Hulu Bets on Ambitious Slate to Catch Up to Competition

Hulu James Franco Mike Hopkins 112263
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From the outside, the Santa Monica headquarters Hulu calls home might look like just another office building. But the second floor that most of its 850 employees occupy is a world unto itself. There’s a video-arcade room, pool table, Ping-Pong table, hammock — even Hula Hoops scattered on the floor. And then there’s the kitchen, stocked with snacks galore, from ice cream sandwiches to beer on tap (light and dark).

The carefree vibe of the space is meant to foster creativity among the staff. But Hulu’s digs also serve a higher purpose: impressing the Hollywood talent who visit. “Even the most successful, experienced producers come, stay and want to get a tour,” says Craig Erwich, head of content at Hulu. “There’s an infectious energy to this place.”

Hulu fever certainly seems to be spreading. After years of tumult, the streaming service is finally showing momentum, driven by impressive deals in recent months for buzzworthy original series from pedigreed talent on both sides of the camera, not to mention top-shelf library licensing. Now, the question is whether all this can pay off for both halves of its hybrid business: the subscription component Hulu Plus, which has long lagged behind Netflix and Amazon Prime, as well as its free component, where the intensifying fight for ad dollars will be on display at this week’s NewFronts presentations in New York.

(Update: News broke late Tuesday of a mammoth syndication deal between Hulu and Sony Pictures Television for the entire library of “Seinfeld.” On Wednesday, Hulu announced an output deal with AMC that will give them streaming rights to the “Walking Dead” spinoff “Fear the Walking Dead.”)

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The original series on Hulu’s upcoming programming slate that should attract the most attention is “11/22/63,” based on Stephen King’s time-travel thriller about the JFK assassination. The show stars James Franco, and comes from J.J. Abrams and Warner Bros. Television. Production on nine one-hour episodes, expected to bow in early 2016, begins in June. The adaptation of the bestseller had been in development as a feature film, but when that stalled, Abrams convinced the novelist to let him turn it into a limited series. The “Star Wars” director, through his Bad Robot Prods. banner, shopped it around to all the usual suspects — but was sold on Hulu’s zeal.

“Hulu responded with an incredible passion for the content and the possibilities,” Abrams says. “And we responded to their enthusiasm and their ambition — the position they were poised to take, to be not just a distributor of media but a creator.”

Shows like “11/22/63” come with high expectations from the likes of Hulu CEO Mike Hopkins, who offers a bold prediction: “We think this is the year we break out.”

To best comprehend the arc of Hopkins’ career, it’s instructive to glimpse his framed portrait on the wall in Hulu’s lobby; all employees sit for a professional photo shoot that shows off their personality. Hopkins is depicted ditching his suit in a trash can, an allusion to his former life as the president of distribution at Fox Networks, where he had been since 1997.

On a recent visit to Hulu’s office, the CEO was in a button-down shirt and jeans, heading for an upfront prep session in a conference room named Central Perk. All of Hulu’s meeting rooms reference fictional locations or companies on television shows: Greendale, Pawnee, Dunder Mifflin, Wisteria Lane, even the Hatch.

There are no personal offices. Everyone — including Hopkins — has a workstation that’s out in the open, with teams intermingled to foster collaboration. All employees are given standing desks (they’re adjustable), though no land lines (unless they ask).

Hopkins’ background in affiliate sales made him something of a surprise choice to be tapped in October 2013 to succeed Jason Kilar, a Silicon Valley darling whose founding role atop the venture freighted Hulu with high expectations (an interim replacement had served seven months). But since launching in 2008, Hulu has been enveloped in controversy stemming from a joint ownership structure encompassing 21st Century Fox, NBCUniversal and, as of 2009, Disney. If the companies’ differing strategies didn’t create enough problems — as well as two abortive attempts to sell Hulu — their highly publicized conflict with Kilar made his departure in January 2013 inevitable, as was the exodus of executives who followed him out the door.

To make matters worse, subscription VOD rivals Netflix and Amazon Prime made considerable progress programming original series at a time when Hulu gained little traction with more modest efforts. But leaning on a solid foundation built on exclusive access to current-season primetime shows from Fox, NBC and ABC, Hulu still saw solid results, reaching $1 billion in revenue last year. Hopkins is expected to announce this week that the subscriber base for Hulu Plus has reached nearly 9 million, up almost 50% over 2014.

