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Summary:

Good news: Hulu did a deal with Viacom to bring The Daily Show back. But a blog post by Hulu’s CEO shows there’s growing tension between Hulu, which wants to keep sharing ad revenues, and its content partners, who want to get paid up front.

jasonkilar

Hulu viewers got good news yesterday, as popular Viacom shows The Daily Show and The Colbert Report will reappear on the online video site. With the same blog post announcing the Viacom deal, Hulu CEO Jason Kilar issued a lengthy defense of his company’s business model and the value the company can create for content owners online. But while Kilar made the case for the continuation of Hulu’s ad-share business model, there’s growing evidence that its content partners will want Hulu to pay up front when they approach the next round of content deals.

The basic gist of Kilar’s argument is that when it comes to monetization, Hulu’s ad platform beats nearly everything else out there. Hulu reports that it averaged $0.143 in ad revenue per episode in 2010, which is better than broadcast DVR ($0.097), cable ($0.106) and cable DVR ($0.048). Hulu doesn’t yet top ad revenue for the typical broadcast TV show, but the startup appears to be on its way to doing just that: in the fourth quarter: Hulu monetization rose to $0.185 per half-hour episode, compared to $0.216 for broadcast TV.

Improved monetization might be one reason that Viacom was willing to come back on board — especially in light of how much Hulu makes compared to cable DVR for shows like The Daily Show and The Colbert Report. But another reason Viacom shows have reappeared is that Hulu has reportedly guaranteed payment of at least $40 million for those episodes, according to Media Memo. Those payments could increase, based on performance of the Viacom shows on Hulu, but that guaranteed money also represents a scary proposition to Hulu and Kilar. The bet Hulu is making is that it can pull in $40 million in ads for Viacom programming and then some.

But make no mistake about it: Hulu doesn’t want to be in the business of paying money up front for content, and that’s what Kilar’s post is really about. It serves as a rebuttal to content partners who insist that the startup license content rather than just split ad revenues in its next round of content deals. Kilar makes a compelling case that Hulu could provide more value as a rev share partner than through paying flat-fee licenses for content:

“We believe content owners are in a strong position to make higher returns from TV content distribution in the future than they have historically. If studios and networks license their content to distributors with per-user per-month economics as the model (as opposed to a fixed fee model), then they will be able to extract a higher portion of the total economics their content will generate… Over the past 4 years, studios and networks have not always insisted on per-user per-month economics in their digital licensing agreements, which has resulted in a regretted under-pricing of their content to digital distributors. That said, we believe that all studios and networks will recognize that it is in their economic interest to insist on per-user per-month pricing in all their distribution relationships (library content and current content).”

When speaking about “the regretted under-pricing of… content to digital distributors,” Kilar is implicitly referring to Netflix’s model of striking flat-rate licensing deals with content. The most obvious example of content being undervalued is Netflix’s digital distribution deal with Starz, which gave the streaming subscription service 2,500 titles of content in the pay TV window for as little as $25-30 million a year. But other content providers are now griping publicly about how much Netflix pays for content, and the overwhelming feeling in Hollywood is that the checks it writes in the future will have to increase massively to support its fast-growing streaming service.

Hulu says it can provide a better way with “per-user per-month” economics, but it’s unclear whether or not its content partners will agree. Disney just did a deal with Netflix that reportedly pays it $150-200 million for one year of ABC and Disney channel content, and that’s a price Hulu is unlikely to match; even if the startup is able to achieve its targeted $500 million in ad revenues next year, that would mean committing more than a third of its sales to securing content from one partner.

What’s more, there’s evidence that Kilar might have annoyed his content partners with the very message that was meant to appease them; the FT reports that anonymous sources at the broadcast networks were furious with Kilar’s comments about the future TV model. One said: “If I were given billions of dollars worth of programming, I too could probably build a business,” the person said. “But I know that in order to build a long-term, viable business I would have to do so in a way that works for everybody.” In other words, the next round of content deals won’t come as cheaply as the last.

Finally, Hulu might have to make more concessions as it approaches future deals; the Viacom deal is evidence of that, since it imposes an unprecedented three-week window on some shows. While episodes of news-based programs like The Daily Show and The Colbert Report will be online soon after they air, viewers will have to wait 21 days after episodes of Jersey Shore, Teen Mom 2 and Tosh.0 air before they show up on Hulu. That’s bad news for Hulu users, as it suggests that other broadcasters may require the same or similar windows when they strike their next deals.

