Even for Hollywood, where long odds and high stakes are staples of storytelling, the plotline is a doozy: A couple of old business rivals facing the threat of a lifetime agree to put aside their differences and join forces on a half-baked experiment that makes them laughingstocks. (We're thinking Jack Nicholson and Warren Beatty.) And who do they put in charge? A young guy, a newbie to the biz. He promptly cleans house and hires an even younger guy who's halfway around the globe. These renegades throw out the rule book — and they pull it off. Their idea kills. The naysayers feast on crow.
This pitch meeting would not end well. Cue Ari Gold: Nobody'll believe it, not in a million years. Are you nuts? Get the %*#$ out of my office! Yet this is the tale of Jason Kilar and a company called Hulu, costarring the heads of NBC and Fox, with guest appearances by Andy Samberg, Tina Fey, Jeff Bezos, and Walt Disney. But we're getting ahead of ourselves.
KaylaMosley: @hulu hulu i think has taken over my life just like crazy commercials said it would. YIKES.
MeGustaCountry: HULU, I'm gonna marry you.
— posted on Twitter in August and September
Imagine that The New York Times and The Wall Street Journal had gotten together and created Google News. Or that Sony Music and Warner Music Group had introduced iTunes. That's Hulu, a daring attempt by would-be victims of the digital revolution, NBC Universal and News Corp., the parent company of Fox, to control their content — and their fates. In just two years, Hulu has become the premier broadcast video site on the Web, featuring free instant access to full episodes and clips from more than 800 TV series — from 30 Rock to The Mary Tyler Moore Show — via 190 content providers. Not to mention 450 free movies. In July, Hulu had more than 38 million viewers (according to comScore Video Metrics) and delivered more videos than any site but YouTube (Nielsen). "If we didn't do this," says NBC Universal CEO Jeff Zucker, "we knew someone else would."
The mogul-in-the-making who defied skeptics and at times shocked the networks is Kilar, Hulu's 38-year-old CEO. He's more Silicon Valley than Hollywood, a buoyant and boyish straight shooter with humble charm and an obsessive streak when it comes to site design. (Jason Bateman would play him in the movie.) Kilar made his mark at Amazon, building the DVD business from scratch. After nine years, he left and contemplated his next entrepreneurial move while traveling the world for a year — blogging from 19 countries and 56 cities, and taking nearly 12,000 photos — with his wife and two small children.
Meanwhile, Zucker and Peter Chernin, then president of News Corp., were collaborating on an unlikely joint venture that they named NewCo. In the spring of 2007, after Kilar returned to the United States, they approached him about doing for NewCo what he'd done for Amazon. Kilar wasn't convinced the joint structure would work and worried that he wouldn't be given true independence. He declined. A week later, at a Seattle Mariners game, he found himself revisiting the decision with his wife. The Mariners came from behind to win on a go-for-broke gamble, a suicide squeeze. By the end of the game, he'd decided to gamble too.
"The industry goes through moments like this every 25 years or so," explains Kilar, a voracious student of media history. "It happened when the major networks started. It happened with cable TV. I realized I'd have way too much regret not doing it."
Of course, it may be the networks that wind up with regret. Because even as Kilar set out to help NBC and Fox avoid the drift toward obscurity that threatens the music and newspaper industries, he began creating something that could contribute to their undoing: a new and better way to watch TV shows.
"My first Hulu experience made my head explode in a brain-spray of awesome." — Chicago viewer Marisa Wegrzyn's comment on hulu.com, now featured on staff shirts
"Nooo!" the room groans at the stalled video.
On a recent Friday afternoon at Hulu headquarters in Santa Monica, California, several dozen employees, overwhelmingly young and male, are gathered for their biweekly wind-down in the Ping-Pong room — not to be confused with the video-game room called Dr. Horrible's Lab, which is equipped with a beer tap welded to the refrigerator. With drinks in hand, department heads introduce recent hires ("He didn't work at Microsoft, but he did get a perfect score on his SATs"). The crowd watches video clips projected on the wall, including a prank cologne ad edited to star a Hulu employee. When the screen freezes, the group razzes the poor guy manning the laptop. The mood turns marginally more serious for a demonstration of new features to the site and a clip of Kilar on Charlie Rose earlier that week.
