(Update: the interview is up now over at Charlie Rose)
A while back, when talking to a friend of mine who works in advertising, I mentioned that I thought Hulu would be an amazing place to work at in this point in time. Hulu is one of the rare cases where you see traditional media companies “getting it” where they embrace new technologies that work really well. Hulu has had huge success and recently its been reported that advertisement buys on the website are most costlier than buying space on TV. My guess is that this is the beginning of a long-term relationship between Hulu and its viewers. So far the company is creating great brand equity by providing online users with a place to view high quality online content in a really enjoyable manner. I don’t see their model eroding anytime soon.
As value investors, we spend an awful lot of our time looking at distressed sectors of the economy. I’ve spent quite a bit of time looking at media companies and found myself a bit confounded. Take a company like News Corp. Rupert Murdoch is arguably one of the savviest media operators in the business. In general, News Corp boasts a more robust digital portfolio of businesses than others — but still they face some trouble. The company’s large newspaper holdings have seen declining ad revenue and even their big media acquisitions like MySpace have faced troubling headwinds as Facebook erodes their user base.
Hulu though, seems to be a prime example of a new online business that knocks it out of the park. Originally started a joint venture between News Corp. (27%) and NBC (27%), Hulu now includes Disney (27%) and Providence Equity Partners (19%). Basically every major TV network except for CBS and The CW.
When I look at media companies, especially in this environment, my first aim is to normalize earnings. It’s tough because the way we consume media is shifting and the new methods of consumption aren’t always monetized well enough. It used to be that you couldn’t count on online monetization because media companies hadn’t figured out but now I think that’s rapidly changing.
CHARLIE ROSE: What is going to be the business model for the monetization of content on the Web?
JASON KILAR: I think it’s going to be a number of things. You know, clearly, when you look at Hulu today, we have a free ad-supported model, and I think that happens to be the biggest. If you take a look at the way the premium content is monetized, there’s a lot of different models out there. Sometimes you pay for an individual episode, for example on iTunes. Other times you pay for a
subscription. And other times it’s free ad- supported.
And if you look at just in the U.S., it’s about a $57 billion industry with regards to ad-supported premium content. That’s the biggest pond.
CHARLIE ROSE: And what is defined as premium content?
JASON KILAR: Premium is — the way that I define it is, it’s done by people who do this for a living. Which doesn’t necessarily mean that it has to be on television. There’s a great example of premium content called “Dr. Horrible’s Sing-Along Blog,” which is created by a guy named Joss Whedon, who created “Buffy the Vampire Slayer,” he’s doing “Dollhouse” right now. He did that on his
own, on his own dime, during the writer’s strike.
That’s premium content. You won’t find it on television, but it’s absolutely premium.
CHARLIE ROSE: Right.
JASON KILAR: So with regards to the business models, I think you’re going to see a lot of different flavors of it. There is going to be free ad-supported, which I happen to think is the most ubiquitous one and the largest one in absolute dollar terms, but there’s also a lot of other models that will be a part of monetization on the Web, including a la carte, subscription, and variants thereof.
The content monetization model that Kilar talks about is akin to the freemium model that’s tossed around a lot by people like Fred Wilson where there isn’t just one system of pricing. Instead you see these tiers, the lowest being free and then it scales up from there. I think that freemium has a tremendous amount of potential, the trick though is to make it so there are real incentives for users to opt for the premium offerings.
One of the really great points that Kilar brings up is that now, media is becoming more of an impulse response business:
JASON KILAR: At one source. So there’s — I’m a big believer that media is an impulse business. You don’t need “30 Rock” to live another day. It’s not like food and clothing and shelter. And I love “30 Rock,” but it’s discretionary. And so the fact that it’s an impulse business means that to me, if you can make it easier to consume, people will consume more of it. So I think the a-ha moment for consumers… was that basically they could consume “30 Rock” when they wanted. When it was convenient after the kids went to sleep or in the morning when they had a break. And that’s very liberating, it’s very empowering, and I think at the heart that’s a big part of the Hulu value proposition.
One of the things that I think is a real feat on the part of Hulu is creating a really well designed and easy site. I originally had the opportunity to beta test it and told everyone I knew about the service and how awesome it was. Sure, some people remarked that they already used similar sites online but typically these were hastily put together and often made the user experience frustrating. Hulu looks and works really well which makes it perfect for this shift towards impulse consumption. The easier these are, the more likely users are to use them.
CHARLIE ROSE: Are we moving to a point where there will be no sort of appointment television, no real-time television?
