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Global Vision

YouTube's challenger is expanding outside of the US. Is it really an evil plot to destroy the world? asks Diane Mehta

When Alec Baldwin headlined a 60-second ad for Hulu during the 2009 Super Bowl, he wore an evil grin celebrating the video-streaming website's "cerebral-gelatinising shows" as he walked through a lab showing people deadened by watching TV. After your brains turn to mush, Hulu will "scoop them out with a melonballer and gobble them right on up," he announces, in the comic persona of Jack Donaghy from the TV show 30 Rock. The tagline: "Hulu. An evil plot to destroy the world. Enjoy."

Hulu is a smarter, more polished cousin of YouTube for the TV-addicted. If you missed the latest edition of The Daily Show with Jon Stewart you can click on Hulu.com and watch it. If you prefer Japanese anime, it's got that too. Home improvement shows, nightly news clips, cartoons, sports highlights, TV shows and films – episodes from roughly 1,500 professionally produced shows or movie titles – are all available for free.

It started in 2007, when NBC Universal CEO's Jeff Zucker and Peter Chernin, then chief operating officer of News Corp., decided they could use their collective muscle to steal audiences from YouTube, which had been bought months earlier by Google. Private equity firm Providence Equity Partners pitched in $100m. Hulu's tongue-in-cheek "evil plot" joke plays on the irony that the venture was launched by two corporations that already control much of our popular culture. NBC Universal operates a US broadcast TV network and several cable networks (including CNBC), Universal Studios, theme parks, and TV production outfits. News Corp. owns newspapers and magazines worldwide and, through Fox Entertainment Group, TV channels and a film studio.

Unlike YouTube, with its shakily filmed skateboarding cats and breakdancing grannies, Hulu's niche would be professional content. NBC and News Corp. put the ex-Amazon executive Jason Kilar in charge and set about making a slick, clean-looking site that wouldn't embarrass advertisers. Though YouTube's user-generated amateur videos are streamed 6.6 billion times a month versus Hulu's 411 million, says comScore, a research firm, the assumption was that no advertiser would risk trashing the brand by letting its ads end up next to intoxicated teens. Hulu's owners were banking on the fact that ads would support the content and the money would pour in.

When Hulu launched in the US on 12 March 2008 no one was bowled over, but it doubled viewer numbers from 12.5 million to 24 million between September and October 2008, according to comScore, when it started streaming premium content from Fox and NBC. Following its provocative Super Bowl ad on 1 February 2009, Hulu became a household name. ComScore recorded a leap from 34.7 million viewers in February to 41.5 million in March 2009, catapulting Hulu to the number three video site behind YouTube and Fox Interactive. Hulu scored another significant coup when Disney bought a chunk in the company, via ABC, this spring, making the website an alliance of three of the four major US TV networks, each with a 27% stake.

Hulu has since revealed it plans to launch in six to eight international markets, beginning with the UK, where the BBC, ITV, and Channel 4, earlier this year scrapped their Project Kangaroo video-on-demand venture after the UK Competition Commission deemed it a monopoly. Jia Wu a media analyst at Strategy Analytics believes English-language countries such as Canada and Australia would be the easiest for Hulu to crack, along with the lucrative French market, which is expected to be worth €150m in web video ads in 2009.

Unlike YouTube, with its global portal, Hulu needs local sites because of a combination of rights issues and different funding models. YouTube, notes Martin Olausson, an analyst with Strategy Analytics, pays for content upfront and gives content owners a small revenue share from ads. But Hulu offers content owners an equity stake, so it negotiates joint partnerships with local content owners, which come with rights attached. This is why UK consumers have only British programming to look forward to on Hulu UK, not US shows. Hulu has been shopping around, dangling equity stakes in Hulu in front of British broadcasters plus a 50/50 split of online advertising. YouTube is thought to be offering 70% of ad revenues, but no equity.

At press time Hulu was believed to have offered UK commercial channel ITV an equity stake – thought to be significant and possibly more than 25% – in the UK venture. ITV is understood to be close to agreeing to give Hulu the rights to shows from ITV Productions; however, a sticking point has been ad sales. ITV has been reluctant to give up control of selling its own ads (it had wanted the contract for all ad sales for Project Kangaroo content) and splitting the sales of online ads for content on ITV Player and a Hulu UK service is problematic. Hulu US is understood to have allowed ABC to maintain control of ad sales around its programmes on the service, and ITV wants a similar arrangement.

