11/9/2010

Why Hulu Is The OPEC Of Online Video

Why Hulu Is The OPEC Of Online Video

Mark Suster 18 hours ago Editors note: The following is a guest post by Mark Suster , a venture capitalist based in Los Angeles at GRP Partners . He blogs at BothSidesoftheTable . The formation of Hulu was defensive designed to stop another YouTube or Napster from emerging and causing disruption to the TV industry. The idea was that if you could put up a consumer site that was seen as the best place to consume content then people wouldnt go to lower-quality or free sites to get it. The founders felt that having a legitimate site for content would discourage Silicon Valley VCs from funding entrepreneurs to create the next big TV killer. This narrative has been confirmed to me by several senior studio executives. Once this new service became popular then the media companies could control the rules of distribution & advertising. To say that the tech elite were cynical of Hulus launch would be an understatement, but by the time it launched just a few months later it was getting great reviews. I have personally always felt a sort of cognitive dissonance regarding Hulu. I have always loved watching videos there but always believed that any company controlled by a consortia of interests would be doomed in the long run especially by established, large incumbents with an interest in protecting the past more than innovating the future. I have made many of my arguments in a blog post I wrote on The Innovators Dilemma , a concept that is important for both innovators & incumbents to understand. When I recently wrote about how excited I was about investing in The Digital Living Room , Hulu was only mentioned in the context of how Clicker.com was a much better metaphor for content discovery and search. So what does this have to do with OPEC? OPEC (the organization of petroleum exporting countries) is a cartel that was set up in the 1960s and represents the interests of the 12 biggest oil producing countries in the world with the goal of increasing prices of oil, a good supplied in limited quantities to a world that had insatiable demand for the product. The philosophy of OPEC has been that if they can limit the amount of oil supplied to the world they can maintain high prices in a world where demand and competition should naturally have downward pressure on oil prices. Hulu is an online video distribution system owned by 3 of the largest 5 film & television suppliers in the United States with the goal of limiting the supply of high-quality online video available in order to defend high prices of the supply of this content on televisions through cable, satellite & broadcast TV. Both systems are threatened in the medium run because alternative supplies of their core products will become more plentiful. The goal of any cartel is to control production, distribution & marketing of a set of goods with the goal of maintaining high prices. Because they are anti-competitive most countries ban cartels. The problem with OPEC, as in most cartels, is that the incentive for any individual suppliers is to cheat the system by going around restrictions. If all other countries are reducing supply & holding high prices then you benefit by producing more yourself or secretly distributing to people who will pay higher prices. This has been the history of OPEC it a cartel full of countries that routinely have cheated. Oil is a commodity with which the world has a love / hate relationship. We love the productivity and independence that comes from oil powering our machinery & transportation but we hate enriching producers that we feel sometimes act against our best interests as consumers. So it is quite lofty to compare Hulu with OPEC. Here is my case: 1. Restricted Supply: We love the content that is produced by the companies that are the primary suppliers to Hulu: Modern Family, The Office, The Simpsons or even classics such as Arrested Development. But Hulu isnt as good as wed like it to be because the supply is held back. Current shows generally only have 5 episodes at a time, which makes the service pretty mediocre as far as consumer value goes. Older shows might allow a single season.

