Why Yahoo Should Buy Hulu

41 Comments

Jason Kilar of HuluWith a new chief executive in the house, it’s time for the beleaguered Internet company Yahoo (s yhoo) to make a bold move. Like buying fast-growing online video service, Hulu. No, it wouldn’t be cheap, but it would be money well spent, as it would add zing to the company in more ways than one.

When Yahoo announced its decision yesterday to name Carol Bartz as its new CEO, it also quietly disclosed that President Sue Decker, who had been a likely contender for the chief executive position, was going to leave the company. Her exit leaves a big hole at the No. 2 spot at Yahoo.

Bartz is clearly a great executive, and a solid, proven manager who will bring some much-needed stability to the company. She needs a president who is both young and energetic, but has the maturity to work with a large number of people. This person would have engineering chops, clear vision, and — most importantly — expertise building great products that provide a compelling Internet user experience for a diverse group of consumers.

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Since magically merging Bill Gates and Steve Jobs into one isn’t an option, she’ll have to settle for a mere mortal. My candidate to be her consigliere: Jason Kilar, CEO of Hulu. What are the odds that he’d be interested? Not high –- after all Hulu is the hottest ticket in Hollywood, has a valuation of about a billion dollars and the attention of everyone from Rupert Murdoch to the Google (s goog) founders. At first blush, a marriage between the hot Hulu with a dowdy and decrepit Yahoo doesn’t appear to make any sense. But that’s the short-term view.

Hulu-tastic

With his service growing by leaps and bounds, and advertisers lining up to get on board, Kilar’s only problem is that he doesn’t have enough traffic –- like, say, YouTube. That will change over a period of time; and as we all know, time is an elastic concept. Perhaps this is where Yahoo can help. Or rather, where the two can help each other. Clearly search and search advertising isn’t quite working out for Yahoo; what Yahoo knows best is media and content. Which is why buying Hulu would be a strategically relevant acquisition for the company — it would play to Yahoo’s media strengths.

Yahoo’s online video efforts thus far are laughable. So much so that I’m hesitant to even mention them and YouTube in the same sentence. (Darn! I just did. But you get my point.) Nevertheless, it still has a lot of traffic and it can very easily help Hulu, which has great content, get scale -– both in terms of infrastructure and number of users. By acquiring Hulu, it would instantly become a credible competitor to Google’s YouTube. Yahoo also has a lot of experience working with branded content and brand advertisers, which can only further help Hulu. For Yahoo, Hulu brings inventory for higher-priced advertising, a marked improvement from what it makes from selling banner advertising.

Win-Win For Everyone?

You’re probably thinking, why would Fox (s nws) and GE (s ge) sell their pet project to Yahoo? Well, why not? After all, they took a $100 million investment from Providence Equity Partners, which means they have an interest in making some sort of a return on this company. By selling to Yahoo for stock -– say, $2 billion worth — Rupert Murdoch would get a nice big chunk of Yahoo shares, which could come in handy if he wants to offload MySpace to Yahoo sometime in the future. NBC would get a significant Internet presence with Yahoo, which could only help its other digital efforts. And the Providence guys –- well, they’d get to make some money.

At current prices, Yahoo looks to be a bargain. And if Bartz does her magic and things work out according to plan, Yahoo’s stock should go up –- which means Rupert, GE and Providence would all make a lot of money from betting on the company.

In other words, a win-win deal for everyone!

Jason’s Story

But if I was running Yahoo, I would do the deal just for Kilar. When Yahoo was looking for a CEO, I made a short list of executives whom I thought would be ideal. He was high on that list; the only reason he wasn’t my top pick was his lack of experience running a big company. As Bartz’s 38-year-old consigliere, he could be the prince-in-waiting. He worked at Amazon.com (s amzn) for 10 years, so we know the man has patience.

I’ve spoke to quite a few people who know Kilar well, and most of them described him as that rare content guy with technical chops. A good team builder, he is said to inspire. Others waxed eloquent about his sense of design and his passion for media. Remember, he ran the DVD store for Amazon. His defining quality is hyper-competitiveness — something that would be important to fire up the troops.

During his keynote speech at our NewTeeVee Live conference back in November, Kilar said: “Our goal is to deliver a service that users, advertisers, and content owners unabashedly love. Our strategy is to deliver ‘brain-spray’ awesome quality.” Imagine what that kind of philosophy would do for the 200 million-plus people who use Yahoo!

