Hulu who?

After much confusion, it is becoming clear what works in online video

IN THE spring of 2007 Jason Kilar was trying to beef up the video offerings of his employer, Amazon, the world’s largest online retailer, when he got a call from a headhunting firm. Would he consider running Hulu, a new joint venture by two “old media” giants, NBC Universal and News Corp? The idea was to enter the confusing online-video market by starting a service from scratch—and doing it properly. Mr Kilar said yes. He showed up in his new office in Santa Monica, near Los Angeles, and with his small team started scribbling ideas on the “whiteboard” wallpaper.

The excitement as well as the confusion had started in 2006, when a young website, YouTube, shot out of nowhere to become that year’s “next big thing”. Within months, YouTube sold itself to Google, the world’s largest internet firm. YouTube had risen so fast by making it easy to watch and share videos in any web browser, and by making it almost as easy to upload home-made videos to its site. Such “user-generated content” seemed to be the future.

In one sense this turned out to be correct. YouTube went on to dominate web video as measured by the number of videos that users watch (see chart). Its social and even political importance are hard to overstate. From “Obama Girl” videos and tutorials about tying shoelaces or folding origami to Yoga and aerobics instruction, YouTube has changed lives. But there was a catch. Advertisers, by and large, will not touch user-generated content with a barge pole. Its quality is variable, to say the least; its content occasionally off-putting. No brand wants to be near it. And much of it is illegal—pirated from large media companies and uploaded by fans. Media giants, led by Viacom, were suing. So there was a threat of costs and no promise of revenues. YouTube is undoubtedly a phenomenon, but it is not a business.

So others showed up hoping to fill that gap. Until recently, says Shahid Khan, a video analyst at IBB Consulting, there were only question-marks. Did a new service need user-generated content as well as professional videos? Was it better to aggregate the content of many media companies or to be an outlet for just one? Would people prefer to download films or television shows to their computers, then transfer them to their iPods, as Apple was betting? Or would they prefer “streaming” a video just once? If so, might they be persuaded to install a bespoke video application onto their computers, or would they insist on watching videos inside their web browsers? Would they pay to watch, or would advertising provide the revenues?

Almost every permutation has been tried. From Amazon to Apple, from Netflix toJoost, from ABC to CBS’s TV.com, companies old and young started serving videos over the internet. Into this mess Mr Kilar tried to enter with the service that was to be Hulu. The bloggers at first scoffed: it turns out that Hulu can mean “cease and desist” in Swahili. But then they started paying attention.

Tune in for the answers

Today, even though advertising is destined for a depression, Hulu appears to have clarified much of the confusion. Mr Kilar will not say what revenue or profit Hulu is making. But it seems to be successful by any measure. Although Hulu is still far behind YouTube (see chart), users have been flocking to it, watching 216m videos in December. Just as importantly, Hulu’s inventory for advertisers appears to be sold out. So Hulu is in the rare position of being able to increase inventory (through new content and more views) and make money from it. Hulu now has more than 100 advertisers, including big brands such as McDonald’s, Bank of America and Best Buy.

It therefore appears that Mr Kilar has, in effect, answered a lot of the questions. He contemplated user-generated content, then decided that “the world didn’t need yet another” YouTube; so Hulu has only professional content, and advertisers love it. He also talked with his bosses at NBC Universal and Fox and agreed that aggregating the content of many was “something potentially much larger” than piping out the videos of just two. Hulu now offers content from more than 110 partners.

Mr Kilar also bet on streaming via the web, rather than letting users download. Rivals such as Joost have made the same choice. Films and TV differ from music, says Mike Volpi, Joost’s boss, in that people watching tend to sit still, whereas people listening tend to move; and people usually watch a show only once but listen to a song again and again. There is a place for Apple’s model of downloading and buying videos—children, for example, like to watch the same TV programme many times—but that market is likely to be smaller.

Mr Kilar was also early to choose the right way of streaming video: through the browser, with a simple and sleek design. He began, he says, with the idea that the site should “not look like Tokyo at night”—in other words, it should be as simple as YouTube is cluttered. And the service should be so easy to use that “my mother would be proficient on it in 15 seconds or less, with no help from me.” Mr Kilar, who began his career at Walt Disney, wanted Hulu to offer the same rich-but-clean experience as Disney’s theme parks do.

Accordingly, he decided against making users download a special piece of software, which would not have “passed the mom test.” This turned out to be correct. Joost started by offering video through its own software application, but lost out to Hulu and did an about-face. A few weeks ago it discontinued its downloadable application and began streaming only through the browser. This late conversion was Joost’s “biggest flaw”, says IBB’s Mr Khan, and now leaves it far behind.

The browser-based approach favours streaming rather than downloads, but that does not mean that the paid-for download model is dead. Mr Khan thinks that some viewers will want to own content, and that may become a premium option on free services such as Hulu.

But the bigger lesson from Hulu’s success is that supporting streamed video with advertising, rather than charging for downloads, turns out to work very well. Hulu’s ads are few and short, with a subtle countdown timer that makes them even more bearable. In some cases viewers can even choose which ad to watch, so it is more likely to be relevant to their interests. And people tend to remember the advertisements they see on Hulu much better than they recall television ads, says Mr Kilar, so advertisers are pleased.

It is too early to declare Hulu the winner. It “has done a very good job,” admits Joost’s Mr Volpi, but “the die has not been cast yet.” Mr Khan thinks Amazon’s offering may become more compelling, and that TV.com, formerly a provider of television listings and now a streaming site owned by CBS, may yet come from behind. But for the moment it appears that YouTube proved that people would watch videos online—whereas Hulu is proving that advertisers will foot the bill.

For full article: http://www.economist.com/business/displaystory.cfm?story_id=13059735