Hulu’s Challenges in Online Video

Online video streaming service Hulu seems to have hit a rough patch. User loyalty seems to be eroding as viewers shift to other sites that offer better content with less interruption. According to a report by comScore, last month 182 million U.S. Internet users watched 38.7 billion online content videos. Google Sites, led by YouTube, remained the leaders in online video content viewership with 153 million unique viewers. Facebook followed at a distant second with 58.8 million users. Hulu did not feature in the top 10 online video content properties, but that has not stopped the company from being ranked fifth among viewership of online video ads.

Hulu’s Financials
Hulu may not have featured among the leading properties for online content viewing, but revenues have been increasing. Revenues for fiscal 2012 grew 66% over the year to $695 million. Growth was driven by both an increase in ad revenues and a rise in the number of paid subscribers for Hulu Plus. Hulu Plus’s subscriber base grew more than double, to three million at the end of the quarter.

The company tied up with more than 1,000 advertisers, recording growth of 28% over the year.  It has a library of more than 60,000 TV episodes, 2,300 TV series, and 50,000 hours of video through tie-ups with more than 430 content partners. Compare this with Netflix, which boasts of more than one billion hours of online video content, including movies, TV series, and original content.

Hulu does not disclose earnings numbers. But analysts estimate that the company is still incurring losses and suffers a nearly $30 million loss a quarter. Analysts estimate that Hulu was planning to spend nearly $500 million in content acquisition during the year. Netflix, on the other hand, was looking spending of $1.8 billion in content acquisition during the year.

Hulu’s Content Development
To attract viewers, Hulu is focusing on content development. It announced plans to work on original content for ten episodes of Saturday Night Live’s Seth Myers’ “The Awesomes” and sports mascot comedy “Behind the Mask.” Hulu has already sought additional $200 million funding for content development. Last year, it spent $500 million in content development and acquisition. But that number is still low compared with competitors like Netflix, which has committed to spend $5 billion in content acquisition over the next few years.

Last quarter, Hulu also announced the release of a new section on its site, Hulu Kids. Hulu Kids offers kid-focused programming, including series like “Thomas & Friends,” “SpongeBob SquarePants,” “Arthur,” and “Teenage Mutant Ninja Turtles.” Unlike with the company’s other programming, Hulu Kids will be offered in an ad-free format and will be accessible only to Hulu Plus subscribers.

Hulu’s Ad Focus
Last month, nearly 11.3 billion online video ads were viewed in the U.S. Viewership was led by Google Sites, where nearly two billion video ads were viewed that reached 32% of the U.S. population. Hulu, though, seems to have taken ads to an extreme. Hulu was ranked fifth with 1.45 billion online video ad views. But it was disconcerting for Hulu to see that it had reached a mere 7.3% of the U.S. population. Hulu’s consumers are upset because of another statistic: among the top 10 online video ad properties, Hulu has 64.9 ads per viewer, recording the highest frequency of ads. Compare that with Google Sites, which reported just 20 ads per viewer.

The increased ad frequency may spell better revenues for Hulu and a viable advertising media for brands, but it also ensures dissatisfied consumers. Hulu shows ads not only on their free site, but also on Hulu Plus, the premium paid option. In a discussion forum on their site, users have been complaining about the increasing ad frequency. Users complain that even for their paid membership, ad frequency has increased by 15-30 seconds of ad time to 75-90 seconds of ads, on every ad spot during any given show.

Hulu’s Management Changes
It is not just consumers who are unhappy with Hulu. Recently CEO Jason Kilar also announced plans to exit the company. Last quarter, Hulu’s investor, Providence Equity Partners, sold its 10% stake in the company for $200 million. With its departure, Hulu’s majority investors are now NBC Universal, Fox, and Disney. The sell-out is rumored to have triggered Kilar’s exit as he did not have many friends left in the remaining board. Hulu is now on the lookout for a new CEO who it hopes will be able to effect positive change.