JASON KILAR: If we were to fast forward, I think that programming is always going to be a healthy mix of event programming and on-demand programming. There’s certain things like scripted dramas that — they’re either topical or such water-cooler moments that I think that they’ll be consumed within 48 hours. You don’t have to consume them at 9:00 at night, but you want to consume them within the first couple of days so that you can talk to your friends about it. The Susan Boyle phenomenon on “Britain’s Got Talent.” You needed to consume that within the first 48 hours to be in the know.
And so I think that for high-quality scripted content, that will be sort of an on-demand environment.
But you look at a lot of programming today, there’s a move to having it be an event program, because there’s value in that. “American Idol” is a great example. The finale of “American Idol,” that’s event television. And the Super Bowl, that’s event television. So, it’s not just sports, but there’s also, I would argue, a big swath of entertainment that’s also event television.
I think that Kilar nails it on what is going to happen with TV viewership. Certain forms of content like sporting events are always going to be consumed live. Shows like Lost where you have a cultish following are likely to be consumed the instant they air, just because their viewers are constantly awaiting their next fix. Other forms of content may not be consumed when they air. I see this being different for everyone though. I think that the lower you value a TV program, the less likely you’re to watch it the instant it airs. If you think about it though, this is going to be beneficial for content producers because it increases the likelihood of their mediocre offerings to be watched on demand with services like Hulu. Whereas before, the program may have been cast aside for lack of interest, now you’re more able to obtain followers. In the long term this is a definite benefit for media companies because it means the playing field becomes less cutthroat and that viewership actually increases (as should ad dollars).
On Newspapers:
JASON KILAR: You know, now that said, there’s a lot of smart people working on the newspaper side of the coin to develop new models.
CHARLIE ROSE: What’s your best guess the way that will end up?
JASON KILAR: So, I think that there’s going to be devices. The Kindle gets a lot of press right now.
CHARLIE ROSE: It does. So — go ahead.
JASON KILAR: Deservedly so, in that they are creating a model that has people get a very valuable thing– which is newspapers like “The New York Times” and “The Wall Street Journal”– on a device whenever people want to consume it, whether on the subway or what not. And they charge people for it. So that’s the beginnings of a business model. I know there’s a lot of contention about well, who gets what, how much does Amazon get, how much does the newspaper get?
CHARLIE ROSE: Well, the contention is not so much who gets what, it’s how much Amazon gets and how little they get.
JASON KILAR: There you go.
CHARLIE ROSE: As you know, because you were there.
(LAUGHTER)
JASON KILAR: I’m very aware of both sides, it turns out. And so that will play itself out, and I’m sure there will be plenty of drama, but these things do sort themselves out. And so I think that there — there’s good news, by the way, in that future.
So Kilar basically has two positions. Keep in mind that Hulu does not produce any of the content on their site and they don’t plan to ever start producing content. They just try to make it so that the content is easily seen which benefits the producers and earns them a cut of the ad fees. He thinks the Kindle is probably the future for newspapers. This might be because of his past experience working at Amazon. I think though that if you change the medium, people may be more likely to pay for news.
What I mean is that people are probably more likely to pay for a paper newspaper than a website subscription. Still though, we see paper subscription rates declining. What a device like the kindle would do is cut out a lot of huge capital intensive costs. The machinery and staff needed to do the actual printing and physical distribution would be cut.
The trick, like Kilar rightfully points out, is figuring out the balance in payments between the newspapers and Amazon or the other device makers.
Monetizing social networks:
JASON KILAR: I think that is fair to say. That is fair to say. And I think
the two — there’s nuance between the two. They’re not — and this is just my assessment. I think you would certainly need to ask them for their thoughts on the topic.
When I take a look at it, the situation is, as you say it, which is an enormous audience, but not an enormous advertiser reception yet, with regards to those companies.
On the one side with YouTube, I think a lot of it has to do with the environment and the content, in that advertisers tend to want to be associated with a certain type of content, which is that they know very well it has a certain quality associated with it that, quite frankly, that quality has a halo effect to their brand and their brand message.
CHARLIE ROSE: And that’s the window that you guys found? This opportunity you guys found?
JASON KILAR: And that’s exactly what we focus on. And so that’s the distinction there.
On the Facebook side, I think it’s a bit of an evolution, in that that company, which has clearly done amazing things, was, I believe, as an outsider looking in, was founded on a culture that was obsessive about the users. And they built a service that is very valuable for users, and that is to be
applauded.
I think challenge for Facebook is to develop a culture that has the advertiser and the ad service be as strong a part of their culture as the user obsession is. And that is a trick, because cultures are not very easy to change. They’re sometimes almost impossible to change. But that is I think the challenge
that they’ll have to.