A first order of business for Hopkins was to hire a new executive team. That included Jenny Wall, formerly a member of Net­flix’s global creative team, as head of marketing. Wall, who joined Hulu about a year ago, isn’t intimidated by her former employer, which has more than 62 million subscription video-on-demand customers worldwide. “Netflix’s subscriber base is incredible — does that mean we are giving up? Absolutely not,” she says. “There’s plenty of room for both players.”

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In a new push to shift its ad-supported and subscription businesses into high gear, Hulu has been opening up its pocketbook, bidding more aggressively for new shows than it has in the past. Under Erwich, whom Hopkins hired a year ago from Warner Horizon, it has ordered several other series from notable Hollywood players, recently inking deals with Jason Reitman and Zander Lehmann for the family comedy “Casual”; Jason Katims, exec producing the family drama “The Way”; and Amy Poehler for “Difficult People,” starring Julie Klausner and Billy Eichner, which will be the first out of the gate, with a late summer launch.

“Money talks,” says Erwich. “You have to have the most aggressive bids, period.” Poehler jokes: “We had a ‘Hunger Games’-style competition to see where our show should live, and Craig had the fiercest bow-and-arrow skills.”

How much Hulu is spending on its souped-up strategy is not clear. In 2013, Fox, Disney and NBCU pledged to invest $750 million in the joint venture. Hulu has used that funding to buy more content, increase marketing and hire people, says Hopkins, who indicated he will spend 70% more on advertising and promotion this year vs. 2014.

Media analysts wonder if Hulu’s parents have the stomach to give the Internet-streaming site the hundreds of millions — if not billions — of dollars more in funding it would need to make a significant run at competing with the two other major SVOD services. In 2014, Netflix spent a net $3.2 billion on additions to its streaming-content library globally, and Amazon says it invested $1.3 billion in Prime Instant Video content last year.

“Hulu is definitely doing the right thing,” BTIG Research analyst Rich Greenfield says. “But will they have continued escalating capital commitment from the parents? The $750 million number is a nice start. But will it be $1.5 billion next year?”

With “11/22/63” and the other prestige projects, Hulu clearly is hungry to be compared with HBO and Netflix. Part of Hulu’s spiel to creators is that it can offer the rare opportunity to put the service on the map. The gist is that — whether you’re looking at “Mad Men” on AMC or “House of Cards” via Netflix — it only takes one show that hits the jackpot to make a network a contender.

Indeed, Hulu’s latest group of creative partners are all eager to deliver that first buzzy, breakout hit. “I remember how ‘House of Cards’ changed my impression of what Netflix was, and how ‘Transparent’ changed my impression of what Amazon was,” says Reitman, director of “Juno” and “Up in the Air.” “And we thought maybe there’s an opportunity to be one of the shows that defines what Hulu is.”

By signing A-list talent, Hulu hopes others will flock to its doors. “When you get James Franco in a show, that really circulates, and helps become an advertisement for Hulu,” Erwich says.

Franco, for his part, came onboard “11/22/63” because of his attraction to the book. He’d picked it up in an airport and had even hoped to develop it himself. After Abrams read an article Franco wrote that praised the novel, he reached out to the actor, and offered him the starring role. Franco agreed, as long as he could direct, too.

“The barriers are definitely crumbling in new ways,” Franco says. “I really have shut off that little tacit voice in my head that says, ‘This is what a movie star does.’ If it’s good content, I’ll just go there. I don’t care where it is.”

Hulu’s originals team isn’t playing by the traditional rules of TV development. It’s encouraging smaller writers’ rooms (its shows have four scribes instead of the usual seven to 10) and eliminating steps it feels bog down the process. “At first, it was a little bit scary,” concedes Beatrice Springborn, Hulu’s head of originals. “You’re so used to passing around a document and everyone signing off on it. Now it’s more ‘Let’s talk through the season.’ I think that’s been really great for creators who think the traditional network process can be a little bit limiting and stifling.”

And by all accounts, the showrunners are thriving. “I feel like they’re very interested in letting the story take the time it needs to develop, and not rushing it, not pushing us into |making it more sensational than it needs to be,” says Katims, who previously produced such shows as “Friday Night Lights” and “Parenthood.”

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Adds Reitman, “Frankly, it’s very similar to the creative experience I’ve had working with Fox Searchlight on an independent film.”

That freedom also allows creatives to push the envelope beyond traditional broadcast standards — on “Casual” in particular. “It’s dark and adult, and there’s sex and swearing and drugs, and that generally doesn’t play that well on broadcast,” Lehmann says. “I don’t think the broadcast people are going to be beating down my door anytime soon, which is OK.”

