Raja Jasti’s Blog - Renaissance Thinking

Peter Kafka interviews soon to be leaving CBS digital boss Quincy Smith who sees Hulu as a problem,

Peter Kafka: Since you’re going to be advising CBS’s Web video strategy, why don’t you lay out, for the record, where things stand?

The other side of the Web, the side that is most thought of by many journalists, is the threat, of an IP-deliverer of video. And how you turn that threat into an opportunity.

And so from that perspective, as  you know, we didn’t go ahead and say, “OK, we’re going to lock down and stream, with all of our other peers in broadcast, and come up with the same rules, and embed and right-click this and go away.” I’ve never had a beef with Hulu. Hulu’s always worked as a great service. That’s part of the problem.

As a network, we need to make sure that our content is being seen where the dollars matter. And right now that’s on air. Opportunities like TV Everywhere — we’re not putting all of our eggs in that basket, though we are big advocates of it — are ones where you can actually take and expand and extend the television market online, so it doesn’t matter what screen you watch CSI on: What matters is that you watched it, it counts and you saw the ads.

But until that happens, it’s crazy to just stream the shows for zero economics. When in fact you can make a lot more money doing things that are additive and complimentary to the rest of the CBS line. That’s where CBS interactive comes in now.

Kafka: But TV viewers are showing an increasing interest in watch their programs on the Web — whether its from legal services like the Web or illegal torrents and pirate sites. Don’t you need to reach them where they are?

Now, if you really look at those numbers, what they’ll say is [online and offline video are] both growing, right? We’re having the best year ever as America’s largest broadcast network. and I think that 99.9 percent of that — this is the Quote I’ve never been able to get in there — is that’s [because] of the great content that we have. There’s some infinitesimal basis point that’s relevant [to CBS ratings because] we are making sure that when people watch it, they’re more inclined to watch it on television. For now.

Once that solution moves, once those economics move – whether that’s more ads, [higher] cpms, more ad buyers… You and I can say all day long, “We’re sold out on web video. That’s going really well. It’s sold out.” Well, no kidding it’s sold out. It’s a $700 million market. The television market is $120 billion. And of that $700 million, half of those [ad buyers] are spending  90 percent of their time doing Google keywords, not buying online video.

The key is, how do you turn television buyers into video buyers? And that’s where a solution like TV Everywhere comes into play.

And by the way, looking at [Hulu CEO Jason] Kilar’s comments the other day, in Colorado [at an industry convention], he sees that too. He’s more sophisticated on this stuff than most anybody. From the perspective of, he understands that’s where the big dollars are. And so he probably went at it as, “I’m going to aggregate all the people first, so hopefully things like TV everywhere come to us.” From our perspective at CBS, we’ve got to go to them.

I don’t hate Hulu. Hulu’s world class video viewing. What I don’t understand is, why license all that content to something that works that well, that seamlessly, yet — without the economic model around it?

Saul Hansell tries to do this in his NYT post.

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 each other 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 had quite a pedigree of upending 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 why 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.

People like professional video and see it differently than user-contributed video

It seems odd to have to say it, but “American Idol,” “Heroes” and the rest of the prime-time line up 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.

Portals are a low-margin business

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.

Bits has an analysis on how the deal between comcast and time-warner will blast open TV.

For people who hope the openness and flexibility of the Internet will come to mainstream television, the deal announced today between Comcast and Time Warner is great news. They just don’t see yet how it blows apart the tight bond between cable content and cable delivery.

On the face of it, the deal is all about controls, rules and limits. The two companies are going to test a method for people who pay for Comcast cable TV to watch Time Warner’s cable networks, starting with TBS and TNT, on the Internet. Some very thoughtful technology bloggers have railed against the idea. On Techdirt, Mike Masnick wrote:

Rather than embracing what the Internet allows these companies to do, they’re trying to remove that ability, and make it act like good old television.

Om Malik, on GigaOm, asked why not simply put all cable networks online for free, just as broadcast networks are doing on sites like Hulu:

Cable operators need media company’s channels to overcharge the working stiffs like you and me. Media companies need the cable operators to share subscription revenues to pay for their highly inefficient and archaic businesses.

They’re right of course that this deal, which is meant to be a model for the entire cable and pay TV business, is a response to open video on the Internet to the existing TV business. But Comcast and Time Warner are accepting the reality of the wired world: people want everything, everywhere now.

So why not let the 92 percent of Americans who subscribe to cable or satellite TV watch the channels they already pay for on their computers and cellphones? In the Comcast and Time Warner arrangement, there is no extra charge, so this simply gives customers more choices.

The Time Warner and Comcast deal blows apart the link between content and delivery, and over time that will create many more choices for consumers. Initially, it doesn’t look that way of course. Only cable (or satellite) subscribers get access to the content right away. And then only for a bundle of networks, whether they want those particular networks or not. But once the infrastructure is in place for cable networks to make sure that only paying customers can watch their shows, it will open up a wide range of other business models.

