Why Hulu is the OPEC of Online Video

Posted on Nov 8, 2010 | 21 comments

Why Hulu is the OPEC of Online Video

This article originally appeared on TechCrunch.

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 wouldn’t go to lower-quality or free sites to get it.  The founders felt that having a legitimate site for content would discourage Silicon Valley VC’s 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 Hulu’s 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 Innovator’s Dilemma, a concept that is critical 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 1960’s 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 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 isn’t as good as we’d 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.

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 it’s their right to do so and there is so much money involved you can hardly blame them.  But this Innovator’s 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, don’t they?  Yes, they do.  But they generally don’t 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 doesn’t.  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 I’m 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 I’ve always argued, if Fox were to create another hit show as popular at “American Idol” it is hard for me to imagine that they wouldn’t run exclusive content & promotions on their own site more than on Hulu, where they’re a smaller partner.

4. Slow innovation: When Hulu launched I think it’s fair to say that it exceeded nearly everybody’s 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 it’s 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 wouldn’t allow Boxee to stream Hulu on the TV.  Even though any of us could just plug our PC’s / 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) don’t 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 haven’t read Ken Auletta’s brilliant book Googled, 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.

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 Innovator’s 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 didn’t 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 didn’t 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.

  • noworkday

    Very good points. Also how can we talk about web openness if you can't use hulu outside of the States.

  • http://twitter.com/chrisfralic Chris Fralic

    Hey Mark – I'm not sure how helpful the cartel analogy is, and when talking Hulu you have to remember that NOBODY thought it would work at all when it was launching. But I totally agree that Skype is the right model forward for them. I loved your piece on the Internet/TV ecosystem, and here's another one from Bill Gurley that gets into the economics. http://abovethecrowd.com/2010/04/28/affiliate-fees-make-the-world-go-round/

  • http://naamanetworks.com/ David Bloom

    I agree with the Hulu/OPEC analogy. Both were created to control, not enable, distribution of content. This leads to a misalignment of interests between buyers and sellers which ultimately leads to failure. OPEC is still a powerful entity but the time when they dominated the global economy passed, even though we are more dependent on their product today than we were in the 1970's.

    Fragmented markets benefit from efficient distribution platforms, but there is a fundamental difference between control and enablement. Ticketmaster and OpenTable control; Sabre and the real estate Multiple Listing Service enable. The issue is whose brand dominates the consumer. Ticketmaster not only facilitates distribution but they own the customer, putting them at odds with suppliers.

    Netflix and Hulu may duke it out to own the online entertainment space but I hope there is still time for some other startup to join the fray.

  • http://arnoldwaldstein.com awaldstein

    The battleground of the living room is proving to be the most interesting one to watch…and the most valuable to grab a piece of.

    I believe that the true mass market doesn't care about openness or anything else except what they want when they want it. And that the rules that we put up with on our laptops change when we sit on our living room couches with our families.

    This doesn't mean that Apple will win because they get this market better then anyone. This may mean that Google and GoogleTV may not stand a chance, but I agree, it will probably mean that Hulu is not going to be a player. They are not innovating towards the target audience. They may be like the kid no-one liked who had the only baseball bat in the neighborhood so always got asked to play…for awhile that is.

    Great post. An important topic.

    BTW..emotionally I can't help but want Boxee to have a chance here. I saw you were in NYC this week. Maybe I”ll catch you at the Boxee Box launch party.

  • http://lmframework.com David Semeria

    Well-said Arnold, user want content and ease of use – they don't really care how they get it.

    In the long run this will play out like email and the ISP market did

  • http://arnoldwaldstein.com awaldstein


    Couple of tangents though that I think are interesting.

    -Boxee's new positioning as the solution for those that don't have cable today, folks living entirely on their laptops is a smart one and it remains to be seen how large this segment really is as it moves to the couch and the big screen.

    -Social is a wild card. Facebook could change the game if it played to their model.

  • Dave W Baldwin

    Well written. This will be the big battlefield and it would be useful to think of the multiple transitions.

    Speaking from the consumer side, why would I pay $10 for Hulu Plus if I can record a show via the overpriced cable provider?

    From outside the box, we have discussion going on within a 12 month time period regarding the Tablet and Television via the Web. Which advertiser wins… the one with the slot on the “Tivo'd” television show, or the banner ad on the tablet sitting to the side of the viewer as he/she passively checks an update? Move forward to being able to check anything in realtime on both the television and that tablet…where is your dollar best spent?