Abrams, too, is getting used to thinking about how the conventional format of episodic storytelling is changing. “As someone who for most of my television career has worked with broadcast networks, I’m just now getting my feet wet in terms of working with nontraditional networks,” he says. “I’m still adjusting to the miracle of not having commercial breaks and being able to use language in a way that people actually talk.”

Hulu, however, does have commercials. And that, according to analysts, is one of the key weaknesses in the company’s bid to gain equal footing with Netflix and Amazon Prime. Consumers, they say, would prefer to see no ads at all if they’re paying for an SVOD service. Moreover, Hulu doesn’t allow users to skip or fast-forward through commercial breaks.

“The content strategy (among the three players) is very similar,” says Eunice Shin, director of consulting services firm Manatt Digital Media. “But what’s different for Hulu is that its hybrid ad/subscription model throws a lot of consumers away.”

As for whether Hulu would contemplate an ad-free SVOD service, Hopkins says the company is looking at a range of ideas. But he adds that the dual revenue stream of ads and subscription fees, similar to cable TV networks, provides more value for partners. “We punch above our weight,” he says.

The advertising load on Hulu is lighter than on traditional TV, says Peter Naylor, Hulu senior VP of advertising. Hulu’s free content carries two to three ads per break, while Hulu Plus runs one or two. That’s compared with four to six commercials (or more) per pod for broadcast TV or cable. The pitch to marketers is that Hulu is a high-quality destination that delivers an audience that’s complementary to TV.

Still, BTIG’s Greenfield notes that consumers increasingly favor content without commercials. “Even YouTube is thinking of an ad-free business model,” he says.

The new Hulu recipe, in addition to juicy originals, stirs in exclusive SVOD deals for existing shows like Fox’s “Empire” — the No. 1 new show on TV this season — and CBS’ long-running stalwart “CSI,” as well as exclusive output deals for select future shows from FX Networks and Turner Broadcasting’s TNT, TBS, Adult Swim and Cartoon Network.

“We’ve got to have the hits,” Erwich says. “It’s a hit-driven business. It always has been and always will be.”

John Landgraf, president of FX Networks, says the Internet-video company was willing to pay the best price of any competitor — including Netflix — while also agreeing to let the cable programmer retain rights for in-season “stacking” (providing episodes on-demand on its own platforms). The pact covers first seasons of FX and FXX’s “The Comedians,” starring Billy Crystal and Josh Gad, as well as “Tyrant,” “The Strain,” “Married,” “You’re the Worst” and others, which will become available on Hulu Plus prior to their season-two premieres.

But for Landgraf, there have been other considerations besides price. Netflix has been reluctant to promote FX whereas Hulu has embraced it. “For Netflix, it itself is the brand,” Landgraf says. “It models itself after Apple, which is a company that doesn’t like to share its brand. Hulu is excited about marketing the FX brand. … They see this as something their users want to watch.” (Even though 21st Century Fox owns FX and also holds a stake in Hulu, Landgraf says no preferential treatment is being extended by either party.)

Another TV property to land exclusively on Hulu is “South Park.” Last summer, the show’s creators, Matt Stone and Trey Parker, along with Viacom, agreed to move more than 200 episodes of the long-running animated series behind the Hulu Plus paywall. Every episode of “South Park,” now in its 18th season on Comedy Central, previously had been available on the show’s free, ad-supported site, southparkstudios.com.

“We had gathered a bunch of audience on our site,” says Stone. “But, now we’re entering a world where if you have just one website with just one show — that’s not how people watch TV shows online anymore.”

But while Hulu beefs up its licensing library, the consensus is that it will take a big original series like “11/22/63” to really take off — and for the company to gain lost ground. Hopkins has made the platform bigger and more relevant in Hollywood, says RBC Capital Markets analyst David Bank. “But Hulu is still looking for their hit show,” he notes. They just haven’t had that breakthrough that Netflix has had.”

And Hulu isn’t yet out from under the shadow of its owners, with reports earlier this month that the FCC was probing Comcast Corp.’s oversight of the property in light of the distance the cable operator agreed to keep from the venture as a condition of its 2011 acquisition of NBCUniversal. Reps for Disney and Fox declined comment on Hulu.

Hopkins’ hope is that the combined result of increased investment across originals, syndication and marketing will drive results.

“If you’re in it, you have to win it,” he says. “We’re trying to pour fuel on the fire.”