Why Hulu Succeeded as Other Video Sites Failed

Many people watch free, advertising-supported episodes of shows on sites like Hulu.

Why were so many people in the technology world wrong about Hulu? It was an idea that seemed like a relic of the worst excesses of the dot-com era: a portal for content run by a joint venture of media companies. Could any venture have more going against it?

Portals, of course, are passé in a world where search engines point people to content spread all over the Web. Who needs professional content when users make their own? And if there is anything more clueless than a big media company, the Silicon Valley wisdom goes, it is a joint venture of several media companies bound to undercut one another with crossed agendas.

Yet Hulu, founded in March 2007, is triumphant when most other video sites have languished.

Most recently, Joost has retrenched and its chief executive, Mike Volpi, has left that spot to join Index Ventures, one of the company’s backers. Joost was notable mainly for the pedigree of its founders, Niklas Zennström and Janus Friis, who have been known to upend traditional industries. Their free Kazaa file-sharing service continued the work of Napster in undercutting the $15 price for CDs. And Skype, the Internet phone service, continues to cause trouble for the cartel of phone companies and governments that keep international phone rates high.

In television, however, the empire struck back. Here are a few reasons Hulu has been successful where others failed:

Putting Network TV on the Internet Is Not Disruptive

The business model of TV networks is free programs paid for by ads. There is nothing technically or financially revolutionary about putting shows on the Internet. And thus the networks didn’t have a weak spot that could be exploited by a newcomer, as Kazaa and Skype did in their industries. Joost hoped that a twist on Kazaa’s peer-to-peer technology would reduce the transmission costs of Internet video, but the price of bandwidth has fallen so much that this didn’t provide any edge. Ultimately, the networks had all the power to decide which sites could distribute their programs. While CBS chose to spread its content widely, there was nothing that forced NBC and Fox to license their content beyond Hulu, cutting out Joost and the others.

It seems odd to say, but “American Idol,” “Heroes” and the rest of the prime-time lineup have many millions of fans who don’t get the same satisfaction from YouTube (even though many of them turn to YouTube for other entertainment). So not only did Hulu have something people wanted, it had a brand promise that was clear and distinctive: Hulu is where you go for network TV. That’s different from YouTube, which is where you go to watch the biggest collection of video that isn’t on TV. Hulu, in effect, is Amazon.com to YouTube’s eBay.

Meanwhile, the brands of all the other video sites — Joost, Veoh, and so on — didn’t mean anything in particular at all. It certainly helped Hulu cement its position as the icon for professional content that the company built a particularly attractive and easy-to-use site. But I think being first with a critical mass of content and the right brand position was more important.

Hulu has proved that there is value in having a portal for video. People go there as well as to NBC.com and Fox.com. That’s why Disney has decided to bring ABC into the venture. But that value is modest compared to the power of the companies that actually create the programming. If a company like Hulu demanded too much of a cut of the ad revenue, a network certainly could pull its programs off and its audience would still only be one click away. That’s why it makes sense for Hulu to be owned by the main networks it distributes. It can help its owners mainly by making it easier for them to find viewers and only secondarily making a profit. Joost and the rest needed to make money, and enough of it to satisfy venture capital investors, by negotiating a large enough share of the ad revenue with the networks.

All this makes me believe that Hulu is an exception that proves the rule. Running a portal is a very tough business and unless you have exclusive access to very valuable content, along with a distinctive brand premise, you are not going to be able to make much money with one.

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