A very close friend of Kilar’s described him as the man who wants to do the impossible. Of course, taking the helm at Hulu and building it into a viable competitor to YouTube, against all odds and attacks by good-for-nothing pontificators like yours truly (who were totally wrong about the service) qualifies as impossible in my books. Hulu’s revenue will apparently match that of YouTube in 2009. No wonder some have jokingly compared Hulu to President-elect Obama.

In many ways, buying Hulu would give Yahoo the same stimulus Flickr provided the company back in 2005. In other words, some of the tangibles cannot be quantified, but it would be a wise move all the same.

41 Comments

jk

When you treat customers with this much respect, it’s easy to understand why Hulu has been so successful.

“Availability Notes:
Customer trust is hard won, easily lost.

On January 9, we removed nearly 3 seasons of full episodes of ”It’s Always Sunny in Philadelphia.” We did this at the request of the content owner. Despite Hulu’s opinion and position on such content removals (which we share liberally with all of our content partners), these things do happen and will continue to happen on the Hulu service with regards to some television series. As power users of Hulu have seen, we’ve added a large amount of content to the library each month, and every once in a while we are required to remove some content as well.

This note, however, is not about the fact that episodes of ”It’s Always Sunny in Philadelphia” were taken down. Rather, this note is to communicate to our users that we screwed up royally with regards to _how_ we handled this specific content removal and to apologize for our lack of strong execution. We gave effectively no notice to our users that these ”Sunny” episodes would be coming off the service. We handled this in precisely the opposite way that we should have. We believe that our users deserve the decency of a reasonable warning before content is taken down from the Hulu service. Please accept our apologies.

Given the very reasonable user feedback that we have received on this topic (we read every twitter, email and post), we have just re-posted all of the episodes that we had previously removed. I’d like to point out to our users that the content owner in this case – FX Networks – was very quick to say yes to our request to give users reasonable advance notice here, despite the fact that it was the Hulu team that dropped the ball. We have re-posted all of the episodes in the interest of giving people advance notice before the episodes will be taken down two weeks from today. The episodes will be taken down on January 25, 2009. Unfortunately we do not have the permission to keep the specific episodes up on Hulu beyond that. We hope that the additional two weeks of availability will help to address some of the frustration that was felt over the past few days.

The team at Hulu is doing our best to make lemonade out of lemons on this one, but it’s not easy given how poorly we executed here. Please know that we will do our best to learn from this mistake such that the Hulu user experience benefits in other ways down the road.

Sincerely,

Jason Kilar, CEO, Hulu”

doug

@questioning,

Om’s idea is a good one. Hulu is blowing up. It would be a great asset to own. I’m just clarifying why. That was the only thing wrong with what he wrote. The premise is sound though.

questioning om

om,

Thank god for yahoo shareholders that you are not running yahoo!

Pretty sites are not what drives value, see google, amaZon, craigslist, etc.

The hype that press has bestowed on hulu and great
Content is the key to their success.

By the way, hulu can not be a good standalone business

Simple formula :

Margin=revenue-partnersplit-costofoperations
Since partnersplit is 90% and cost of streaming is high margin=shit

This is NBC and fox trying to stop the YouTube drain.

doug

@Om/@Rocky, thanks for the follow ons. Those are good points. However, I still think you’re being blinded by the bright lights. The breakthrough of Hulu is that I can watch all that great content in one place, right at the hosted source, in a UI that doesn’t make me jump through hoops like the networks’ own sites. And to the extent that Fancast or Sling or TV.com fail to match Hulu for features, those “hoops” are still the problem in most cases. So hats off to Hulu for not making their users work as much – I will grant them that. But is that such a huge breakthrough, or is everyone else just screwing up inexplicably?

At any rate, Fancast doesn’t have that many fewer users than Hulu.com proper. Hulu really beats it via syndication, since it is the host site of the content, and Fancast is not. Moreover, the advertising on Fancast, and even YouTube, of the Hulu brand on each video played there tells users to just go direct to Hulu rather than watch it via Fancast. It’s like Yahoo advertising Google back in the day. Users aren’t dumb. And moreover, users are lazy! If they can get everything in one place, they’ll default to the source. In other words, once you get to a baseline satisfactory UI, this is about CONTENT. And over time it will become even more so.

@Om, I believe you like the convenience of Hulu in terms of the availability of this content, in one centralized location, at the hosted source, and not watching on a syndicated downstream player. Features are just icing on the cake. Unless you just like green and charcoal that much? I’ll put it to you another way. What is it about Hulu’s experience, versus Fancast’s, that you like so much better? I don’t think you can articulate a truly meaningful list of features.