Kilar, dressed in a T-shirt, jeans, and sneakers, sits on the floor sipping beer from a plastic cup and enjoying the frat-house irreverence. Only when the topic turns to online ad sales does he hop to his feet. He mentions new clients and cites a promising meeting with a major chief marketing officer. While ad revenue is plummeting elsewhere in media, Hulu's is growing, with more than 250 advertisers and an estimated $120 million in revenue in 2009, according to analysts — from zero just two years ago. "In the early days," Kilar tells the group, "advertisers wouldn't even meet with us."
Just two months into Kilar's tenure, Zucker, Chernin, and the other board members paid a visit to these same offices. They walked across a carpet dotted with video-game icons from the previous tenant, past empty pizza boxes and employees in flip-flops, and into a conference room stocked with snacks from Costco. "You realize it's not your father's media company," a deadpan Zucker recalls. That feeling was reinforced when Kilar unveiled a bombshell: The search engine his team had built would display results for all broadcast video across the Web.
"There was this slight moment of 'huh?' " recalls J.B. Perrette, head of digital distribution at NBC Universal. Why would a site owned by NBC and Fox allow you to search for, say, CSI: Miami — and then provide links to take you to the CBS site?
Kilar calmly explained that he wanted Hulu to be the online authority on TV video, just as Amazon is the expert site for books. If people are looking for a particular show — any show — Hulu should help them find it. As Kilar sees it, shows are the brands users care about, not the networks that air them. There was a "healthy debate," he recalls. It was a debate that he would win, although he's too diplomatic to put it that way.
Kilar's office has the thrown-together feel of a dorm at his alma mater, the University of North Carolina at Chapel Hill, complete with a life-size cutout of vampire-slaying Buffy draped in a Tar Heels basketball jersey. A Fruity Snacks box from Costco serves as a computer stand, and the windows facing the parking lot are papered over for privacy.
Sitting at his desk, Kilar tells me that he's trying to do at Hulu what his hero Walt Disney did when he reconceived amusement parks. "Going to Disney is like getting an MBA in product design if you know what you're looking for," he says. Hulu has become a hit not just because of its wealth of content, which now includes current shows from Disney/ABC, the third network to take an equity stake in the site. Hulu is also a hit because of its graceful design and ease of use. The viewing window is a third bigger than its predecessors, and the resolution is TV quality, not grainy. Unlike Fox's MySpace, with its cacophony of ads, Hulu is uncluttered. Most of its innovative navigation tools are hidden, "like a closed Swiss Army Knife," says CTO Eric Feng, so as not to distract from the shows. ("On Hulu," says Kilar, "the shows are the stars.") And the volume of ads per show is one-quarter that of network TV.
"Consumer behavior is one of the hardest things to change," Kilar says. "The gap between the existing and the new has to be so materially better that it shocks you into a behavior change."
"It's a testament to both the madness in the private equity markets and the hype around online video taking place right now that a company without a name, a Web site, or even a clear exit strategy has been able to raise $100 million at a market valuation of $1 billion." — From the blog NewTeeVee, in 2007, alongside the logo "NewCo Wreck Watch: 112 days"
"Let's go to the living room," Zucker says. He's kidding, but it's only sort of a joke. We're in his corner office suite atop Rockefeller Center, and there's an elegant sitting area with a cream-colored couch and upholstered chairs. To his left, the Manhattan skyline stretches south into the distance, like a giant board game. To his right, three flat-screen TVs mounted on the wall play silently.
"The industry has gone through more change in the past five years than it has in the previous 50," Zucker tells me. Despite the magnate-in-the-sky setting for our discussion, he means it. And Hulu grew out of that realization.
In December 2005, NBC aired the Saturday Night Live short "Lazy Sunday," featuring Andy Samberg and Chris Parnell as a couple of deadly serious rappers extolling The Chronicles of Narnia, cupcakes, and Red Vines candy ("crazy delicious!"). It quickly went viral on the Web, where millions of people caught it on YouTube. But NBC didn't earn a dime. Along with TiVo, the illegal Web videos were a wake-up call about just how powerfully digital technology could disrupt the TV business. Then, in late 2006, Google bought YouTube for an astounding $1.65 billion. "It seemed crazy to us," Zucker says. "That value was built principally on the back of our content."