techcrunch.com/2010/11/08/hulu-opec/

1/9

11/9/2010 consumer value goes. as far as

Why Hulu Is season. Older shows might allow a singleThe OPEC

Of Online Video

Why the limitation? Many reasons but a clue is that the studios have to honor time windows for when the show runs. They monetize via high-priced advertisements during the prime-time airing on TV, via syndication to international audiences or less-watched channels after the original series has run and via DVD sales in retail channels. Of course its their right to do so and there is so much money involved you can hardly blame them. But this Innovators Dilemma restricts them from having as useful of a service as they otherwise might. Hulu Plus now allows you to get a more extensive catalog for $10 / month. It has just been released to wide audiences November 2010 mostly in response to the growing popularity of Netflix and ironically the introduction of the ABC.com player on the iPad. 2. Limited Targeting of Advertisements: The great promise of the Internet for advertisers was that they were finally going to be able to deliver targeted advertisements to users because they could finally know who you were. This has become a reality with banner ads, search ads, contextual ads and Facebook ads. But not Hulu ads. Why? They know who we are, dont they? Yes, they do. But they generally dont even allow advertisers to purchase ads for a single show let alone ads targeting YOU by reading your cookies on your computer. So we have ads that are even less targeted than those on television. The reason lies in protecting the high price of broadcast & cable advertising rates. They are nervous about trading analog dollars for digital pennies. So advertisers have to buy run of site ads rather than show specific ones. 3. Cheating: As I pointed out cartels create the incentive to cheat because each individual supplier gains by cheating if everybody in the system doesnt. In oil that is a country secretly producing more than their allowed rate limits. In Hulu it is each individual studio / network wanting to push their own stuff direct rather than through Hulu. I might talk openly about how Hulu is my partner, while simultaneously launching an iPad player before Hulu does (as ABC did) even when Im a shareholder. Each of the major media shareholders maintain their own websites where they can (and do) promote their content directly and have every incentive to do so. As Ive always argued, if Fox were to create another hit show as popular at American Idol it is hard for me to imagine that they wouldnt run exclusive content & promotions on their own site more than on Hulu, where theyre a smaller partner. 4. Slow innovation: When Hulu launched I think its fair to say that it exceeded nearly everybodys expectations. The website was easy-to-use, fast, clean and gave us access to the good stuff. Yet for all the fanfare at launch and despite its popularity as a website to consume video content I would argue that its pace of innovation has been slower than its initial launch might have suggested. If you want to search for video content on the Internet its far easier / more useful to do on Clicker.com than on Hulu even for content that is offered on their site! Hulu emerged in the social networking era and yet Boxee has been way out in front in terms of creating social viewing experiences. We are seeing the emergence of the digital living room and yet Netflix, Apple & Google all seem to be better positioned to have a seat at our couches. We are entering the age of second screen TV viewing. We are really still in the first inning of this trend but it is not being led by Hulu. They were late to the iPad and late with a subscription service. At times the innovation has actually worked in reverse and not just a stand still. As consumers we all want to get content streamed to our television sets in addition to our PCs and iPads. Boxee was created to give us this experience. And as the service started to gain popularity it created an integration with Hulu to allow Boxee users to watch what was already free on the Internet on their television sets. Yet Hulu blocked the integration and wouldnt allow Boxee to stream Hulu on the TV. Even though any of us could just plug our PCs / Macs into our TV sets ourselves (or with a little help from YouTube instructions ), Hulu wanted to block this. Why? Because the MSOs (cable & satellite providers) dont really want to see you watching Internet videos on your TV set. This kind of viewing, called over the top, is what is leading many households to cancel their expensive cable packages. When you can already watch Jon Stewart, Saturday Night Live, all the news shows, The View and everything else on the computer it seems like live sports, ESPN and HBO are some of the last vestiges of content keeping many from cutting their cords today. And yet I imagine that this lack of innovation must irritate nobody more than the CEO of Hulu, Jason Kilare. His launch at Hulu was so successful and we all started believing that maybe he could really just pull this thing off. But I suspect he, and the rest of Hulu, are starting to discover the Faustian bargain of having the big media suppliers as large shareholders in a world where startups or other tech companies get to play by their own rules. If you havent read Ken Aulettas brilliant bookGoogled , you should. Amongst other things it chronicles the frustration many media companies have had in not being able to play by the same rules as the tech companies.