@Rocky, you missed my point #3 above. Hulu has a far, far better experience than NBC or Fox, for the same content. Hulu wins hands down. There is no excuse for it. NBC should fire someone. You have to go through too many hoops on that site. It defies common sense, especially when they have Hulu in the family showing them the way. It’s merely an experience problem, not a technology problem.

Again, I’m not saying Hulu is doing anything wrong. They are doing a lot right with their experience. They have a great player too. But not so much that it trumps the fundamental importance of being the *hosted aggregated destination* for Fox and NBC content. That is what George Kliavkoff kickstarted, and he deserves that credit. Jason K may be the greatest operator ever but George is the one with the vision that drives 90%+ of Hulu’s traffic. And he hired Jason to boot.

2009 will be interesting. Do the networks allow Hulu to become another YouTube in terms of gaining hand in distribution of their content, or do they wake up to the monster they’re allowing to be built and start to instead promote their own destination sites? (And do a better job of developing those sites, now that they have the template for what that experience needs to look like, at minimum, to hold an audience?) There is no practical reason why at this point they need to let Hulu take the prize.

Drew Robertson

Jeepers doesn’t anyone remember when Yahoo overpaid for Broadcast.com? Even if Hulu made some sense for Yahoo, Wall Street would scotch the deal.

Thomas

@Rocky Agrawal: What makes you say NBC.com beats Hulu? By content, site design, etc. I say Hulu is the clear winner.

@les madras: Everything I’ve seen on Hulu has had all paid ads, but the major thing I’ve seen that they do wrong is showing the same ad each time. So if I’m watching a 1 hour episode of Chuck and there are 6 commercials (can’t remember the exact number) then I get the same 30 second commercial 6 times. Why not show 6 different commercials. The ad either worked or didn’t work the 1st time so the additional 5 times are a waste of the advertiser’s money. So far that’s pretty much the only mistake I would say that Hulu has made.

Rick

What the fuck hulu is outside US. Couldn’t expect a sensless post from Om specially

Rocky Agrawal

@Doug

It has to be about a lot more than content. NBC and Fox have the same content on their sites. NBC.com beats (slightly) hulu and hulu trounces Fox.com.

When you figure in the amount of on-air promotion that NBC and Fox do for their own Web sites (compared with zero for hulu), hulu’s performance is even more impressive.

hulu is also smartly taking advantage of YouTube to distribute its content:
http://blog.agrawals.org/2008/12/29/a-tale-of-two-media-companies/

james pierce

yahoo is better off building it’s own flash vod site which is not hard to do. Hollywood would license to anybody with $$$. Hulu has no proprietary tech so buying hulu would be a content play.

Paying $1billion to hulu for just content is expensive. It is cheaper to deal with the content provider directly.

Ashu

I think what Yahoo does next to stay afloat would be interesting to watch. Especially, with even Google cutting some services and layoffs in this recessionary period. I wish good luck to Yahoo and her team. I guess we should see some thing by mid year :)

socialapp

Yes, It would be interesting to follow Yahoo in the upcoming months especially with a recession around. Hope it goes well.

Om Malik

@Doug THere are a lot guys with access to similar content — except they are no Hulu.

when was the last time you went to Fancast? Yes they have amazing content too – except on Hulu people are actually watching it and enjoying it and loving the service. Big difference.

As they say – you can buy the best ingredients, but only a great chef would create a perfect meal. That is how i view Hulu.

Al Anon in Burbank

les madras, yes hulu doesn’t have a very heavy commercial load. But everyone I’ve shown Hulu to winds up using it to varying degrees. From an advertiser’s standpoint, Hulu audiences by nature are younger and more likely to be drawn in to network TV on their own terms (on demand). AND, you can’t skip commercials, unlike broadcast DVRs. Hulu have done a great job mimicking Netflix’s subscription queues and encouraging discovering new programming. Give it time, I think you’ll see a minute of national advertising in each break once Hulu catches on wide.

les madras

om, this is a crazy idea. if you watch videos on hulu you will see that most of them have one paid ad and the rest are public service ads. does yahoo need more eyeballs that it cannot monetize effectively?

Al Anon in Burbank

Hulu via Boxee on AppleTV comes close to a cable killer (it already has for me, saving about $1,000/yr). If allowed, the studios would have owned the entire distribution chain (all the affiliates and/or theatres) if they could during the broadcast era. Why in Gods’ name would FOX and NBCU cede control of one of their future distribution channels for a comparative pittance?