How deals are cut is highly significant. While clips of unkempt Scottish sensation Susan Boyle singing on Britain's Got Talent drew close to 100 million hits on YouTube, ITV – which owns the rights to the show – lost out on a potential windfall of about €1.5m by battling over ad formats with Google. It illustrates the fact that YouTube and Hulu are only just beginning to figure out their business models. Ads aren't enough, but they're not chump change. Ad revenues for video will account for $2.2bn (€1.5bn) of spending this year worldwide, projects research firm eMarketer, almost double last year's amount. The firm expects it to hit $7.5bn (€5.2bn) by 2012.

While Hulu's potential may be exciting advertisers, who have watched hard-to-reach teens abandon sofas, YouTube has a more creative approach to making money. "What's not disputable at this point is that YouTube remains the 800lb gorilla of video," says Will Richmond, a broadband video analyst with the online publication VideoNuze. "It has over 40% of share of all online video views."

YouTube has sponsored user-generated video contests to help advertisers promote their brands. Intel, Sony, and the Pulitzer Center on Crisis Reporting solicited videos on underreported stories. Oxfam asked viewers to upload videos asking their government to end poverty. And this summer, millions used YouTube's click-to-buy links to Amazon and iTunes after watching a Minnesota couple's contagious video of their wedding party dancing down the aisle to R&B star Chris Brown's dance jam Forever. It rocketed the song up the charts and made Brown a bundle.

And Hulu is not the Holy Grail of video it promises. Hollywood, in fact, appears to be saving its best stuff for cable. ABC drama Lost, for example, offers all of Season One, the last six episodes of Season Five, and nothing inbetween. Films range from National Geographic specials to Lassie and B-list 90s' flicks, with a clutch of documentaries and indies. Even Hulu's owners have held back top-tier programming from the site, such as full episodes of American Idol. "If Fox, NBC, and Disney already have existing deals with pay TV operators that are providing a lot of money to your business, you don't want to piss them off too much, too quickly," stresses Olausson.

But if you don't give consumers what they want, it irritates them. Earlier this year, Hulu took several seasons of It's Always Sunny in Philadelphia offline at the request of its partners and the viewer response was scathing. Rights come and go, says Hulu. The maze of international rights contracts and legacy deals is mind-boggling, especially in the film industry. And film studios like it when people pay for their movies. They live by the theatrical release, and soak up cash from DVDs, movie rentals, and the rest. They're loathe to threaten that, which is why "the only ad-supported movies you see on Hulu are those at the tail end of the so-called ‘windows', after they've gone through theatrical, pay TV, and the DVD window," says Richmond. Erica Motley, a partner at Terbish Partners, a consultancy for the film industry, adds: "Looking at it from a third-party perspective, for indie film or documentaries, does anyone know it's there? People go to Netflix to watch indie films. People go to Hulu to watch what's on TV."

Something's got to give and it looks like it will be the "freemium" business model. Both Hulu and YouTube are looking into a premium or a la carte download service. Rupert Murdoch's News Corp. recently announced it is throwing up a paywall for all its websites, and there's a groundswell of talk about charging subscription fees or micropayments for media content. It's a no-brainer that the business model needs to evolve. That's why not everyone's buying it when YouTube says it's "close to being profitable" and NBC president and CEO Jeff Zucker says Hulu's "close to breaking even." After all, says Olausson, "Ad budgets are being slashed all over world." Olausson also points out that more companies are looking at the direct-to-consumer model. Apple's iTunes and NetFlix, for example, are based not on ads but on the direct-to-consumer model, and are still growing despite the recession.

That said, video ads are still expected to grow faster than other ad segments in the next five years, says Wu, who estimates Hulu's 2009 revenue between €55m and €70m (costs are harder to nail down given Hulu's deals with investors ABC and FOX). Research firm Screen Digest, which last year estimated that Hulu would clear $12m (€8.4m) in gross profit in 2008 and $175m (€123m) in 2009 (and said YouTube would make no profit in 2008 and take in slightly less than $175m in 2009), has since backtracked. Dan Cryan, head of broadband for Screen Digest, says they're currently reconsidering those estimates, given Hulu's ABC deal and international plans. But he has revised last year's estimate and now thinks Hulu will make about €70m in revenue this year. He can't commit to a margin estimate for YouTube yet.

But the bigger question is who wants to pay for content that's already free? Olausson compares the groundswell of free music to Napster in the 90s, pointing out that people don't want to keep downloading everything from a peer-to-peer network when they're 40. He also believes the future will depend in part on whether young people pay for content on demand once they're footing the bill, not their parents. "But I don't think you can ever put the genie back in the bottle," he stresses. "Everything will become on-demand."

Does that mean we can expect a future of free, instantaneous access to our favourite brain-rotting shows online or in our living rooms?

Don't hold your breath. "We're a long, long way off from a Nirvana state where everything is available on every platform every time you want it," says Richmond. "But we're chipping away."