Instead of suing YouTube for $1 billion, the way Viacom did, NBC and Fox founded NewCo to compete with it. Initially, they stuck to the corporate playbook, assigning teams from various departments at both networks to strategize. A few months in, more than 100 staffers met at the W Hotel in midtown Manhattan. It did not go well. What Mike Lang, a News Corp. executive vice president and NewCo board member, saw was a pileup of competing visions designed to protect existing turf. We're dead, he thought to himself. The blogosphere came to the same conclusion, referring to the project as "ClownCo." Soon after, the networks secured venture capital from entertainment veteran Providence Equity "to give some validation to this crazy idea," says Zucker.
Kilar was brought in to provide a single vision and to do things in a different way. He pushed for stock for employees, like any other startup. He told his new bosses that he wanted to create a technology company like Amazon, not a traditional entertainment company. Of course, he had initially turned the job down. "We were a little concerned," admits Zucker. "Was this guy flaky?"
Fox and NBC had agreed that they wanted an outsider not constrained by the conventional wisdom in TV, and Kilar wasted no time showing them just what that could mean. NewCo had some 45 consultants and network staffers when he arrived; he let go all but a couple of the people and rejected most of what they'd set up, with the exception of a distribution network and some data facilities. "There was a bit of 'What does he know that we don't know?' " acknowledges Lang.
To replace the original NewCo team, Kilar told the networks he wanted to acquire a startup in China. Accompanied by a pair of chaperones from NBC and Fox, Kilar scooted off to Beijing before his first day in Santa Monica and introduced them to 28-year-old Feng, a basketball and poker buddy he'd known in Seattle. The two had never worked together, but Kilar knew Feng had been a brainy researcher at Microsoft with an entrepreneurial bent. Kilar was determined to develop proprietary technology and, after studying Feng's year-old online-video startup, decided that he was the one to do it.
One of the network escorts argued that Feng was too young and inexperienced for the high-stakes project. But the other network exec told Kilar, "It's your company." Feng became Hulu's CTO, although he admitted to Kilar that he wasn't sure exactly what a CTO did. At one point, Lang contacted NBC and said what everyone must have been thinking: "What have we gotten ourselves into?"
Kilar preferred to build the site with a handful of people he knew — "the Ocean's Eleven approach," he called it. He hired Amazon and Microsoft veterans and former classmates from Harvard Business School, folks who were willing to work long hours scribbling ideas on whiteboards and writing software code in a push to get the site up in less than 90 days.
Soon, Kilar was lobbying to release an invitation-only beta site to allow continuous iteration before the official launch. It's a common Web practice, but on TV, it's akin to filming an early draft of the script. "Jason pushed us on the beta," says Lang. "He said, 'This won't work perfectly,' but we trusted the approach." Kilar's manner was consistently politic — and the board realized that rejecting his ideas would leave them with few options. When Kilar proposed an odd-sounding new name, Zucker's first reaction was: "What the hell does 'hulu' mean?" (It's Chinese for "holder of precious things.") But he went along with it.
And so Hulu was born.
Digeratti: Jason Kilar, just saw ur interview on Charlie Rose where u say u search twitter about 20 times a day for hulu ... Whats up? U listening?
— posted on Twitter in August
Late on a Wednesday afternoon at the Santa Monica College pool, Kilar can't resist. While waiting for his 6-year-old daughter to emerge from the locker room after her swim lesson, he dives in. Not into the pool. Into Twitter, which he estimates has about 2,400 Hulu-related tweets a day.
At Amazon, he learned the importance of studying customer feedback. Twitter takes monitoring to another level. "It's a transparency engine," Kilar says. "I've always said that our brand is what people say about us when we're not in the room, and this is the best tool for hearing what people are saying." He "listens" often. Twenty times a day. Sometimes every 20 minutes. (Yes, the night that Kilar appeared on Charlie Rose, he replied to Digeratti, "I am.")
At the pool, Kilar glances up from Twitter on his BlackBerry with good news. "Someone just commented on 21 Jump Street," he says. The show, featuring Johnny Depp, ceased production in 1991. But with Depp starring in Public Enemies and the upcoming Alice in Wonderland, Hulu procured episodes and promoted them. To Kilar, the Twitter activity indicates that the move was a good one — and that Hulu is getting better at delivering programming that's relevant to its viewers.