CHARLIE ROSE: So, what’s the way out for them?
JASON KILAR: The way out is literally for Mark Zuckerberg– and he’s doing it, I believe– is to make sure that that’s a part of the culture, that the quality of the advertising service and the efficacy of the advertising service has to be talked about as much internally as the user experience. Only when you have that sort of obsession over both of the customers that are actually a part of that business, well, I think you have great, great traction on the advertising side.
I have a feeling that sites like YouTube and Facebook have a long term trend in their favor with their users that’s going to force advertisers to evolve. Right now, they’re very conservative about putting ads on YouTube or Facebook because it’s really unlike any other place they’ve worked before. But I remember hearing another ad executive on a podcast with the Economist say that advertisers are always nervous about new technologies. In the end, they end up embracing it.
Will Hulu start producing their own content?
JASON KILAR: … I’ll describe a little bit of Hulu, for example, a day in the life of Hulu.
We have three customers. We have users, we have advertisers, and we have content partners. We have three customers. We don’t have one customer, we have three. And we make all of our decisions in a balanced way. And, by the way, our rallying cry as a company is to make sure that we deliver a service that users, advertisers and content owners unabashedly love, which means that the design of the service has to delight advertisers as much as it delights users, and we’re not willing to settle for less than love, to be quite frankly — to be quite frank.
And so that’s an entirely unique culture, because it means that you’re boxing your decisions, in that you have to make sure that the design of the service is very aesthetically clean for users, but also focus for advertisers. And I’m not saying it’s easy, but we constantly live that delicate balance between our three
customers and not sacrificing one out of the three or two out of the three. And that’s a huge part of our culture. If you ever stop by the office, I think you’d feel that advertiser focus. You`d feel that user focus and you’d feel that content focus…
We’re very — a big part of our culture is that we’re humble, which means that we’re very self-aware, I guess you could say. We fancy ourselves pretty good at Web site design and pretty good at technology, very good at creating advertising services that work. We happen to think that we are uniquely unqualified to create content. We don’t write scripts. We don’t produce television shows. We are uniquely unqualified to do that. So I don’t see that happening. We certainly don’t have the capability today, nor do we have the ambition to do that. I think that there’s so many talented people out there that should be doing that, as opposed to a bunch of technology geeks, which is what you’d find at Hulu.
I really like that Kilar is very willing to contain the company’s culture and core competencies. Many business failures arise when management ventures into areas where they have no real experience. They end up hiring plenty of consultants and outside expertise at a great expense and waste capital which could be allocated better by sticking within their current business.
What I also think is great is that the company seems to be employing a kind of equity ownership program among employees. This is often found in a lot of start ups, but because Hulu is this joint venture between media companies I feel like it’s pretty different. Kilar mentions that it’s one thing that sets Hulu apart from its larger owners:
JASON KILAR: If you were to take a look at the culture of Hulu and the setup of Hulu and the, you know, it couldn’t be more different than the cultures of NBC Universal and Newscorp. Now, the cultures of Newscorp.
CHARLIE ROSE: In every way.
JASON KILAR: In every way. And by that I mean that the cultures of NBC Universal and Newscorp are ideally suited to their mission, but Hulu’s mission is very different, which by saying that it necessitates a very different culture.
We all fly coach class. We eat popcorn. Like, we have cardboard boxes that hold up our monitors. We are very frugal. That is needed for the culture. And the other thing is, everybody at Hulu is an owner in Hulu. That is so different than the cultures in traditional media. But that culture.
CHARLIE ROSE: How is everybody in Hulu an owner? Meaning all the people — all your partners are owners? All the people who provide the content are owners, or?
JASON KILAR: No.
CHARLIE ROSE: No, you mean the people who work at…
JASON KILAR: My assistant is an owner, my assistant is an owner in Hulu. And that’s the way it should be. Because if we’re fortunate to create upside and to create value for Hulu, I think everybody at Hulu should participate in that upside.
In general, I think that these ownership cultures tend to create environments of hungry employees who are really committed to their product. But it’s always a bit of a risk:
CHARLIE ROSE: OK. Why did they take the risk? I mean, is it because what you are offering is down the road or in the near term offers extraordinary opportunity for income? Is it because it offers an opportunity to build something? And what is that something that they think they’re building?
JASON KILAR: I’m very sober and a realist when it comes to answering this question. And I think if you were to get to know our team, the vast majority of folks, if not all of them, are at Hulu because they see the promise of a service that they so dearly wanted themselves growing up. You know, there’s something very powerful about what Hulu can do in terms of making media available on your terms. And to me, that’s why the people are at Hulu.
