The Aftermath of Hulu CEO's Bad Boy Memo

 Edel Rodriguez

When Jason Kilar launched Amazon.com’s video store in 1998, he hung a framed photo of Walt Disney in front of Sleeping Beauty’s iconic castle in Disneyland in his office. “That explained a lot to me,” recalls Jeff Shannon, a former Amazon video editor, who remembers saying to Kilar: “Amazon is obviously not your last stop. What do you want to do with your life?” Kilar responded, “I want to run my own entertainment company.”

Since 2007, Kilar has been doing just that, running the streaming video site Hulu as its CEO, all the while channeling the obsessive perfectionism of his idol Walt. But with one foot-in-mouth move Feb. 2, Kilar may have doomed his future at Hulu, a joint venture of three of the biggest media conglomerates — Disney, News Corp. and NBCUniversal — which is on target to reach its millionth customer this year.

In one of the most controversial memos in recent showbiz history, the 39-year-old Kilar could well have written his own Hulu obituary. His post on the Hulu blog was intended as a corporate announcement that The Daily Show With Jon Stewart and The Colbert Report were returning to the site after nearly a year’s absence. For $40 million to $50 million, Hulu would also get MTV, Comedy Central, VH1 and other Viacom channels for its new subscription service, Hulu Plus.

But the post quickly shifted gears, turning into a reckless, 2,000-word manifesto of Kilar’s own, announcing, for all the Web to see, “Hulu’s thoughts about the future of TV.” The broadside did not mention his studio bosses at News Corp.’s Fox, Disney’s ABC or the new Comcast/NBCUni’s NBC, but it essentially called them out as veritable Luddite idiots whose business model was doomed. “Traditional TV has too many ads,” Kilar wrote, and those ads repel consumers and annoy advertisers with too many “wasted impressions.” Hulu’s programming streams with just half the ads of traditional TV, and Kilar claimed Hulu’s are twice as effective for advertisers. Consumers want to watch whenever they feel like it, he lectured, and therefore profitable cable and satellite network show bundling will shrink because customers don’t like it.

“A number of you that are reading this might be thinking that we’d have to be crazy to think that our small team can actually reinvent television [up against] distribution giants like cable companies, satellite companies and huge online companies,” Kilar wrote. “We are crazy. All entrepreneurs need to be.”

[pullquote]

Hulu’s corporate owners were ominously silent when asked to comment. The U.K.’s Financial Times reported that Kilar’s views were “personal and clearly not shared by anyone at Walt Disney,” according to a Disney source. And, privately, others called the blog post “a Jerry Maguire moment,” referring to Tom Cruise’s title character in the 1996 Cameron Crowe film — a sports agent gets fired for clobbering his bosses with an idealistic memo, “The Things We Think and Do Not Say: The Future of Our Business.” Some called Kilar’s blog post “suicide by cop,” a provocative move that could trigger a lethal response. “Is Jason Kilar trying to get fired?” asked All Things Digital’s Peter Kafka.

“I think he was stupid — it’s obviously really stupid,” says one insider who knows the situation well. “But he was so engaged in the process of describing the new world order that he basically rambled on and forgot that these businesses you’re pissing all over are not going to be happy.” Since then, Kilar —who refused comment for this story — has kept his head down. But internally, says the insider, “He made a series of mea culpa calls. He realized and said, ‘I got carried away.’ He was chastened.”

Now Kilar’s fate probably rests in the hands of Disney/ABC Television Group president Anne Sweeney. Kilar’s original backers — Jeff Zucker, former CEO of NBCUni, and Peter Chernin, former president and COO of News Corp. — have moved on. Under terms of the Comcast/NBCUni deal, approved by the FCC and the Justice Department, NBCUni — though it remains a partner — has had to give up any management role in Hulu. That leaves Fox and Disney in control, and Sweeney is considered a formidable boss, not likely to look kindly on a Jerry Maguire moment. Sweeney did not return calls seeking comment.

The incident not only reveals what Kilar calls his “thoughtful stubborness,” but also a clash with the TV culture that surrounds him. A University of North Carolina Phi Beta Kappa double major in journalism and business administration, Kilar interned at Disney while still a student and went on to a job building a South American amusement park for the company until leaving for Harvard Business School in 1995. A born salesman as well as a brilliant innovator, he now finds himself confronting corporate forces whose interests are constantly shifting and no longer line up in a way that necessarily favors Hulu. Like other impolitic memos that have rattled Hollywood, Kilar’s manifesto might wind up looking prescient in the long run, but in the short term, it could turn out to be a clumsy political move.

