Searching for Life on Hulu

Just over a year ago, Hulu sold out its advertising inventory. And while still a nascent offering, that was a notable achievement in a world of Internet startups largely focused on capturing users before dollars. Not that the site lacks for viewers: Hulu has grown at a clip not anticipated even by its own backers. In February, less than a year after launch, Hulu became the Internet’s second-most-popular video site, trailing only YouTube, according to Nielsen.

Hulu has taken the lead in forging a business model for legal long-form Internet video, a content area that didn’t even exist as recently as three years ago. Originally dismissed by critics, including some at YouTube parent Google who referred to it as “Clown Co.,” Hulu was derided as a flawed strategy, a digital outlet for old media that consumers had no interest in watching.

But advertisers viewed its potential differently, with 200 marketers signing up with Hulu in the past year. That said, in recent months, the amount of unsold inventory given over to public-service ads has been equally visible.

The answer as to why that’s been happening may lie in the amount of new supply that has come with the site’s jump in viewers, combined with the glut of broadcast inventory during this economic downturn. After Hulu debuted its “Alien” ad with Alec Baldwin on the Super Bowl, for example, the site saw a rise of more than 40 percent in streams.

“Hulu experienced a major surge after the Super Bowl, and I think they were trying to be somewhat conservative — it was hard for them to predict that increase to advertisers,” says James Kiernan, vp and group client director at Publicis Groupe’s MediaVest. “It would have been difficult for them to have sold advertisers prior to that increase.”

More fundamentally, Hulu is caught in between an Internet model and a broadcast model, one that media buyers have yet to fully understand or accept. Media agencies are still set up for scale buys; that’s how they make their money, and Hulu doesn’t fit well within that model. Additionally, video on the Internet is increasingly sold on the basis of audience and behavior, while traditional broadcast still uses content as a proxy for audience.

“What is troubling is that some of the inventory that’s been unsold has been in attractive programs with devoted audiences in the Internet zone and coveted demographics in 18-34,” says James McQuivey, an analyst with Forrester Research. “I think ad buyers don’t know where the Internet fits into their overall media buying yet. It’s part B of a two-part buying process, where they buy TV first. Now that the first part is rebounding, maybe the second part will also rebound, but there are still some fears that online video won’t pick up until the fall season.”

Now, with a new partner in Disney, Hulu offers more premium content than any of its Internet video competitors. In addition to original backers NBC Universal and Fox, Hulu works with 150 content providers, including all of the major TV production companies with the exception of CBS, which is aggressively developing

Hulu’s traditional backers created the site as a hedge against the industry’s digital future-seeking to avoid the mistakes the music industry made in dealing with Napster-and as a way to control and monetize their content on the Web. But Hulu’s growth is said to have even surpassed their own expectations, and sources familiar with the site say that leaving a lot of inventory unsold at Hulu is a calculated measure so network CPMs don’t slip.

“The fact that Hulu has succeeded so quickly, particularly since the Super Bowl, has taken its partners by surprise,” says an industry source. “Partly, it’s a load issue, but it’s also about the fact that the more Hulu succeeds, the more its partners fail. [NBC Universal CEO] Jeff Zucker says he’s only getting 10 cents on the dollar as the business transitions from analog to digital. So, with the success of Hulu, you’re driving business away from an advertising model that works for the networks to one that does not. [Hulu’s partners are] not so focused on increasing ad dollars at Hulu as they are in protecting the mothership.  They’re still figuring digital out, and they need to find a way to increase those digital dimes to at least quarters or 50 cents. They’ll give up an additional $20-50 million in ad revenue rather than get the model wrong and cannibalize themselves.”
Even while in beta, Hulu attracted eight charter advertisers: The site took a known model — pairing high-quality video content with ads — and added some of the best characteristics of the Web. That’s a far cry from the other big growth area of the Web, social networking, which is trying to shoehorn advertising into communications-something that’s never worked well. But content-for-attention is a model that both advertisers and consumers understand and, mostly, accept.