Without its architect, Hulu needs new grounding

Analysis: News Corp., Disney at odds over core direction

Jason Kilar may be gone, but plenty of questions remain about the future of Hulu.

The resignation Friday of the streaming service’s CEO and chief architect, who will step down before the end of the first quarter, had been considered a foregone conclusion, according to insiders, given his tempestuous history with parent companies News Corp. and Disney.

Ultimately, Kilar couldn’t square his ambitions for Hulu with those of its owners, which were less interested in the potential of the joint venture in and of itself than as an adjunct of a broader business encompassing their far more lucrative TV operations.

Tensions between those owners and with Kilar were laid bare in a confidential internal memo leaked to Variety last August that all but foretold his exit in its very first sentence: “Outline transition plan for new CEO. Discuss potential candidates and process.” Hulu and its parent companies denied at the time that the statement represented any intent to leave on Kilar’s part.

Perhaps more telling were the issues the memo exposed over the strategic direction of Hulu between Disney and News Corp., which share oversight without involvement of a third owner, NBCUniversal, per a condition of Comcast’s acquisition of the conglom. A fourth owner, Providence Equity Partners, exited last fall, selling its stake in Hulu to the other stakeholders.

Though Hulu has had to prove its viability over the course of its five-year existence in part because of the conventional wisdom that joint ventures rarely work in Hollywood, a counterintuitive skepticism is taking effect: The fewer the cooks in the company’s kitchen, the more complicated Hulu’s future seems to become.

The complications start at the company’s core: Hulu is a hybrid business. One part is Hulu.com, a free, ad-supported clearinghouse that averaged 22 million unique visitors in November coming for next-day programming from its owners’ broadcast wares (with the exception of CBS). The other is Hulu Plus, a subscription VOD product in the mold of Netflix that provides 3 million subs with a deeper trove of programming for a monthly fee.

Both components contribute to the nearly $700 million in revenues Hulu reported for 2012, though that’s not enough to overcome what amounts to a $30 million loss for the venture in its most recent quarter.

As the August memo revealed, Disney and News Corp. are at odds over which half of the business should continue. That News Corp. is in the Hulu Plus camp should come as no surprise considering Fox content on the website is available on next-day basis only to consumers who can authenticate their pay-TV subscriptions (there’s an eight-day delay for non-subs) or are Hulu Plus subs. But Disney has faith in the ad-supported business, where Hulu has proved a pioneer capable of monetizing traffic even more effectively than YouTube.

It’s conceivable that 2013 is the year Hulu’s overseers pick one road or the other to continue on, which raises another question about its future: Would the owner who doesn’t get its way want to continue in an ownership position? Kilar’s exit could provide as good a juncture as any for yet another exit.

The venture is no stranger to management turbulence considering the owners agreed to try to sell Hulu in 2011. But not long after attracting the likes of Microsoft and Yahoo to the auction block, the owners backed out. Whether outside interest will be revived anew — or whether there’s internal consensus on going down that road again — is unclear.

As the aborted sale process made clear, the value of Hulu is largely tied up in the content deals it has its with its owners.

Much of 2012 was spent trying to diversify Hulu’s programming base with various exclusive arrangements, including pacts with Viacom, the BBC and WWE. An estimated $500 million was brought to bear in 2012, and despite the absence of profits, Hulu management was asking its owners for even more, according to the memo and subsequent reports.

How much will be spent and where that money will go is a question mark for 2013, and the uncertainty is all the more pressing given that Hulu competitors including Netflix, YouTube and Amazon are loosening their purse strings.

Hulu made some admirable strides on funding original programming last year, including several series like the critically acclaimed scripted drama “Battleground.” But Netflix has at least four scripted series set to roll out in the coming months, and Amazon’s development efforts are expected to soon yield its first pilots. YouTube is headed into its second year of a slate of funded channels.

And while Hulu has landed its share of exclusive content pacts, which help differentiate it from a cluttered field, recent dealmaking by Netflix and Amazon indicates that there’s going to be more pressure than ever to pay the kinds of premiums that help keep key TV series and films away from rivals.

International expansion is another area where Hulu lags the competition. While it has put down roots in Japan, its parent companies have discouraged pursuit of other territories where Kilar has sought to invest, from Australia to India.

There’s no word yet on whether there will be an interim replacement for Kilar or what lies next for the former Amazon exec, who has been credited with supplying the vision and direction that turned Hulu into a go-to destination for premium TV programming. But as universally lauded as Kilar was for putting Hulu on the map, there’s no question Disney and News Corp. will turn next to someone who can execute their vision.

That figure may very well reside within the company, but it’s entirely possible that Kilar will be followed out the door by any number of the chief lieutenants who were with the venture from the beginning and stood to earn a windfall in the vested shares triggered by the Providence buyout.

CTO Rich Tom is exiting alongside Kilar — which will no doubt ignite speculation that Kilar already has his next venture ready to go — but for now other right-hand men Andy Forssell, senior VP of content, and Jean Paul (J.P.) Colaco, senior VP of advertising, haven’t signaled same. Still, the revolving door at Hulu HQ may well keep spinning in the coming months.

“I’ve been so fortunate to play a role in this amazing, ongoing journey,” Kilar wrote Friday in a blog post on the company’s website. “My decision to depart has been one of the toughest I’ve ever made.”