Between his four young children and the long hours at work, he has little time for the networks' appointment TV. At night, he and his wife surf Hulu on separate computers in the study. "We live the product," Kilar says. He admits he's neurotic about quality. He studies the site for misplaced logos and grammatical errors, glitches that the team often fixes by midnight. He scans ranked results of the million-plus daily Hulu searches, looking for the fastest movers. That's how Hulu noticed that users were searching by genre, which led to the creation of its science fiction and comedy channels. "Customers won't tell you what they want," Kilar says, citing a Bezosism. "But their behavior will tell you if you capture and analyze it."
A month after the site went public in March 2008, Hulu ranked 10th on the Web for video streams, with 63 million. Then Hulu capitalized on what NBC's Perrette calls "lightning-in-a-bottle moments." Kilar once cracked that "Hulu's original business plan did not include phrases like 'and then Tina Fey will impersonate Sarah Palin and an online sensation will ensue.' " But when Fey's bit went viral, Hulu began encoding SNL video for the Web immediately after each broadcast, getting a jump on the piracy sites.
Because Hulu's player was easy to embed in other sites, users could spread its videos (and ads) to tens of thousands of places on the Web, expanding a distribution network that included huge portals like AOL and Yahoo. By January of this year, Hulu had nearly quadrupled traffic, without spending a dollar on advertising.
"He always thinks about the customer and the customer experience," Zucker says of Kilar. "That's his singular focus." Pause. "I wish he were as focused on the monetization."
Zucker grins, backing off. "Which he is." It's another joke. Sort of.
FrigginGrawr: I love how hulu lets me pick which commercial i would prefer to view
— posted on Twitter in August
Zucker says flatly that the amount of advertising and the ad rates on Hulu must increase. Which seems pretty harsh considering how successful Kilar's model has been so far. Indeed, in many ways it has been so successful that it threatens the traditional TV model as much as YouTube's viral "Lazy Sunday" did.
Broadcast TV remains the easiest way to reach a mass audience. The online audience for a given show is dwarfed in comparison. Consequently, online ad spending on video, though growing at a 43%-a-year clip, represents a pittance — around $1 billion in 2009, compared to around $46 billion in broadcast ad revenue. Yet the major networks have seen their audience shrink and become more fragmented since the 1980s, thanks to cable TV. Now that more than 60% of Americans have broadband at home, online video could further erode the networks' audience. If that happens and broadcast ad revenue falls, the networks would struggle to pay for quality programs. That $120 million in estimated ad revenue for Hulu this year wouldn't go far, with production costs for each episode of a typical TV drama running about $3 million. Hulu needs to do more to close the revenue gap.
Kilar has hooked viewers partly by showing fewer ads — just 2 minutes of promotion for 22 minutes of, say, The Office, compared to 8 minutes of ads on TV. Limiting sponsorship to one advertiser per episode helps make recall rates twice as high as those for the same ads on TV, says Jean-Paul Colaco, Hulu's senior vice president of advertising and a Harvard classmate of Kilar's. According to ad buyers, that level of engagement has helped Hulu reach ad rates that are 50% to 100% higher per thousand viewers than broadcast rates.
Hulu also lets viewers control part of the ad experience. In some instances, they choose which commercials to watch: BlackBerry, Applebee's, or Fancy Feast cat food? Viewers can also choose between one chunk of ads before a movie or several shorter segments. They can vote thumbs-up or thumbs-down on each ad, which gives them the satisfaction of providing feedback and helps Hulu deliver more appropriate promotions. (Sorry, voting thumbs-down on all of the ads won't eliminate them.)
Along with ad feedback, users supply demographic information when they register at Hulu. The whole package enables advertisers to achieve far more precise targeting than TV provides. "I have a big belief that if you don't have children under the age of 2, you don't need to see a Pampers commercial," Kilar says. "That's not money well spent for an advertiser."
