Hulu at a Crossroads

As business school students, we're cash-strapped and have precious few TV-viewing hours left over in our busy schedules, so we consume most of our entertainment online, for free. Although we usually just use Hulu for our weekly fix of our favorite shows, today we're geeking out on the viability of their business model, because what self-respecting business school student can forget about the wisdom of Michael Porter while chuckling at the musings of Michael Scott?

As a joint venture between NBC Universal, NewsCorp, and Disney, Hulu offers content from its stakeholders' networks (NBC, Fox, and ABC) so that you can enjoy The Office and Glee on your laptop for free just hours after they air on TV. However, Hulu's development hasn't been smooth sailing, particularly because of conflict between stakeholders and management and among the stakeholders themselves on a variety of strategic issues.

The sustainability of the joint venture is a major area of concern. First, in the wake of the introduction of Hulu Plus, Hulu's new premium subscription service, management and Hulu owners have disagreed over how to divvy up shows that will appear in front of, or behind, the pay wall.  This means that users of Hulu's basic service will not have access to many of the shows they used to.

This is not the only instance of infighting between management and stakeholders. There have been reported disagreements over the pricing of Hulu Plus, which was recently lowered to $7.99, probably in an attempt to compete with Netflix. More recently, a blog post by Hulu CEO Jason Kilar highlighted ongoing fundamental disagreements over the future of digital television in general. Additional conflicts between management and Hulu's owners arose when ABC released a free, ad-supported video player on the iPad that competes directly with Hulu Plus on the iPad.

Hulu's main suppliers also happen to be its owners, who provide the majority of the company's content and existing distribution rights. But these rights are neither exclusive – for example, The Office can be seen on Hulu, NBC.com, and Netflix – nor long term. Given these current tensions and baked-in conflicts of interest, the sustainability of Hulu's business model is questionable.

That being said, Hulu does have real value.  The company has become one of the most popular destinations for video content on the web with 1.1 billion video impressions in October 2010. The website's interface and player are market leading and user-friendly. The video player is reliable, functional, and attractive. Additionally, Hulu has done a great job developing its ad serving technology from a relevancy and user engagement standpoint.  It should play up these strengths (brand recognition, online player, and ad technology) and remove itself from the content licensing game, which is proving to be much more complicated and perhaps unsustainable than originally thought.

You know who is good at licensing content though? Cable companies. They've been doing it for years, and now, as they begin to invest in TV Everywhere and seek broader digital distribution rights over shows, cable companies now have to come up with their own online players and ad-serving technology in order to allow cable customers to stream shows on-demand from the internet as part of the included services in their cable subscriptions. But cable companies aren't necessarily strong web companies, and many lack the technology and user experience expertise to create effective online players and targeted ad serving platforms.

Hulu can take advantage of this weakness by becoming the consumer-facing destination for all the cable operators' TV Everywhere initiatives. Hulu would provide the user interface, possibly co-branded with an MSO-specific wrapper, and would serve its own ad content, using its sophisticated ad infrastructure and targeting systems.  It would then serve the content, which is licensed by the cable operator, to the viewer, depending on his or her cable subscription package. Hulu would collect a recurring license fee from the cable operator in exchange for Hulu's technology back-end, brand recognition and audience, and management of online content.  For content supported by advertising, Hulu could take a cut of ad revenue to incentivize the company to maximize the performance of its ad targeting technology.

This proposed shift in business model would allow Hulu to leverage its strengths, removing them from the role of content licensor and transferring that task to the cable providers. Cable companies, in turn, would be saved the trouble of creating and maintaining online content distribution platforms and instead, transfer this responsibility to an existing expert and eliminate the inefficient duplication of effort across each cable system to create its own platform. The new model creates a stable and recurring source of revenue for Hulu, while at the same time broadening its existing extensive consumer-facing footprint.  This shift in strategy also allows Hulu to exploit its sophisticated advertising platform at scale to fully realize the value of its intellectual property.

This proposed change may or may not have been hatched while watching back-to-back episodes of 30 Rock. But when some of our favorite shows like Colbert Report, The Daily Show, and V (we won't admit which one of us watches it…) are getting yanked from Hulu, we can't help but realize that Hulu needs to address its content problems sooner rather than later before we start to look elsewhere. And since Stern business school students are clearly the trendsetters for the rest of America, Hulu had better realize it too.