techcrunch.com/2010/11/08/hulu-opec/

2/9

11/9/2010

Why Hulu Is The OPEC Of Online Video

They seem to have such a talented team over at Hulu and yet seem held back from the best that they could produce. As NBC (founding shareholder at Hulu) and Comcast complete their merger I suspect the pressure on and control of Hulu will be even firmer. 5. The Road Ahead? Hulu hinted at greatness. They clearly have a very talented management team yet are clearly held back by the Innovators Dilemma from their shareholders that binds them. They raised $100 million from Providence Equity Partners at a $1 billion valuation and have thus proven that they understand that a degree of independence is vital for their success. If I were a corporate shareholder at Hulu I would set them free even further. I would reduce contractual obligations that bind them to your archaic industry norms. I would reduce my equity stake much further. I would take a lower valuation in exchange for bringing in world-class investors that can create the right structure for future success. Disney has already shown it has innovation potential on its own in the tech meets media world and being too tied to Hulu will only continue to create inconsistencies. Fox has already divested much of FAN (the Fox Audience Network) and has been wanting to sell MySpace for some time. NBC will merge with Comcast, owner of Fancast, which would be a competitive offering to Hulu. I think all of these players are better off reducing their ties to Hulu while driving their own innovation in house. The model I would look to? Skype. It languished under the ownership of eBay who didnt have the right vision or structure to take Skype to the next level. The current executive team at eBay are not the ones that bought the company and thus were able to create a deal that brings the right incentives to spin-out Skype. But they didnt just sell it and take the cash. They held on to a minority stake and brought in people like Andreessen Horowitz to help create a more valuable asset in the long-run for their reduced stake. I would much rather be a big media company with a smaller stake in a video company that transforms the industry than a larger shareholder in one that does not. Obvious. One day television & film are going to be disrupted and the opportunities for monetization by those that understand the future will be immense. In the current structure I cannot see how Hulu becomes this company.

Adve rtise m ent

Now

Commented

Facebook

Googles Response To Facebooks Response To Googles Facebook API Ban Square Now Processing Millions Of Dollars In Mobile Transactions Every Week Facebook Finds A New Way To Liberate Your Gmail Contact Data Is Apple Finally Poised To Cut The Insanely Annoying Cords To My Head? Google Versus RockMelt: Who Does Search Previews Better? Google Instant Previews: Get Ready To Be 5% More Likely Satisfied With Google Search

Related Topics
hulu Mark Suster

Adve rtise m ent

techcrunch.com/2010/11/08/hulu-opec/

3/9

11/9/2010

Why Hulu Is The OPEC Of Online Video

5 people liked this.

Showing 29 comments
Sort by Popular now Subscribe by email Subscribe by RSS

Christopher

18 hours ago

The problem is this. EVERYONE in sillycon valley w ill pay millions for yet another firehose to aggregate crappy video and episodes from the 70s and other video no one w ants to see again. Next to no one w ill pay to have new content created. NO MORE data/video/audio FIREHOSES. More revision3.com please. Pay some actors. Create good new content, and don't license it to Hulu.
roschler and 4 more liked this

judyshapiro

16 hours ago

Historically cartels, like DeBeers for example, invariably implode over time because their effectiveness requires near 100% compliance by cartel members. No easy task. Cartels also suffer from their inherent resistance to innovate as that w ould undermine the cartel itself. Hulu raised our expectations that w e can use our computers and TV seamlessly. Now they may be a victim of their ow n success and its likely to get w orse w hen Google / Apple TV really gains adoption. In essence, the media and technology companies w ant to double and triple dip into w hat consumer already paid for. Consumers already pay for their Internet access yet w ith Google TV, they w ill be paying to gain access to the sites w e w ant (w hether that toll be an app you have to dow nload or actual fee). And consumers already pay for content via ads yet again, w e w ill need to pay subscription fees w hen using these integrated internet/ TV offerings. The Hulu scenario is just the tip of the iceberg I fear. What is surprising is that everyone is looking to toll the consumption of the content despite the fact that there are great business models that dont tax the content at all. Instead, they are based on communities of interest w here you can monetize how people interact w ith each other and w ith the content as they experience it. Fasten your seat belt its going to be a bumpy ride. Judy Shapiro
Nonprofit Tech and 3 more liked this

hipkat

15 hours ago

Well said Judy. The cartel (eg Hulu) w ill get into bed w ith the tech companies who are like the mega oil companies of today. History tells us how this type of arrangement can end. I have a bad feeling. Tx Mark great piece.