And advertisers are responding. For the June launch of its new search engine, Bing, Microsoft ran a "Bing-a-thon," a live 72-minute telethon parody featuring SNL's Jason Sudeikis and G4 host and Playboy cover girl Olivia Munn. Every Hulu ad that day was a Bing-a-thon clip, and the infomercial was the day's fourth-most-watched program. On average, viewers tuned in for nearly 30 minutes — the equivalent of nearly 60 30-second spots. While watching, they could also do a Bing search within the Hulu screen and tell friends about it. "This gave us the right audience, the ability to educate and entertain, and the opportunity for them to try out the product and then market our product for us," says Sean Carver, Bing's director of marketing brand integration. "No other ad platform lets you do all that."
But there's a rub to this success story — and it's the reason Zucker and Hulu's other parents continue to press Kilar. Compared to both broadcast and cable TV, Hulu remains small, both in viewership and in the volume of ad dollars it brings in. And the networks' ad revenue threatens to fall faster than Hulu can make it up. Estimates for the 2009 — 2010 season are down by double digits.
Kilar acknowledges in an indirect way that the amount of advertising on Hulu shows will likely increase. He goes to the whiteboard walls of his office and scribbles the ratio of ads to content now compared to the 1960s: A half-hour show such as Alfred Hitchcock Presents worked with four minutes of ads, half as much as TV today.
That's twice as many commercials as Hulu currently shows. Would that ruin the Hulu experience? Probably not. But it remains to be seen how users might react (even if the ads are more relevant to them) and whether another less ad-focused digital player could steal Hulu's limelight.
LadyXanth: Hulu only has season 1 of Desperate Housewives? I just watched the season finale, I NEED season 2 *devastation*
KasieTierson: Oh hulu why won't you let me watch my shows :(
— posted on Twitter in August
Hulu finds itself caught between TV's past and future. As Zucker puts it, there is "a natural tension." The sticking point is convergence — industry shorthand for making high-quality online video available on TV. Networks and cable companies fear that if people can watch Hulu streams of their shows on TV with fewer ads, they won't tolerate the ads on TV. "I want to be very careful here," Zucker says when I ask about convergence. He bridges his fingers, thinking. A moment later: "In some form, that's clearly going to happen. It's a question of how we navigate that migration."
Even as they're giving viewers more control over content through Hulu, the networks are trying to control the pace of change by limiting how much content they share. For Kilar's team, getting every episode of a TV show is not as simple as asking for it. The networks, cable companies, and production houses are trying to maximize revenue from multiple platforms — broadcast and online ads, Netflix and on-demand licensing fees, DVD sales, syndication. They don't want to make content available if it's likely to damage existing businesses.
So far, NBC and Fox say they have yet to see cannibalization. Hulu may even have boosted the TV audience on some shows, such as Glee and It's Always Sunny in Philadelphia. The networks put some season debuts on Hulu before broadcast to kick-start interest. But in general, the content providers are conservative. Their default on Hulu is to provide exclusive rights to only the five most recent episodes of current shows. But there are no rules. The first season of Arrested Development is available; previous seasons of The Office are not. Lost fans can watch the first four seasons, but only part of last season. American Idol is a no-show altogether; Hulu couldn't secure the rights from its multiple owners. It's all a mystery to viewers, whose typical rant/plea is "Where the hell is episode 5 from season 2?"
"Hulu was a breakthrough service, but people are never satisfied," says Will Richmond, a veteran analyst with Video-Nuze, a Web site and newsletter. "It was a desert and Hulu provided water, but now the people also want food and table settings. On the Web, people are accustomed to access, and they don't take kindly to restrictions."
Kilar is sympathetic. "Users deserve to have whatever they want to watch," he says, "whenever they want to watch it, however they want to watch it." He and his team try to manage viewers' expectations without going into the rights issues. They post expiration dates on episodes, and email alerts to registered users. If Kilar learned one thing at Amazon about changing an industry, he says, it's patience. Bezos used to say, "Online commerce is the worst it's ever going to be." Online video, Kilar knows, can only improve.
StewartRogers: I watched a bizarro movie last night (something low budget and free from hulu.com), but am closing in on 4 weeks without cable.
jonrog1: Hulu on a laptop using sprint. The networks are screwed.
— posted on Twitter in September
The networks don't tell Kilar what to promote. His team decides on the slot atop the home page, and users determine the columns that list the most popular shows and clips. Except for major changes, Kilar says he doesn't need network approval to modify the site. He didn't ask permission to start including names with user comments to discourage inflammatory anonymous posts. "No, no, there is no call," he says with a laugh. "They know we're a separate company. They find out about new features the same way our users do."
