Hulu’s Pitch: We’ll Pay You More Than Anyone (Online)

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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