RachelG liked this

Dan Munro 17 hours ago

No idea w hat your day job is Mark (kidding) - but you gotta give it up .... these posts just keep getting better! ;-)

techcrunch.com/2010/11/08/hulu-opec/

4/9

11/9/2010

Why Hulu Is The OPEC Of Online Video

In the end - this prompted me to go back and reread Clay Shirky's post from April titled "The Collapse of Complex Business Models." http://goo.gl/hwLKq ... definitely w orth reading the w hole post - but the last paragraph is a pretty good summation: "When ecosystems change and inflexible institutions collapse, their members disperse, abandoning old beliefs, trying new things, making their living in different w ays than they used to. Its easy to see the w ays in w hich collapse to simplicity w recks the glories of old. But there is one compensating advantage for the people w ho escape the old system: when the ecosystem stops rew arding complexity, it is the people w ho figure out how to w ork simply in the present, rather than the people w ho mastered the complexities of the past, w ho get to say w hat happens in the future."

2 people liked this.

msuster

17 hours ago

great paragraph!

Sam 18 hours ago

NetFlix is there to compete and keep Hulu on its heels.

pbj and 1 more liked this

Rob 17 hours ago

...a related and interesting post from Mark Cuban on how Netflix has the superior model: http://blogmaverick.com/2010/10/22/how-google-tv-could-hand-netflix-the-entirestreaming-universe /

Vlad

10 hours ago

Mark, What do you think about "competing" services like Netflix and Videolla? Can paid content defeat that model in long run?
pbj liked this

msuster

5 hours ago

I think the future w ill be a combination of subscription, pay-per-view and ad-supported. Which is the exact same situation as the present!

tatsuke 16 hours ago

The purpose of the cartel is to maximize profits, not "keep higher prices"; high prices don't imply more profits. But good stuff.
1 person liked this.

msuster

15 hours ago

Not to nitpick, but the actual definition is to control prices or limit competition: http://www.merriam-

techcrunch.com/2010/11/08/hulu-opec/

5/9

11/9/2010
webster.com/dictionary/cartel

Why Hulu Is The OPEC Of Online Video

1 person liked this.

Tris

18 hours ago

Hulu w ill continue to be successful as long as it is supported via ads. As soon as they start charging for the service AND showing ads, view ers w ill flee in droves. I w ant Hulu to succeed, w hich is w hy it's one of only a handful sites for w hich my Firefox ad-blocker extension is disabled. There's nothing wrong w ith only having the most recent 5 episodes available. This is still a giant leap over the "old days" when you had to be in front of your TV at 8pm to watch your favorite show . TV over the air w as free. But you had to buy a TV. Hulu is free, but you need a computer and high-speed internet. I only w ish there were more show s on Hulu. Like, all of 'em.
pbj liked this

Gerald Z

18 hours ago

Yes, it's against Hulu's TOS to w atch Hulu on your TV! http://pctvcables.com
pbj liked this

m3talr3x 15 hours ago

haha, the term television is an aging term nearing obsolescence. Every "TV" as you call it in the future w ill just be a giant computer monitor hooked up to some multifunction HTPC that people w ill use to access all things digital. Even the idea of "getting on the internet" is aging. I just turn on my screen, type in a search box what I w ant to listen to, w atch, read, etc. and hit enter :)
2 people liked this.

Eric Rost 6 hours ago

Why does every article on this subject outright say that hulu doesn't w ork w ith boxee? I w atched The Office on boxee just last night through hulu when hulu's own stupid "Hulu Desktop" app w ouldn't play it properly. hulu streams JUST FINE on boxee.

msuster

5 hours ago

I read all of the articles on the subject and Hulu on several occasions physically blocked Boxee. Each time Boxee found a w ork around. It became a game of cat-and-mouse. So perhaps it is w orking today - w ho know s about tomorrow or next month.

Vlad Azimhodjaev 11 hours ago

Mr. Suster, Nice article and comparison w ith OPEC. Loved the "cheating" part about ABC. Looking forward to see you on TWiVC. Vlad

techcrunch.com/2010/11/08/hulu-opec/

6/9

11/9/2010
Jfoz01 2 hours ago

Why Hulu Is The OPEC Of Online Video

Cheating in this case has a w rinkle. Disney has a huge shareholder named Steve Jobs. He has a vested interest in getting people to use the iPad and streaming video is one of the coolest ways to do this. But he didn't w ant to use flash so iPad users are unable to use the existing, very good Hulu experience via a standard brow ser. So if you are Disney and you have tw o competing interests, you play them both and let the consumer decide over time w hat's best. This OPEC comparison is missing out on a key element: Hulu has it's own mission to serve consumers and w ill have to be patient and careful (and aggressive) to defeat the innovator's dilemma. The three joint partners started Hulu, but they are not running the company. Mark aptly points out that the future for Hulu lies in independence.