Chone

Everybody loves Hulu because of the content. That’s it. For most of these posters who have said they like Hulu, substitute the word “content” for “hulu” and the post will still make sense.

Gadget Sleuth

I’d rather they leave Hulu alone…its fine as is. Yahoo! has shown they can’t manage new ideas very well, so if they do sink, i’d rather that Hulu not sink with them.

Doug

I’m missing what Hulu has done operationally to win. Most of Hulu’s success is due to its amazing content, which was given to them by their parent networks. Hulu has a good design, maybe even a great design, but it’s not really any better than the designs at Sling.com or Fancast. Many of the features of Hulu lag.

Yes, Kilar gave an inspiring speech there at the conference, but quality isn’t a strategy, and it’s a tough differentiator to maintain, even if instilled in the culture.

Really, the success of Hulu comes down to three simple things: 1) owning NBC and Fox content (which has, granted, led to more deals for a deeper library of content, but still the majority of the top shows viewed there are NBC and Fox); 2) that this content is distributable/embeddable in a Hulu player (80%+ of their “unique users” are actually viewing on other sites – their proprietary traffic went down post-Fey/Palin); 3) that they don’t screw up the user experience with needless clicks and downloads the way the network sites inexplicably do.

I’m not sure any of these three things do anything for Yahoo. And Jason may make a great #2 anyway, but let’s not give his team more credit than they deserve. George K provided most of the value by getting NBC and Fox to play ball to create this site, and that was the vast majority of what got them where they are today. The site is well designed, but it’s hard to screw up owning full episodes of Family Guy and The Office online.

It’s also unclear that Hulu will remain a priority for NBC and Fox vs. the success of their own domains/brands. I think 2009 will see this issue play out a bit more, and their success vs. their parent sites and vs. cable providers will only highlight the creation of a “hulu monster” that the big boys may later regret creating.

Thomas

Please God no.. Hulu is awesome. Yahoo will just ruin it like everything else they touch!

anon

sounds like a good idea, if the only problem is getting traffic… but monetizing this (or youTube) for that matter looks like another issue..

people watch this most “professionally produced content” on Tivo to bypass the ads…..

maybe a better deal for blockbuster or someone like that…

maybe the ceo of hulu is a good guy… but to pay a $1B to get one guy…. seems too much…

Dave Zatz

Hulu might be good for Yahoo, but I’m not so sure it’d be good for Hulu. And I don’t know about the Flickr analogy. (Or decision to kill the much larger Yahoo Photos.)

DMC

Buy Hulu? That depends on whether or not Yahoo is happy to see growth in just the US. What many US-based users may not realise is that Hulu content is still not served to the vast majority of Internet users on the planet. They’ve had the same b/s faq for eons now saying that it is their intention to do so…but nothing seems to be happening.

Om Malik

@matt now that would be a pointless acquisition. Hulu is proving that it is a clear leader in professionally produced content destinations.

Alex

This was very well written. I too agree that this would make much sense for many of the companies discussed. The caveat is that Hulu would have to be LEFT ALONE to operate. The future of digital content versus traditional “paper” delivery are going in opposite directions. A nice piece of YHOO owned by News Corp would be the way to go. Also, with IPTV finally starting to take shape a company such as Hulu would be positioned nicely for future growth. Nice piece Om.

Om Malik

@Chris

No one quite talked about what they were going to do but since they raised private equity money, there is a need for an exit. IPOs are totally out of question though I think a sale to Yahoo in which they get Yahoo stock in exchange would make a lot of sense.

Chris

I thought this wasn’t mean to be bought. It was meant to be a platform for these media companies to legally distribute content. It would be like Google selling Gmail right?

Om Malik

@Mike Hill,

Hulu has very few employees – less than 100. Moreover, it is the kind of strategic acquisition that makes sense when things are not the best. People always have a strategy during good times, aggression during slowtime is what makes it a bold move. I disagree with you about making a weak case for sound buying decision.

Of course, we can chose to disagree!

Mike Hill

A YHOO M&A would not make any sense at this point, and would be such a throwback to the kind of buying sprees that got Yahoo to where they are now.

Especially given they just finished a round of layoffs!

Why buy another product and spend the time and effort to bring it into the Yahoo fold, spending both time and money that Yahoo simply does not have.

This article makes a pretty weak case for a sound buying decision.

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