“I think Jason wrote the post to force the issue and to let his Hulu team know that he is standing up for them,” Business Insider editor Henry Blodget says. Team loyality has been one of Kilar’s trademarks. He once interrupted a Hawaiian vacation for a red-eye round trip to Detroit so as not to miss a Tar Heels Final Four game. And when his former Amazon boss David Risher left to launch Worldreader.org to bring e-books to developing countries, Kilar’s PSAs on Hulu generated 8 percent of Worldreader’s visitors. “Jason’s been incredibly generous,” Risher says. “He does the right thing.”

But Hulu’s owners don’t necessarily share that team spirit with him. “I suspect that Jason is sick of being obstructed at every turn by partners whose only interest is preserving the massive cash flow that the traditional TV business provides,” Blodget says. “Jason and the Hulu team have built a great product, and they want to be free to build a great company. But by now they probably both realize that if they aren’t given independence, that’s never going to happen.”

“It’s not that he was saying something that people don’t say every day,” the inside observer says, “but he was saying it as an employee of a joint venture of media companies. You promote the business you’re in. Our TV guys don’t say, ‘Don’t buy a video.’ And the video guys don’t say, ‘This way you don’t have to have cable.’ It’s that simple.”

[pullquote]

When Zucker and Chernin hired Kilar in 2007 — Disney joined the partnership two years later — the big threat was YouTube, which was giving away TV shows for free. The year before, Google had purchased YouTube for $1.6 billion. The studios were looking to erect a counter-force, test the Internet waters and banish the pirates. So Kilar was charged with building a legal alternative to pirate video — in about 90 days. Since then, Hulu revenue has climbed steadily from $108 million in 2009 to $263 million in 2010. He predicts that will nearly double to half a billion in 2011.

Headquartered in Santa Monica — his offices are not far from where he lives with his wife and four children — Kilar runs the company in a style that’s more Silicon Valley than Hollywood. None of the 250-plus Huluites — Kilar included — has a private office; stock options spread the wealth; decor includes a neon flamingo and Airzookas; and there are regular taco-eating contests and refrigerated beer on tap.

That sort of high-IQ frat-house irreverence can raise a lot of eyebrows when it breaks out of the confines of Hulu. In a media release announcing the Comedy Central deal, he cracked, “We are thankful that Viacom was DTS. Our first order of business in the partnership is GTL with Philippe [Duaman, Viacom CEO].” DTS? GTL? That’s Jersey Shore parlance for “down to snuggle” and “gym, tan, laundry,” hardly the sort of thing likely to endear him to his corporate overlords.

Especially since, though Hulu’s growth has been impressive, it remains dwarfed by Netflix’s $2.16 billion in 2010 revenue, as the DVD-by-mail giant morphs into a still-bigger streaming giant. And more digital streaming entertainment competition is springing up all over: Competitors include Apple; Amazon; Microsoft; Time Warner’s forthcoming HBO GO, with which CEO Jeffrey Bewkes hopes to neutralize Netflix; and YouTube, which hired ex-Paramount exec Malik Ducard in a bid to gain access to more streaming video from Hollywood.

But with the departures of Zucker and Chernin, who granted Kilar the independence he demanded, the executive is no longer protected against long-festering resentments within Fox and NBC, whose own websites lose ads to Hulu. Chernin’s replacement, Chase Carey, pushed for a subscription model like those offered by Netflix and satellite company DirecTV, which Carey had run. So Kilar added a new Hulu Plus subscription service. But when the owners blocked Kilar’s October attempt to drop Hulu’s subscription price from $9.99 to $4.99 to counter Netflix, he threatened to quit — and still only got a price cut to $7.99.

Kilar is furious that his owners are dallying with his competitors. According to the Wall Street Journal, he called Disney CEO Robert Iger to express concerns when ABC began offering shows with ads free to the iPad in April. (ABC is considering launching its own Hulu Plus-like subscription service.) He also complained when NBCUni offered Saturday Night Live to Netflix.

The bottom line: Hulu isn’t as useful to its current owners as it was just four years ago. The conflicts of interest intrinsic to a joint venture are threatening to tear it apart. Kilar’s blog post just crystallized the contradictions.