Tyler Beerman

13 hours ago

Does this mean facebook is the OPEC of social? Ie social w eb, social graph, social-netw orking etc etc?!?

m3talr3x 16 hours ago

Hulu is great, Netflix/Amazon is for people 30+, younger generations w ill not pay for video content. If I cant w atch something on Hulu, Youtube or another w ebsite for free (Plus some ads) then I w ill eagerly and quickly dow nload from P2P anything I w ant. I alw ays give legit w ebsites a chance first but I w ill never pay for video content along w ith many other like minded people. This is part of the reason w hy I think cable/sat providers are an endangered species, but different rant..

David Ciani

16 hours ago

this article begs the question: Aren't cartels illegal under federal antitrust laws?

msuster

15 hours ago

Yes, but Hulu isn't a real cartel. It just plays one on TV ;-) For one, not all major media companies are participating. Also, there are so man emerging content sources that it's hard to imagine it would be ever classified as so.
1 person liked this.

David Ciani

14 hours ago

You do have a point, but being a Joint Venture between 3 out of the "Big 4" television netw orks (ABC, CBS, Fox & NBC) is pretty significant. CBS despite not having its content on Hulu seems to know w hat its doing in this department. They have the shortest delay between broadcast and online release, some times their content goes up w hile the show is still broadcasting on the w est coast if not right after its done airing.

dougan

17 hours ago

Wow , Mark, a truly great article. The only complement I w ould like to add is that the Valley, and many of the other great tech centers around the w orld have smart-smart entrepreneurs and financiers w ho are already laser-focused on bringing alternatives to the w hale in the sw imming pool. I believe, if anything, hulu provides a competitive benchmark to aspire to (/against). I suppose w e can

techcrunch.com/2010/11/08/hulu-opec/

7/9

11/9/2010

Why Hulu Is The OPEC Of Online Video

only hope that hulu's eventual successor is not so closely aligned w ith the content publishers.

Martinftw 17 hours ago

you w rote: "I think all of these players are better off reducing their ties to Hulu while driving their ow n innovation in house." I see your point, but remember Hulu is getting shows like the Office and Modern Family w ithout paying for the development and production of those show s. In other w ords, they are getting properties that are w orth upw ards of 8 figures w ithout sharing the burden of those costs. They're able to achieve this because ABC/NBC/Fox together ow n the majority stake in Hulu. If the netw orks reduced their ow nership, they w ould probably not give their show s aw ay like this. My tw o cents. Also, great article.

msuster

17 hours ago

Understood. It's w hy Hulu has this dilemma. They can't piss off shareholders - they need the content. Netflix created a consumer service people w anted and w ere w illing to pay for. So they have the money to shell out. Ironically, they're in a better position regarding content.

Sam 17 hours ago

Netflix may be in a better position (I say that's questionable itself) but are they in a good position? Gross margins are going dow n (= content costs going up as they continue to pay the equivalent of carriage fees). As they continue to aggregate content and charge all-you-can-eat sub fees the same w ay that traditional MSOs do now , how is/w ill their model all that different?
1 person liked this.

msuster

15 hours ago

large and loyal subscriber base, large cashflow to pay for content deals. I think they w ill "ow n" head-end content distribution.
pbj liked this

Jeremy201 17 hours ago

As long as Disney (via ABC) is invested in Hulu, expect $$$ to be the first priority. Screw innovation. Screw consumers.

Real-time updating is enabled. (Pause)

Add New Comment

Optional: Login below .

techcrunch.com/2010/11/08/hulu-opec/

8/9

11/9/2010
blog comments powered by DISQUS

Why Hulu Is The OPEC Of Online Video

Adve rtise m ent

2010 TechCrunch
Powered by WordPress.com VIP

About

Advertise

Archives

Contact

Events

Jobs

Network

Staff

techcrunch.com/2010/11/08/hulu-opec/

9/9