Suddenly, you won’t have to buy your programs and the wires to your home from the same company. It’s not at all hard to imagine “DISH without the Dish,” an Internet-only programming bundle from the satellite company. And then Web sites like Hulu or Netflix or new startups could go to network owners and buy content to sell.

Mr. Masnick and Mr. Malik seem to believe that the media companies are going to sell their networks only through existing cable companies. I don’t see that. The networks have no long-term interest in turning down any distributor who has the money to pay the going rate for their content. And Washington wouldn’t put up with content companies favoring some distributors over others, just as cable networks were forced to sell to satellite companies as well as cable operators.

Of course, the pricing and terms may not be exactly what consumers want. The media conglomerates now force the cable companies to buy their channels in one package — to carry ESPN, Disney wants systems to offer ABC Family as well. They may try to keep selling these bundles as new distributors crop up. With more options and more competition, over time the market will sort out the right products and prices.

This doesn’t mean the demise of the cable systems by any means. They have been very successful selling a bundle that includes a wire to your home and several applications that use the wire — voice-calling and video programs. Many people will still vote for that convenience, especially if the video programs follow them to other devices.

The Time Warner-Comcast deal announced today creates the technical architecture that allows content and distribution to be separate. And that will enable exactly the sort of openness, and flexibility that technologists root for. (But you may still have to pay money to watch that football game.)

Les Moonves, CEO of CBS, says that Hulu does not not hurt TV.com, CBS backed online video destination.

CBS Corp. (NYSE: CBS) isn’t threatened by Walt Disney Co. (NYSE: DIS)’s move to join Fox Broadcasting Co. and NBC Universal on Hulu LLC , CEO Leslie Moonves told analysts on the company’s first-quarter earnings call.

When asked if the addition of Disney and ABC.com content to Hulu would hurt the value of CBS Interactive’s TV.com, Moonves said TV.com will perform well on its own.

“TV.com is doing extremely well. We like the ability to control our own content — where and when it goes. We don’t like the idea of being exclusive to Hulu. It’s not to say one day you won’t see CBS content on Hulu, or Hulu content on TV.com. But this gives us the freedom to place our content wherever we want,” Moonves said on the conference call Thursday.

“We wish Hulu well. We think it will do well. But we think TV.com will do extremely well, and we will be in control of our own destiny,” Moonves added.

CBS picked up TV.com in its acquisition of CNET Networks last year, and it relaunched the site, which is part of its CBS Interactive unit, in January.

Disney joins NBC Universal and New Corp as partner in the joint venture Hulu.

Three of the four big broadcast networks now own stakes in Hulu, the popular video Web site.

ABC Enterprises, a unit of the Walt Disney Company, announced Thursday that it would join NBC Universal, which is owned by General Electric and Vivendi, and the News Corporation, owner of Fox, as a partner in the joint venture.

Hulu, which in the last 18 months has become the third most popular video site on the Web, behind YouTube and Fox Interactive Media, displays free, high-quality versions of television shows and movies, supported by advertising. It said it would add ABC shows like “Lost,” “Desperate Housewives” and “Jimmy Kimmel Live” to its online library by late summer, pending regulatory approval.

Anne Sweeney, president of the Disney-ABC Television Group, said that while most of the network’s shows will continue to be available on ABC.com, that site attracts mostly core fans. By distributing them on Hulu, Disney hopes to reach Hulu’s much-larger audience of 42 million visitors a month.

According to people briefed on the terms of the deal, ABC will give Hulu an exclusive license to distribute its shows on Hulu.com and across the Web on Hulu’s partner sites, like MySpace and AOL .com. ABC will also give Hulu around $25 million in marketing credit, which Hulu can use to advertise itself during ABC’s broadcast shows.

In exchange, Disney will take a 28 percent stake in Hulu.com, a little less than the stakes of the joint venture’s founders, NBC Universal and the News Corporation. As part of the deal, NBC and the News Corporation also renewed their commitments to provide their shows exclusively to Hulu for an additional two years.

The deal is a blow to YouTube, owned by Google and by far the largest video site on the Web. It also courted Disney but struck a deal to display only short clips from shows on ABC and ESPN. People familiar with the negotiations said talks between Disney and YouTube broke down over how a deal would be structured, with Disney insisting on owning a stake in any joint venture.

Jeff Zucker, president of NBC Universal and a member of the Hulu board, said the experience on Hulu.com was superior to that on YouTube, for viewers and advertisers.

“Advertisers have made it clear that they want a safe environment unpolluted by videos of cats on skateboards,” Mr. Zucker said. “Couple that with the fact that Hulu has generated a user experience that is second to none. That has made Hulu the pre-eminent video site.”

ABC’s deal with Hulu also isolates CBS, which will be the only major broadcast network without a seat at the Hulu table. In a statement, CBS said it wanted to maintain control over the distribution of its shows online.

CBS has been offered a chance to join the joint venture several times, say people who have followed the continuing discussions, but has always declined. CBS distributes its shows on 300 video sites, including Joost, MSN and AOL. It also withholds some shows from the Web for several days after they are broadcast to ensure that the Web does not cannibalize the more profitable TV-watching audience.