There is a kicker to it, which is if we’re able to create a truly special company, there should be a financial benefit and a significant one if we’re able to create something truly special. But I think that the financials, if that’s what motivates you, you should go work on Wall Street, not work at Hulu.
I really like the bit about the frugal culture at Hulu where they fly coach and use cardboard boxes to hold up monitors. It may not be as glamorous as their counterparts in other companies, but it certainly helps keep down a lot of upfront costs and allows them to invest more in their business. Many successful startups are a result of the founders solving a problem that they themselves had or thought needed to be solved for people they knew very well. I think that’s the case here. Before Hulu, streaming media was often found on illegal sites that were often shut down within months. The sites were sometimes slow and the video quality wasn’t the best. Now, with Hulu you end up with a site that is well designed that works really well. You want to pour your hours into it and hope that they increase their library of content.
The conversation finally ended with a discussion on monetizing Twitter. At first I was pretty skeptical about Twitter, but I find myself using it more and more as a means of sharing interesting articles I find throughout the day that don’t really warrant a post on the blog. If you’re interested in that, feel free to follow me on Twitter.
CHARLIE ROSE: So is that an economic model?
JASON KILAR: Not yet. And I say — I stress yet. I can tell you that it is a business that has tremendous utility. I use it at least 20 times a day. It’s.
CHARLIE ROSE: What do you use it for?
JASON KILAR: What I do is I go to search.twitter.com and I search for the name “Hulu,” and I do that about 20 times a day, because the name “Hulu” gets written about on Twitter about 2,400 times a day right now. And by.
CHARLIE ROSE: But you can’t read 2,400 times of material, can you?
JASON KILAR: It turns out you can, as long as you look at it every 20 minutes. And so I have a BlackBerry, and I look at it every 20 minutes. And I’m not the only one. Almost everybody at Hulu looks at search.twitter.com for the word Hulu.
The reason why we do it is that it is real-time feedback on the quality of the customer experience that we’re delivering. So, we’re able to know if we’re doing something right and double down on it. We’re able to know if we misspelled a word on a Web site…
CHARLIE ROSE: And you’ll know instantly.
JASON KILAR: And we know instantly. So there are many occasions where at 11:45 at night, I’ll see a tweet about, say, a word that was misspelled, for example, on the Web site, and I’ll be able to send that to our CTO Eric, and he and I will have a conversation at 11:47 at night, and the site will be fixed by midnight. That’s a 15-minute turnaround, where without Twitter, that wasn’t
possible. It’s an amazing transparency engine.
CHARLIE ROSE: So, what will Twitter be in three years?
JASON KILAR: My prediction is that in the same way that Google is an intent revealing service that can be monetized that way, I would think that if I were at Twitter, I would focus on the search aspect of Twitter, because people are revealing intents when they do a search. That’s very valuable to marketers. So obviously I’m just commenting as sort of a sideline observer of it, but there’s
something valuable in the fact that I’m using it, quite frankly, for a lot of searches where before I did not.
CHARLIE ROSE: It is an interesting phenomenon. You’re here, we’re talking about Hulu, Twitter is on the cover of “Time” magazine. We did a show with them. I mean, it is — the level of curiosity about all of these things, whether it’s YouTube or Twitter or Hulu or so many other new Internet expressions is
extraordinary. And it’s beyond — I mean, clearly it is the province of the young. But it’s expanding in a — I find just a fascinating number of ways. Not just in terms of the ideas, but in terms of the consumers.
JASON KILAR: There’s no better time to be living, I think. I’m biased, of course, but we live in interesting times. And as a person that has this odd combination of technology passion and media passion, this is the best — this is the golden age of media, I think, because it’s leveraging technology to make it better and easier to consume. It gets back to that impulse business.
I think Kilar really nails it with where Twitter will have to go to monetize. The service’s real time search capabilities are extremely powerful for not only advertising but also things like data mining. While other media execs like Barry Diller seem to think that it is a service too difficult to monetize, I feel like it will again be a situation of the advertising model adapting to a new environment. Getting to know where people at any point in time, especially with unique locations like one particular store in NYC seems like it would have a lot of utility to an advertiser and the companies that are buying ads.
I know the interview wont give you any new investment ideas, but I think it gives you a really good take on where media is going, especially with these new technologies that seem to be disrupting the space. I thought that some of the views, especially on monetizing services like Twitter were pretty enlightening when contrasted with the more traditional media voices we heard from the Sun Valley conference a short while ago. I can’t wait for the Charlie Rose site to get updated with the link to the video and transcript so you can read the full interview yourself.
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