Hulu's hurdles
Internet video sharing site tries to serve fans and networks alike. It isn't easy.
NEW YORK (Fortune) -- It took Hulu.com less than a year to become the go-to destination for television-watching on the Web. Hulu even scored a spot on traditional media's biggest stage, a Super Bowl commercial.
But popularity can be fleeting. The site's real challenge is not winning attention, but keeping it. And as more and more viewers watch episodes of "The Office" and "Saturday Night Live" online, startups and media companies alike are becoming increasingly aggressive about claiming their share.
So, after spending the better part of 2008 forging new relationships with content providers, Hulu has spent the last week ending a couple. The free video site pulled all of its content from CBS's revamped video site TV.com on Feb. 17. Days later, it removed programming from Boxee, an open source social media player that lets users watch Internet video on their television sets.
Backed by News Corp. (NWS, Fortune 500) and NBC Universal, the "YouTube killer" launched a year ago with ten advertisers, scant content and a lot of skepticism. The site grew fast, and in January, viewers watched Hulu clips 232 million times, a 63% jump from September. The site's CEO, former Amazon executive Jason Kilar, focused on two things: building the very best video player on the Web and adding as much programming as possible. Beyond Fox and NBC, Kilar quickly added hundreds of other shows and movies. And he struck distribution deals that allowed Hulu videos to play on other sites.
At the start of 2009, Hulu had become the fourth largest video distributor on the web after YouTube, Yahoo (YHOO, Fortune 500) and MySpace. What's more, Hulu had made a business out of video, something these other sites have failed to do so far. Advertisers pay top dollar to have their ads embedded in 15 and 30-second clips baked into the programming. While the site doesn't comment on profitability, an analyst recently estimated the site made $12 million in 2008 profits, according to a recent Newsweek article.
But, as viewers watch more and more TV on the Web, video sites like Hulu are becoming increasingly threatening to traditional media content and distribution companies - the big networks and the cable providers, for example. The relationships between these guys are becoming downright uncomfortable. Some of these companies are getting into the online video business themselves; others are putting pressure on sites like Hulu to pare back on their distribution channels. This could go a long way toward explaining why Hulu ended relationships with two of its more popular partners.
Consider TV.com. It is now the property of CBS (CBS, Fortune 500), the media juggernaut that passed on its opportunity to join with the other big networks in Hulu's original launch. But when Hulu first partnered with TV.com, it was owned by CNET, and basically served as a TV fan site that hosted mostly user-generated content. That changed when CBS paid $1.8 billion for CNET last year. (TV.com? The golden URL alone was surely a major asset to CBS in the acquisition.)
CBS redesigned TV.com to compete as a major video site that would draw the same advertisers who have paid premium dollars to put their ads on Hulu.com. The site saw a 263% increase in unique viewers in January. Though it has nowhere near as many video streams as Hulu, TV had 5.9 million unique viewers compared to Hulu's 4.5 million, according to Nielsen Videocensus data.
Hulu withdrew its content, offering a terse release by way of explanation that cited "contractual rights." Two days later, CBS fired back with a statement of its own, saying it had every right to stream Hulu video content on TV.com under a company agreement, and explaining, "We are evaluating our next steps at this time."
Even as bystanders awaited the next salvo in the Hulu/TV crossfire, Hulu removed its programming from Boxee. Kilar spoke directly to Hulu patrons about the move in a blog post called "Doing Hard Things." He wrote that Hulu was respecting the wish of its content providers, saying, "While we stubbornly believe in this brave new world of media convergence - bumps and all - we are also steadfast in our belief that the best way to achieve our ambitious, never-ending mission of making media easier for users is to work hand in hand with content owners." Translation: Dad says we can't.
These content providers that Hulu cites have been the Web site's greatest assets to date. People tuned into Hulu at first because they could find "Saturday Night Live" clips there, after all. But as viewers turn to the Internet for more and more of their programming, these types of relationships are likely going to grow even more contentious and harder to navigate.
Early on, Kilar made it his goal to make Hulu content ubiquitous on the Web. He knows that when TV viewers want to watch their favorite shows, few stop to think about the networks and Web sites that host them. They simply type "The Office" into a search page. Now the very content providers that agreed to back his efforts may end up crippling him. 
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