. Typically, it is a balance between the wins the content owner gets by being on Hulu (revenue, gaining incremental audience, addressing piracy) balanced by an estimate of opportunity costs. I am biased, of course, but I believe that the advantages of being on Hulu far outweigh any perceived opportunity costs. For people that are either rabid fans, abhor commercials, or are price insensitive, they will watch a program live, DVR it, purchase the commercial-free DVD, or buy the electronic download. But for the other 93+ percent of the population, any given TV show is an impulse business in that if you make it convenient for me to consume, I’ll have a much greater likelihood to consume it. If you don’t make it convenient for me to consume, I’ll pass on your TV show and do something else with my 22 minutes. A personal anecdote: I had never watched American Dad! before Hulu. Never heard of it in fact. But I’ve become a casual fan of American Dad! as a result of it being on Hulu and recommended alongside Family Guy. I’m not a rabid fan of American Dad! such that I’d buy a DVD box set or pay for a download. But given that it is convenient for me to watch via Hulu, I’ll follow it from time to time and in the process, the content owner earns revenue from my patronage via the advertising dollars.

We have named a drink “Hulu.” It consists of gin and Mountain Dew (it’s the same color as the Hulu logo). Does Mr. Kilar object? — Levi

No objection. My only request is that your Hulu cocktail not be overdone with a little umbrella because, well, none of us are real fans of cocktail umbrellas.

I first want to say that I love Hulu and feel that it is the best alternative to broadcast television out there. Given that, the one drawback is that most people want to watch television in their living room and not in front of a computer monitor. Netflix has had great success in teaming with Microsoft and the Xbox 360 for video streaming. Is that a possibility in Hulu’s future? — Sandeep

Thank you for the kind words about Hulu. Anything is possible in terms of Hulu’s future. That said, we don’t comment on the future regarding Hulu’s product road map. In lieu of an answer to your question, might I suggest enjoying a new drink that some other readers are planning to release?

When will Hulu be available on my Blackberry? I work in the TV business and I see Blackberries everywhere, yet I can’t watch my own show on Hulu! — Matt

What are these so-called mobile devices of which you speak? Suffice it to say that Blackberries and many other mobile devices are well represented amongst the Hulu team. When we wrote down the mission of Hulu on a whiteboard here at our offices, we were very careful not to specify on what kinds of devices to which we’d deliver the Hulu service. We simply wanted to help people find and enjoy the world’s premium content when, where, and how they wanted it. Right now, we’re focused on the personal computer, and feel we’ve only scratched the surface in terms of that large opportunity. But please know that our mission certainly does not suggest that we will always be exclusively focused on the personal-computer environment.

Why is the same ad repeated over for the same program? Are you considering more creative uses of the commercial break such as advertising with specific Hulu messaging, Hulu-centric campaigns, more internet-centric (and graphical) calls to actions, etc.? — Better_By_Design

In some cases, a company chooses to run the same creative ad more than once in a given episode. Fortunately, that is happening less and less, partly because we’re strongly counseling brands not to do that. For brands that would like to own a full episode stream for a given user, we’re working together with the advertising agency and the advertiser to ensure there’s enough varied advertising to do so. It takes time, but we’re making good progress. To your second question, we believe that our best inventions are yet to come in terms of the Hulu ad service. Today we offer a host of creative options, including, in some cases, the ability for users to choose which ad they’d like to see during a break. There is so much more to come from this side of our business. We’re very excited about what we believe is a massive opportunity to improve the advertising experience and effectiveness for both users and advertisers.

How do you currently consume television programming? How did you watch TV two years ago? And how do you see yourself watching TV two years from now? — Rob

My television consumption behavior is highly unusual in that I consume the majority online via an iMac in my home office. Americans get more than 99 percent of their video content each day via the living room, so I truly am an odd bird. I watch certain things on a big plasma TV, particularly UNC basketball. I watch more premium content now than I did two years ago, when relatively little was streamed legally online. Time has always been in short supply for me, so if it is not extremely convenient to consume, I tend to pass. Two years from now I suspect that I’ll be watching more premium content because it will be more convenient to watch at that point. In the U.S., I suspect there may be 50 million minutes of idle time produced each day just by the people waiting in line at Starbucks. As a Hulu team, we’ve only scratched the surface in terms of helping people find and enjoy the world’s premium content when, where, and how they want it.

What is the biggest hurdle Hulu faces today? Attracting more users? More programming? Resolving any legal issues? Attracting more advertising? Expanding to alternate revenue sources? — Bobby G

Our biggest hurdle is ensuring our Hulu team culture remains strong and, ideally, that we make it even stronger. Our culture is rooted in an unusually high-quality bar and an unmitigated obsession on behalf of our customers. Everything else flows from that.