Hulu CEO faces big changes

Jason Kilar set for mega payday; owners to alter content deals

“Outline transition plan for new CEO. Discuss potential candidates and process.”

These sentences are the topmost bullet points of a confidential internal memo regarding the business of Hulu obtained by Variety. Dated in July, the three-page document covers a range of sensitive issues pertaining to how two of Hulu’s parent companies, News Corp. and Disney, plan to transform the streaming service.

Whether that plan out will be carried with or without CEO Jason Kilar, whose future at the joint venture has been the subject of speculation for nearly two years, is the question.

But while the bullet points might suggest Kilar is already out of the picture, the reality of the situation may be more complicated. Neither reps for Hulu nor its managing partners would comment on the contents of the memo, but multiple sources suggest the “transition plan” reflects contingency planning in the event Kilar steps down — a possibility given what will happen next at the company.

A management buyout of another one of Hulu’s owners, Providence Equity Partners, that was first reported in April will close in September, say insiders, triggering two different developments that could be gamechangers for Hulu and Kilar.

The first is that the buyout will allow not just the exiting private equity firm to cash out, but any Hulu executive with a significant number of vested shares. For Kilar alone, that could mean what a source familiar with his compensation package described in the neighborhood of $100 million.

That has News Corp. and Disney execs contemplating leadership alternatives given concerns that Kilar may leave after such a windfall. But sources caution that no search committee has been hired nor have other candidates been approached for his job. There have been preliminary talks between Kilar and Hulu board members about his future, but without resolution.

A second consequence of the Providence buyout is that the change in the ownership structure will precipitate significant adjustments to the content licensing agreements that give Hulu its most valuable asset: next-day access to primetime programming from the TV networks owned by News Corp. and Disney.

Deal terms could sway Kilar

Numerous proposed deal terms outlined in the memo, from eliminating content exclusivity on the ad-supported website to scaling back the venture’s international ambitions, could discourage a richer Kilar from staying at a potentially weaker Hulu.

Regardless of Kilar’s pending payday and corporate challenges, multiple sources say Kilar is keen on sticking around at Hulu to finish what he started in 2007, when he defied the bad buzz that dogged a venture once derided as “Clown Co.” to build an innovative trailblazer. Kilar declined comment via a Hulu spokeswoman.

News Corp. and Disney issued a statement in support of Kilar from Hulu board directors Jon Miller, chief digital officer at News Corp., and Kevin Mayer, executive VP of corporate strategy, business development and technology at Disney: “Jason is an outstanding CEO, leading Hulu to exceed our expectations while also uniquely positioning the company for ongoing growth in the long run. We look forward to Jason and Hulu continuing to expand Hulu’s reach and deliver increasing value in the future.”

The changes outlined in the memo underscore the central tension gripping media conglomerates today as they juggle the often conflicting interests of growing the brands of tomorrow while still protecting existing revenue streams. With Providence out of the mix, Hulu is going to be exposed more than ever to its owners’ need to cater to the more lucrative demands of advertisers and distributors supporting legacy businesses — which often leads congloms to restrict online availability of network programming.

Comcast also has an ownership position in Hulu but can’t directly manage its business affairs as a condition of its 2011 acquisition of NBCUniversal, one of Hulu’s original stakeholders. Disney didn’t come aboard as an owner until 2009.

Rhode Island-based Providence invested $100 million in Hulu, which amounts to a 10% stake, when the joint venture launched. Given that private equity’s typical modus operandi is to hang on long enough to turn a tidy profit, it came as little surprise four months ago when reports surfaced that Providence was seeking an exit that would effectively double its investment given Hulu’s $2 billion valuation.

A spokesman for Providence declined comment.

While the management buyout has yet to be completed — a reflection of the complexity of the transaction — all expectations are that it will close. Providence’s investment in Hulu comes with an option to exercise a sale of its shares sometime in September, according to sources, in lieu of the inability for the private-equity firm to recoup its investment via an IPO or sale.

The four owners nearly sold Hulu last year but pulled it off the auction block after drawing interest from a range of companies from Microsoft to Yahoo. An IPO was also briefly considered but never pursued to fruition.

But Providence isn’t the only one standing to make money in the “liquidity event” once the buyout closes. Hulu shareholders, from top management to lower-ranking employees with options, stand to cash in, especially Kilar — who is estimated to have a stake in the company of at least 5%, which could peg his haul in the nine-figure range depending on whether his shares were diluted over the course of his tenure at Hulu.

The anxiety doesn’t end at Kilar, however. Regardless of whether he stays, Hulu’s owners are bracing for a potential brain drain among the ranks of his chief lieutenants, who stand to make a pretty penny themselves from the Providence pullout. Kilar’s right-hand men include Andy Forssell, senior VP of content, and Jean Paul (J.P.) Colaco, senior VP of advertising.

