Peter Kafka

Recent Posts by Peter Kafka

Hulu’s New Plan: Compete With Netflix and Amazon. How Is Hulu Going to Pay for That?

hulu-alec-baldwin380So they’re not selling. But what are Hulu’s owners going to do with the video service now?

The immediate response to that question, via people who provide answers on behalf of Hulu’s owners, and translated a bit for public consumption: They are going to invest in Hulu’s potential as a “subscription video on demand” service.

That is, they see real value in building up its Hulu Plus paid offering. Which is competing for eyeballs, time and consumer dollars with Netflix and Amazon.

That makes sense.

Yes, Hulu, which generated $690 million last year, can also be valuable as a free website that provides some “catch up” content from its three TV network owners (Disney/ABC, Comcast/NBC, 21stCenturyFox/Fox). It can also function as a hub for not-exactly free content for “authenticated” pay-TV customers (see the Dish/Fox/Hulu deal from 2011).

But Hulu Plus has turned out to be surprisingly popular, with more than 4 million people paying $8 a month for a subscription, even though the stuff they pay to see still has ads (Netflix’s and Amazon’s stuff is ad-free).

While that places the service way behind Netflix and its 30 million U.S. subscribers, Hulu may well be ahead of Amazon when it comes to video eyeballs.

Hulu’s managers have been campaigning for years to get more cash from their owners, so the money-losing service could compete even more effectively. They want to spend more on other people’s content, and make more of their own.

One problem with that theory, though: If Hulu is going to compete with Netflix and Amazon, it may need a lot more money than it has, even though its owners have committed to giving it $750 million in fresh cash.

I’m assuming that the contribution isn’t going to be an annual thing, but am trying to get Hulu’s owners to confirm that one way or another. But even if Hulu’s owners kicked in $750 million every year, and Hulu put all of that to work buying new stuff for the site, it could find itself outgunned. (Update: Nope, that is not going to be an annual payment, though Hulu will get some of that $750 million immediately, says someone who knows. Alas, this person won’t tell me anymore about the payment schedule.)

Netflix spends more than $2 billion a year buying content from other people and creating its own stuff, like “House of Cards”. Amazon, by Netflix CEO Reed Hastings’ estimates, may be spending up to $1 billion a year on its content deals. And Jeff Bezos doesn’t seemed constrained by the idea of profits, so that number could certainly spike up.

In recent months, Hulu’s current management has been arguing, sotto voce, that Netflix and Amazon may be overspending for their stuff.

So it’s possible that Team Hulu has deep and special insight about ways to buy and make content cost-effectively that its competitors don’t have, and the cash they’re getting now will be enough. But that has got to be some very special insight to pull that off.

And you shouldn’t assume that Hulu’s owners will be giving the company a deal on their own stuff when it comes it licensing fees and windows. If anyone is going to get a break on the networks’ shows, it will be the pay TV operators, who are paying the programmers really big dollars for that stuff already.

Meanwhile, a related question that I don’t have answer for yet: Now that we know who is going to own Hulu, who is going to run Hulu?

Interim CEO Andy Forrsell, who has taken over after Jason Kilar’s departure, has said he would like the job, under the right ownership structure, with the right resources. But as of today, Hulu’s owners are still describing him as “interim CEO”.

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Just as the atom bomb was the weapon that was supposed to render war obsolete, the Internet seems like capitalism’s ultimate feat of self-destructive genius, an economic doomsday device rendering it impossible for anyone to ever make a profit off anything again. It’s especially hopeless for those whose work is easily digitized and accessed free of charge.

— Author Tim Kreider on not getting paid for one’s work