Hulu CEO Jason Kilar: We’re No Cable Killer! We Swear!

If you’re planning on swapping out your expensive cable TV service for Hulu’s $10 a month subscription offering, Jason Kilar has advice for you: Don’t do it!

The Hulu CEO insists that his “Hulu Plus” service, which gives subscribers a deep catalog of shows they can watch on their computers or on gadgets like the iPad, isn’t meant to replace cable. Instead, he says, it’s meant to augment cable. Just like your iPhone doesn’t replace your PC.

And he’s right. Hulu Plus is designed explicitly not to threaten the cable business. That’s why it doesn’t offer any news or sports, and why it only offers shows that air on three broadcast networks and almost nothing that runs on cable networks.

To spell it out: Hulu’s network owners–GE’s (GE) NBC, News Corp.’s (NWS) Fox and Disney’s (DIS) ABC–all have corporate cable siblings, and they all make lots of money from cable subscription fees. (And the broadcasters themselves are trying to get the cable guys to pay them for their stuff, too.) So they have no interest in upsetting the likes of Comcast (CMCSA) by creating a real cable competitor.

Doesn’t matter what Kilar says, argue the Web TV optimists/cable cynics. They believe that sooner or later the content guys will want to break free from the cable guys and go “over the top”–by selling their stuff directly to consumers or via rival middlemen like Hulu or perhaps Apple (AAPL).

One day, maybe. But right now the TV industry continues to work very well for its biggest players. A hint of the dollars involved: Yesterday, news broke that Fox, which makes “Modern Family” for ABC, has sold reruns to NBC Universal’s USA network for $1.5 million per episode. USA of course, will pay for the programming with dollars it extracts from cable operators.

Think anyone involved in the above scenario wants to shake things up anytime soon?

I talked with Kilar yesterday about Hulu Plus and its place in the TV ecosystem. Here are edited and condensed excerpts from our chat:

You’ve been working on putting this service together for more than a year. What took so long?

At a macro level, it’s balancing the needs of consumers, advertisers and content owners. And if you talk to any one of those three customer sets in isolation, often times you won’t delight the other two. So the hurdle we faced with Hulu Plus was, how can we thread this needle in a way that delights all three customer sets?

Hulu Plus will cost $10 a month, but will still feature ads. Haven’t Web users been conditioned to expect ads with free stuff, but not with stuff they pay for?

I don’t think that’s [the case]. We’ve done so much research about this, in terms of talking to thousands and thousands of people about the service, in obviously confidential ways that mask the brand name behind this…The vast majority of consumers actually pay for premium content through subscription and get advertising. And by that I’m referring to [cable TV, in the] living room environment. Which is where most of the consumption happens these days.

What we found in our research is that there isn’t this sort of belief of “If I’m paying for this, I must have no ads.” What [we asked] consumers was, “If you had a choice between having it be with no ads and at a higher price, [versus] having it with a relatively modest level of advertising but lower priced, which would you prefer?” They dramatically chose, in large numbers, the latter.

There’s no reason why we couldn’t offer an ad-free version of this. It just would be at a higher price.

There doesn’t seem to be any programming here from cable TV networks. That’s not a coincidence, right?

It’s a broadcast-focused service.

But how do you explain that to customers, who don’t distinguish between broadcast and cable TV–they just know they like TV shows?

When we launched Hulu, everybody was saying, “Oh, this is going to be a substitute for pay TV in the living room.” And I think people may say the same thing here. But it would be wrong. Because when you look at what is in the service versus what is not in the service, it very much is akin to a smartphone relative to a laptop.

The cable and satellite pay TV services have linear, live windows, which are different from the windows that we have in the service. There’s sports, there’s news, there’s cable…this is something different. I believe that as you see this play out, this is something that’s going to be incremental and complimentary to your cable and satellite service. And it’s priced that way.

So this is explicitly not something that should appeal to potential cord-cutters?

I don’t see this as a substitute for cable or satellite service. It’s not a product that can serve that need.

But it could it become that, one day?

I think the relationship between cable and satellite and telco pay TV service providers, and the content industry is a very, very solid one. And I think that is going to persist for quite a long time.