Providence’s exit will consolidate power among Hulu’s remaining owners, who are poised to make many changes to the content deals in place with Hulu for programming from their broadcast and cable networks. The memo outlines amendments including:

• No more exclusivity for current-season content once restricted to Hulu and the networks’ respective websites. Now Disney and News Corp. can turn around and license programming to another third-party, i.e. YouTube, which could dilute Hulu’s competitive advantage in the marketplace.

• No more content parity. ABC.com and Fox.com will be able to hold back certain content to differentiate their own sites from Hulu, which was once entitled to everything on the networks’ sites.

• Exclusive “super-distribution” rights Hulu once retained to syndicate content to third-party sites like Yahoo and AOL would revert back to Disney and News Corp.

• Fox wants to increase to four ads per commercial pod on Hulu.com.

Growth of Hulu Plus key

Sources close to the companies also said that discussions around these potential moves are designed to further accelerate growth for the paid service, Hulu Plus, which execs have said has already proven to be successful.

The deal points specified in the memo can’t be conclusively determined to be the final amendments to be implemented by Hulu’s owners, though they certainly give a sense of News Corp. and Disney’s intent with regards to changing their relationship with Hulu. It’s also unclear whether the new deal terms would take effectively immediately.

Another portion of the memo reveals Disney and News Corp.’s less than enthusiastic interest in Hulu’s international ambitions, which at this juncture is limited to Japan, where Hulu launched last September. Though Hulu international head Johannes Larcher gave an optimistic progress report on Hulu’s corporate blog in June detailing its plans for the territory, the parent companies don’t seem to share in the excitement.

The memo makes clear News Corp. wishes to “limit” its investment to $30 million while Disney “would like to discuss a less ambitious product which requires less capital investment but which could prove to be a good bus

The memo also notes Hulu has its eye on other markets, though its owners have mixed feelings on that end. While both companies don’t object to Hulu’s exploration of launching in Australia, both make clear they have no interest in funding a proposed expansion into India.

In addition, there’s an interesting disparity in strategy between Disney and News Corp. on a key point: authentication. While News Corp. wants to continue to maintain its eight-day delay on programming availability to viewers who aren’t subscribers to participating multichannel video providers, Disney declines to do so.

That demurral stands contrary to widely reported suggestions that Disney and other content companies were going to fall in line behind News Corp.’s authentication strategy, which it began implementing this time last year.

News Corp.’s continued interest in including Hulu as an authentication hub remains, however. One of its amendments to the content licensing agreement is an acceleration of Hulu’s implementation of authentication technology should other multichannel video providers sign on for so-called TV Everywhere services.

The sheer volume of restrictions Hulu’s owners could impose begs an obvious question: What is the point of putting the clamps on their own investment, let alone disincentivize its superstar CEO to stay the course?

That’s been a sore point in the past for Kilar, who first sparked speculation that his days at Hulu were numbered in February 2011 by publishing a post on the Hulu corporate blog critical of the traditional TV business that is Hulu’s owners’ bread and butter. The move represented a rare misstep for the CEO, whose own strategic approach to the business is said to be heavily influenced by the decade he spent previous to Hulu at Amazon, where he reported directly to founder Jeff Bezos.

Compounding Hulu’s managing partners’ anxiety is the way Kilar’s name pops up atop the wish list for every CEO vacancy that comes up in the digital media space. He had to publicly distance himself from Yahoo’s search last month to replace Scott Thompson as CEO, a position that later went to Google’s Marissa Mayer.

Revenues robust in 2012

What Kilar has achieved at Hulu in the areas of technology and monetization is impressive by all accounts. The company should easily surpass the $420 million in revenues generated last year, in addition to collecting $8 per month from over 2 million subs to Hulu Plus. But those numbers are still dwarfed by the advertising and affiliate fees coming from the likes of Fox News Channel or ESPN.

Though the road ahead for Hulu isn’t about to get any easier under new management, that may not be news to Kilar. The terms of the deals with Hulu owners’ content were understood by all involved, say insiders, to give Hulu a head start out of the gate, but not take the company down the homestretch.

While the average executive in Kilar’s shoes might be expected to move on, they may be underestimating how invested he is in the corporate culture he’s built at Hulu and how committed he is to a vision for the future of a company that is barely five years old. As tremendous a payday as the one likely coming to him next month, he’s likely to be richly rewarded for sticking it out and growing the company to the point that could yield greater upside down the line.

That said, his owners remain concerned he has enough money coming to launch a new vision elsewhere.