Disharmony hits Hulu

Parent company sending mixed messages about biz model

Hulu is starting to show signs of why it's not easy to run a joint venture between competitors.

Recently, the popular video site's various parents have sent mixed messages about Hulu's future business model -- and whether it will erect some sort of paid subscription wall.

Now, reports are bubbling up about an increasing level of discord between Hulu's own ad sales staff and the staffs of each of the site's broadcast partners: ABC, NBC and Fox.

Observers predict that the already complicated arrangement is likely to become more so, particularly given the prospect that NBC Universal may be sold to Comcast -- which already operates its own online video site (Fancast) and has a markedly different philosophy regarding just how free TV content should be on the Internet.

The broadcast nets have always had first crack at selling their own shows on Hulu and can buy back inventory from the site at anytime. Hulu's sales team can't sell any individual series or network--but instead is supposed to sell buckets of video based on genre or audience demos. Theoretically, the broadcast nets shouldn't care whether Hulu or their own staffs sell inventory within their own shows--since the networks are said to pocket 70% of ad revenue regardless.

But according to sources, network sales execs, who've never been crazy about the idea of another party controlling their content, are increasingly wary of the relationship. They say that Hulu's sales staff -- rather than treating the relationship as a partnership -- at times deliberately sells against its network brethren, promising lower CPMs that can end up diluting the value of the entire category.

Hulu's prices are known for being high -- in the neighborhood of $40 CPMs -- but networks say they'll competitively cut prices when needed, and sometimes they'll even hint that advertisers will receive inventory in specific shows -- a definite no-no.

Many speculate that it's those sorts of channel conflicts that have kept CBS from working with Hulu. According to one source, ABC sales executives long resisted a deal, but Disney CEO Robert Iger ultimately pushed for a partnership. Hulu executives declined to comment for this story.

Some digital buyers dismissed this talk as just the typical grumbling that comes from having multiple sellers peddling the same inventory, something that happens all the time with display ad networks. But others complained that buying Hulu, whether directly or through the networks, isn't as smooth as it should be.

"It's confusing and conflicting, and very muddled," said Lisa Herdman, vp, director of national programming for RPA, who handles Honda's online media. Most stop short of accusing Hulu of outright deception but report that its sellers are often not forthcoming about what they can and cannot sell.

On the flip side, buyers say that broadcast networks are inconsistent when it comes to selling Hulu avails. And the fact that the networks often have to turn to Hulu to secure more avails before presenting a final package to buyers can hinder the buying process. Such challenges are likely to become more acute as spending in online video surges.

"There are a lot of growing pains with the whole scenario," said Jeff Ratner, digital director, North America, Mindshare Interaction/Maxus. "Hulu has created a legitimate marketplace for online video. Now you are seeing the downside."

One thing buyers agree on universally is that they don't want Hulu to implement a paid wall, which they believe will stifle the site's steady growth over the past year. Hulu has soared from 12.5 million unique users in September 2008 to 38.7 million this past September, per comScore. "With DVRs and on-demand viewing and all these other options, Hulu's viewership could suffer if they start charging," said Jordan Bitterman, senior vp, media, Digitas. Yet both News Corp. deputy chairman Chase Carey and NBCU president/chairman Jeff Zucker have stated publicly that they are weighing a paid model, something that Hulu itself shot down in a recent interview with Adweek.

Why the conflicting opinions? Hulu's ad business isn't keeping pace with its growth, according to some analysts (estimates place its 2009 revenue at around $120 million). And with cable companies looking to push audience authentication (such as Comcast and Time Warner's TV Everywhere program), and broadcast networks talking about seeking retransmission fees, the climate and attitudes about free, ad-supported TV on the Web are quickly changing.

Complicating things further is the possibility of Comcast purchasing NBCU -- which some predict could result in the network ditching Hulu entirely. That might not seem like a big deal, given Hulu's depth of content and NBC's weak ratings, but shows such as "The Office" and clips from "Saturday Night Live" are hits among Hulu's tech-savvy audience.

"It's clear that Comcast is actively considering the role of content as part of its TV Everywhere initiative," said Tracey Scheppach, senior vp, video innovation director, Starcom MediaVest. "If Hulu loses some of its very compelling content, that can't be seen as a positive outcome for them."