    Hence the battle will be over bandwidth… but remember even rural America is gaining more.

    Your advice for those wanting to take part with one that transforms is on the money. For the next five years will be one where the audience watches what they want when they want. Come to think of it, they already are.

  • http://bothsidesofthetable.com msuster

    Thanks, Chris. I agree that nobody thought it would work at all (I included that in the piece with a link to the hugely negative TechCrunch article) and said as much

    “To say that the tech elite were cynical of Hulu’s launch would be an understatement, but by the time it launched just a few months later it was getting great reviews.”

    But to my cartel argument: a group of industry titans who come together to try and control prices and reduce supply. So, I know it's not an ACTUAL cartel but I think has similar characteristics.

    and re: Hulu, while many were blown away in the first 12 months I think many early adopters are now pretty disappointed with the lack of innovation / current direction. After all this time no social features? Making it difficult to watch on our living room TV? Reducing the number of videos available?

  • http://bothsidesofthetable.com msuster

    I have a conflicting dinner but am going to somehow try to swing by if I can.

  • http://bothsidesofthetable.com msuster

    and that audience will only grow …

  • http://www.channelstack.com/mychannelstack/RVTV RamVaz

    I really enjoyed this post. I definitely agree Hulu is doomed because it represents too many different interests. I also agree that the approach of all the existing television players (MSO, Content Companies) is to re-create the existing cartel on the web. They are overlooking a couple huge points that will make this impossible.

    -They now need to compete with web only content (UGC, semi-professional, professional web only). Of course there will always be a demand for the premium shows that major networks bankroll. But if they make it too hard/expensive to access that content, viewers will substitute other content. I speak from personal experience. I am a cord cutter who has found numerous web-only shows that I prefer over the premium mainstream stuff.

    -They can not control the distribution entirely. If the major networks attempt to overprice and restrict access to their content, it will be copied and distributed without them. Are they aware of how easy it is to screencast a video and upload it to a non-YouTube host? So the content will be distributed with or without them. They should accept this and start thinking of ways to get the audience to watch the content through their web presence. They can complement the ad revenue with opportunities to upsell the viewer to premium products: paid apps, social features, additional unseen cuts, no commercials, etc. It has been very easy for a very long time for network and MSO exec's. Now is when you actually need to innovate and adapt, not sure they are up for it.

  • MikeyP

    I think the OPEC argument is great, but, I have experienced another factor in the model: the automotive companies. In this model, I think the car companies are the media buyers and advertising agencies.

    I work for a digital signage software startup. We have software that pushes content to the screen via IP, as well as an advertising platform. When we approach larger media buyers about our advertising platform, their questions are of critical mass and margins. They can make more money and spend less time on a blanket purchase across TV than spending more time segmenting and targeting for lower impressions larger CPM.

    The major brands themselves are looking for targeted advertising, but the layer in-between them and the consumer, the media buyers and agencies, are stifling the growth of that targeting.

    I do not know if the same is happening on Hulu, but it seems that the advertising industry in some areas is moving at a glacial pace and is also limiting the growth.

    The digital out-of-home market is paralleling the in-home market, albeit a much smaller section. DOOH is still growing and finding a new model.

    Have you heard of similar encounters?

  • http://bothsidesofthetable.com msuster

    One problem for DOOH (I've spent a lot of time analyzing) is that there isn't clear efficacy or standardized measures.

    For example: purchasing screen time at a gas station, on an elevator, at check-out in a supermarket or at my local cafe are very different experiences. Even within one segments – say cafe's – screen placement can have a big impact on awareness.

    Other problems:
    1. is it sight & motion or sight, sound & motion.
    2. What is a “standard unit” – video pre-roll? text ads? animation?
    3. Can I use existing creative or do I need to create new stuff?

    It is easier to buy TV today. You buy a mass audience, you have some information about demographics, you have some control over time / day the ad will be seen (percentage of people not time shifting) and you have known ability to make emotional connections.

    For now, my gut says DOOH will remain an “experimental” buy until it solves some of these issues. And my sense is that this won't happen fast.

  • MikeyPiro

    With the ability to collect and assign data, as well as anonymously measure viewing, (an idea that makes in-home cringe) DOOH is getting some of these issues worked out.

    I agree that the issues are out there, but I hope and am working towards getting resolution fast.
    With television now, the television playing does not equal eyeballs watching. When TV and internet combine you may have the same issues for those hoping to target and measure.

    To your point 3, won’t the media buyers will have to create more and different types of ads if they want the very granular personal connection?