“I think Hulu is screwed,” Blodget says. “I think Jason will either give up or get shown the door, and most of the talented folks at the company will leave with him. Then the networks will install a corporate yes man at the helm, and the product and company will gradually die. The good news for the networks is that they never blew much money on the deal. It was the folks at Providence Equity who put up the cash [$100 million, for a 10 percent stake].”

“If I was Jason right now, I’d be losing a lot of sleep, but I’d still be defending my vision,” says Shannon, the former Amazon editor. “He’s in a tight spot because others don’t share that vision. Competition had escalated from Netflix, Google, Apple … and now Amazon’s back in the mix. Hulu started strong, and now it’s not the only game in town.”

Against that backdrop, Kilar’s memo could be more of a calculated move than a spontaneous outburst. “Nothing he’s done is an accident,” a former Amazon colleague says. “He wants to push Hollywood through this [technological] door or push himself out the door so he can do it somewhere else. I don’t think this is a Jerry Maguire moment. Here’s this guy who was right on a lot of things.”

So what does makes Jason Kilar run, and run off at the mouth? One key is probably his formative experience at Amazon, where he led efforts to move into the video and DVD business, working his way up to senior vp between 1997 and 2006. At the time, everyone thought Barnes & Noble would crush what was derided as “Amazon.bomb.” But the old bricks-and-mortar bookstore business paradigm proved wrong, and Amazon’s metrics-driven, Internet-based lean-and-mean one proved right.

Kilar is, like his mentor, Amazon founder Jeff Bezos, a game-changer. “When we first called the studios [to start Amazon’s video store],” Kilar once recalled, “every studio said, ‘We don’t want to sell our DVDs on the Internet.’ ” 

Says founding Amazon Video/DVD editor Anne Hurley: “We had to beg for meetings back then. What helped sell the studios was the tech edge Amazon offered. We could share our search results. We could tell them what customers really wanted — information they had never been able to get their hands on before. So studios could focus their attention on releasing those titles that already had a built-in buying audience.” Similary, at Hulu, Kilar has tried to use tech to reform inefficient TV-culture traditions.

Convinced of his vision, Kilar often adopts a confrontational style. He sacked most of the original Hulu startup team and replaced them with Amazon, Microsoft, and Harvard biz school cronies — “The Ocean’s Eleven approach,” he told Fast Company. As he sees it, Hulu isn’t just a TV company, it’s an anti-TV-as-it-is company. “He was one of those people who was going to win at all costs,” a top Amazon veteran says. “The intensity, the conviction — there is I think for all of us a weird-ass evangelical feel to the work. If you feel crossed at any point, it really gets your back up.”

But Kilar’s visionary stance risks setting up a clash with the business interests and corporate cultures of the Hulu partners. “Jason was and is a bold innovator and has been a little politically blind to the fact that media companies build businesses organically,” the insider says. “It’s not, ‘Let’s get together and build Facebook.’ Media companies build adjuncts and extensions of existing businesses. He didn’t invent it in a dorm room. He had capital, he had content. Having said that, he built a pretty f---ing good mousetrap.”

Within the tech world, though, there is often an insensitivity about more diplomatic concerns. An employee Kilar once fired recalls him saying, “I’m sorry, I just don’t get what value you add.” That’s what his Jerry Maguire blog post is saying to his Disney, NBCUni and Fox bosses — who might be asking themselves the same question about him.

The corporate insider says Kilar isn’t out of the equation at Hulu yet, though “He’s extremely bright and extremely articulate. He’s charismatic, a great salesman and a self-promoter, but also a promoter of his vision for the company. The issue is what’s the next direction for Hulu? More ads or fewer ads, more pay or less pay [for subscriptions]? What is the natural evolutionary future? Once that’s determined among the partners and Jason, is that something that’s consistent with Jason’s vision? Do the visions converge? If they do, he’ll stay on board. If they don’t, he won’t.”

The content contracts that make Hulu possible expire in the summer. Will Kilar be there come fall? One early Kilar colleague at Amazon is philosophical: ”He can be 100 percent right and timing is everything. If you’re right about something at the wrong time, you can go down in flames. Or this could be a brilliant, fantastic thing to do.”

 

 

 

 

 
comments powered by Disqus