But there are limits to Kilar's independence. Last February, in a blog on Hulu called "Doing Hard Things," Kilar explained that its content providers had asked to remove programs from a service called Boxee. For a company that espouses liberating content, the decision seemed out of character. Boxee's free open software lets users access music, photos, and video on their computers and online through a single application. With a device like Apple TV, you can transfer that content to a standard TV. In other words, you use your HDTV or your home theater to watch shows on Hulu, with far fewer ads than you'd see on broadcast or cable channels.
Although Boxee had been delivering up to 100,000 Hulu streams a week, Hulu instructed Boxee to end the practice. It's the only company to have done so.
Kilar insists that Hulu's Amazonian mission — to help people find and enjoy the world's premium video content — hasn't changed. "Boxee had no right to do what it was doing," he says. But he admitted on his blog, "This has weighed heavily on the Hulu team."
There's also pressure from Hulu's network parents on another front. At a conference in early September, News Corp. chief operating officer Chase Carey warned, "Ad-supported only is going to be a tough place in a fractured world... . You want a mix of pay and free."
There's little question that the next big change in online video will be paid-subscriber sites, particularly those offering access to more cable shows. Currently, episodes of fewer than 20% of cable shows are online, compared to about 85% of offerings from the four major networks. As part of an initiative called TV Everywhere, cable companies, including Comcast and Time Warner, are developing sites restricted to authenticated paying cable customers.
"I've had conversations with them," says Kilar of the cable providers, whom he says he sees as potential partners, not competitors.
Could paid content work on Hulu? "We don't think any one consumer model is the answer," says Kilar. (Hulu is also exploring international expansion and, according to analysts, an iPhone app). The most likely option is adding a subscription service alongside free content. Think of it as Hulu Premium — an online version of what HBO did to distinguish itself from standard cable service. For a monthly fee, VideoNuze's Richmond suggests, members would get ad-free content on Hulu, early access to programs, and more comprehensive archives. For a share of the fee, companies would make more shows available. Most important, Hulu could offer those subscribers Boxee-style access to TV, giving the networks a long-awaited convergence strategy with a steady revenue stream.
"I take from Carey's comment that the horse is already out of the barn," says Richmond.
But no one knows for sure what the next plot twist will be for Hulu. So far, as Anne Sweeney, president of Disney/ABC Television Group, says, "Hulu's shown performance." Two years ago, ABC, which was the first network to stream episodes of its shows on its own sites, declined to join the joint venture. Starting a new branded site didn't make sense. Now, combining ABC's more female audience and Hulu's viewership, which skews male, does.
But the online video space is so volatile that one industry observer estimates that Hulu could cost the networks nearly $1,000 per viewer in lost advertising, while another worries that Hulu could be tomorrow's MySpace. If Hulu's corporate parents don't renew their deals to provide the site with exclusive content two years from now, who knows what might happen?
When asked about all of these potentially dire circumstances, Kilar nods, as if he's been expecting the questions. "These are perfectly rational arguments," he says. "They just happen to be incorrect."
How can you be so sure?
"It was the same at Amazon. I was there when people were calling it Amazon.bomb, and everybody was saying that once Barnes & Noble goes online, the game is over." At Hulu, he says, "we're creating the kind of service we want. We're some of the biggest media consumers on the planet. This is the way we think media should be."
The most captivating glimpse into the future Kilar is creating is Hulu Desktop, where viewers on average spend twice as long as they do on hulu.com. The interface has a cinematic feel, displaying episodes and clips of the shows you've subscribed to, like TiVo, but with endless memory. It puts the cable companies' guides to shame. As you browse the vast Hulu library — by popularity, recent additions, or other groupings — you can add video to your queue to watch later, Netflix style, and share it with friends. You control the sequence of shows, too, which play one after the other without prompting, like a playlist on iTunes or your own must-see-TV evening lineup.
Hulu Desktop is designed for more of a "lean-back experience," Kilar says. He doesn't mention watching TV from your couch. But he doesn't have to.
See more of Jason Kilar at Innovation Uncensored 2011.