    One advantage with DOOH, you can get much closer to the point of sale. (Although Amazon and Toys’r’Us made great just in time for the holidays iPad apps that make surfing and shopping fun and easy. I can see QVC going on Google TV steroids.) Still, the controlled stats show that DOOH works, it just has a sort of black art stigma about it.

    Still won’t the Ad Agencies have to get more organized and commit to invest in granular marketing for effective Hulu advertising? More market specific advertising will require more subject matter experts, as well as more designers to create that content. Do these factors contribute to the Hulu conglomerate?

  • http://youarekillingme.net steveray

    great post as usual Mark. The cartel analogy is spot on

    I don't think its necessarily the ownership issue that is hampering Hulu, its the licensing. Unless Hulu or Google or Boxee figures out how to ship dollars to content producers in orders of magnitude larger than they are shipping now, online providers are going to be hamstrung by inability to license content in a manner that makes for a good user experience. Hulu's problem isn't that NBC owns it so much as its that Viacom pulled the Daily Show because it is short term unprofitable to keep it on Hulu. Media companies arent set up to protect long term viability, but rather short term profitability. see my old post titled “defending corporate Harakiri” http://youarekillingme.net/?p=262

    I can't speak to why Hulu isnt innovating in search and social, but they aren't succeeding in general because they haven't found a pre distribution disruption that is profitable enough. My money is on Apple to figure it out because they are the only player that can bring an integrated hardware/software/content/marketing product to market without an entrenched business to protect. Its why iPod and then iPhone have succeeded. Google's attempt to create a platform for old model CE companies to sell living room boxes is going to result in a Steve Jobs drinking up their tears of sorrow. I know cause I still cry some of those bitter tears from the subscription music business. :)

  • http://www.siliconvalleywatcher.com/ Tom Foremski

    Disruption happens because more value is created for a lot less cost/revenues. I'm not sure how the TV studios/channels can make more money through disruptive ventures. The point about disruptive technologies is that they disrupt. Someone has to be disrupted and Hulu slows the pace of disruption. I don't follow your reasoning that it is better to take a smaller stake in Hulu and drive innovation (disruption) through your own organization. How is that going to increase revenues? Andrew Grove at Intel is famous for saying “eat your children” but no one does.
    Disruption has to come from outside of the industry. Google TV isn't going to do it, and there's no clear challenger.

    When the owners of the content can lock it up and control distribution and rights, they can keep prices high.

  • http://www.siliconvalleywatcher.com/ Tom Foremski

    It would seem that there are some excellent arbitrage opportunities for an ad agency that really understands how to manage multiple media buys targeted at micro-demographics and to track those buys in real-time. Markets with glacial incumbents should be ripe for disruption.

  • http://bothsidesofthetable.com msuster

    I think you're misunderstanding my argument:

    – disruption will happen. there is too much demand for it
    – hulu in its current form isn't likely to bring disruption
    – the management team at hulu is talented but they're held back by structure
    – the only chance for hulu to be disruptive would be for the studios to own less, interfere less – let hulu sink or swim
    – nobody eats their young. but perhaps having a small ownership stake in something that you don't control and therefore has a chance to succeed is better than owning a large stake in something not valuable in the long run
    – I think the studios should focus on internal innovation (nothing to do with hulu) rather than industry-wide cooperation

    that's the basis of my argument.

  • http://bothsidesofthetable.com msuster

    I agree with your entire line of reasoning. only thing I would say about ownership, though, is that through ownership comes control and prohibition of certain activities. It takes risks to succeed in business and I'm not sure the studios are letting Hulu take as many risks as they'd need to in order to succeed.

  • http://www.victusspiritus.com/ Mark Essel

    Industry incumbents survive far longer than we would prefer as consumers, but they're disrupted in the apparent blink of an eye as a competitive option gains momentum.

    I cut the cable content cord years ago. It's funny now that Optimum Online (and Xfinity, and other partners) are now my wireless phone company. Their wifi coverage satisfies my needs and is included in the cost of bandwidth to my home. Although Google Voice and Gizmo5 may have a low quality VOIP connection to the phone network, I can't beat the price (free) and expect alternatives to improve over time.

    We vote much more with our wallets all year to influence the future of our nation, than on a Tuesday in November.

  • http://www.janrenner.com/ Jan Renner

    ESPN is now available online to authenticated TW Cable subs. Easy to sign up and works well. No ads yet. Most TW customers don't even know about it though…