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  1. “But other content providers are now griping publicly about how much Netflix pays for content, and the overwhelming feeling in Hollywood is that the checks it writes in the future will have to increase massively to support its fast-growing streaming service.”

    Then they’re idiots. Netflix doesn’t HAVE enough money to keep writing blank checks for their overvalued content. While the content has value, they forget that the Netflix service has value, and customers are paying for that as well.

    Tell you what. How about making your content — all of your content — available, and then Netflix paying you if and only if someone actually watches an old episode of Columbo or Hill Street Blues?

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  2. It was Starz’s forward thinking and risk taking that started Netflix in the streaming business. They asked for about $10k/title and got the ball rolling. ($10k/title sounds like a lot but it is very aggressive.) If they asked for 10x more, like the other studio’s did, we’d still be getting all of these shows from the PirateBay and no one would be making any money on digital.

    With risk comes reward. That library is worth a lot and with their amazing foresight, or just dumb luck, the market size exploded and the value of their library increased as well. One other note, the value of their partner, Netflix, also increased over that time making it able to pay more for the library had they not done the deal in the first place.

    Netflix and Hulu are not really that special. They have a good head start but anyone else with enough capital and marketing can knock them off the top. There is nothing key or proprietary that will keep competition away.

    Content is king and the content rights holders are calling the shots. Some with vision, like Starz, will take some risk and get rewarded for it. Others like to knock the online model as they are not playing in the digital space and see it as a challenge to their distribution value chain.

    With the shareholders HULU has, it should have been a slam dunk from day one. $500M in ad revenues this year is nothing for a company with this pedigree and opportunities given to it. It shows that you need forward thinking partners that have a long term vision of where the market is going to be and play an active roll in getting there. Not partners who wish to control and limit the company to make sure it does not surpass their entrenched value chain.

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    1. @TimeKeeper

      Well said.

      Also,

      “Netflix and Hulu are not really that special. They have a good head start but anyone else with enough capital and marketing can knock them off the top.”

      I think you’re implying Amazon Prime, which would be an 800 pound gorilla in this space overnight.

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    2. TimeKeeper – For as small as that Starz deal looks now, it’s worth mentioning that there wasn’t a market for the Starz Play service when Netflix did the deal. I think that Verizon had also signed up for Starz Play, but no other MVPDs were willing to pay for it. From that perspective, $20m-$30m a year doesn’t seem like a bad deal, considering no one else wanted it.

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      1. Ryan – Precisely. It was brilliant on both their parts. $25m is exactly what it was worth at the time and Netflix proved it by paying the fee. Lucky for Starz, that asset has grown in value. Lucky for Netflix, so has their service.

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  3. [...] Jason Kilar wants to avoid licensing content on the same terms as Netflix // Ryan Lawler at NewTeeVee suggests that Kilar’s post, which makes a numbers case for continuing to license network content on a per user-per month basis, is the CEO’s pitch to content providers not to stick the company with the sort of expensive licensing agreements to which Netflix is increasingly being subjected. This entry was posted in Journalism, New Media & Digital Culture and tagged digital television, hulu, jason kilar. Bookmark the permalink. ← “Integrating two software systems is usually more like performing a heart transplant than snapping together LEGO blocks. It can be done—if there’s a close enough match and the people doing it have enough skill—but the pieces don’t fit together trivially. And failure may not be immediately obvious; it may take a while to see signs of rejection.” blog comments powered by Disqus /* [...]

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  4. [...] Hulu Gets Back Viacom’s Daily Show, Jersey Shore (New York Times): Meanwhile, the site is defending its ad rates, saying it pays more than all outlets except live broadcast (maybe it’s those action ads!) [...]

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  5. [...] Hulu’s pitch to broadcasters is that it helps drive more monetization per episode than most other platforms, including DVR and cable. In a long blog post defending the company’s business model, CEO Jason Kilar said Hulu’s averaged $0.143 in ad revenue per episode in 2010, better than broadcast DVR ($0.097), cable ($0.106) and cable DVR ($0.048). While not quite as high as the monetization for broadcast TV, which averages $0.216 per half-hour episode, Hulu’s fourth quarter monetization rose to $0.185 per episode by comparison. [...]

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  6. [...] there is a complicated dance going on between Netflix and the television companies, and even between Hulu and the television companies who own it—to say nothing of what’s been happening with video platforms like Boxee or [...]

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