Broadband Cable Association of Pennsylvania


December 21, 2012

As Inc. and Netflix Inc. battle it out for dominance in online video, owners of the much smaller Hulu LLC, Hollywood's own online video service, are under pressure to decide which direction to go.

Jason Kilar, chief executive of Hulu, has asked the site's owners-Walt Disney Co., Comcast Corp. and News Corp .-for about $200 million to fund more program purchases and an overseas expansion, according to people familiar with the situation. That is roughly twice the amount they contributed this year, one of the people said. The request to sink more money into the unprofitable, five-year-old venture has put the spotlight on differences between Disney and News Corp.-the two voting partners-over Hulu's business model, which involves both a free service and a fledgling subscription offering. (For regulatory reasons, Comcast, the majority owner of NBCUniversal, can't vote its stake.)

It isn't known how News Corp. and Disney will respond, but the request could prompt the owners to clarify the strategic vision for Hulu before increasing their bets on it. News Corp., parent of the Fox broadcast network and The Wall Street Journal, wants Hulu to evolve into solely a subscription service, whereas Disney, owner of the ABC network, favors the free, ad-supported approach. A Hulu spokeswoman said, "We do not comment on continuing discussions regarding decisions that have yet to be made."

Hulu streams shows from its partners channels, as well from other networks, such as Viacom Inc.'s Comedy Central. Over the past couple of years, it has begun to develop original programming, beginning in earnest with the documentary series "A Day in the Life," directed by Morgan Spurlock, and "Battleground," a 13-episode comedy about a dysfunctional Senate campaign. Hulu already has incurred heavy costs for expansion. The company doesn't disclose profits or losses, but Disney for the first time gave some indication recently when it reported its fiscal 2012 earnings. Disney revealed Hulu had sustained larger losses for the fiscal year "driven by increased programming and marketing costs, partially offset by higher advertising and subscription revenues." Some number-crunching of Disney comments indicates Hulu's quarterly operating loss was around $30 million.

Hulu had to borrow $338 million in October to finance the $200 million buyout of Providence Equity Partners' 10% stake in the venture, and a $134 million equity-compensation payout to employees, according to a regulatory filing by Disney. Of the employee payout, about $40 million went to Mr. Kilar, according to people familiar with the matter. Hulu's owners guaranteed the loan. While Hulu invested more than $500 million in content in 2012, its competitors are spending far more. Netflix has committed to spend $5 billion to secure movies and programming for online streaming over the next few years, with about $2 billion of that due in the 12 months through next September. The outlet has commissioned original series like "House of Cards" as well as paid for rights to an array of Hollywood content, as has Amazon. Amazon declined to comment on the cost of its content, but Reed Hastings, CEO of Netflix, estimates his competitor is losing between $500 million and $1 billion a year on building its subscription video-on-demand service.

On Thursday, Amazon said it had approved pilots for six original series including "Dark Minions," an animated series about workplace slackers written by stars of "The Big Bang Theory." "If Amazon and Netflix are stepping it up, what are you going to do? That is the big question for everyone at Hulu," a person familiar with the matter said. Tension over Hulu's purpose surfaced almost as soon as the site was unveiled in 2007. At that time, online video was beginning to take off and broadcasters were trying to respond. NBC and Fox, the two original driving forces behind Hulu, wanted to draw viewers away from Google Inc.'s YouTube by making their content available on an array of sites including AOL, Microsoft Corp.'s MSN, and Yahoo But Hulu has proved no match for YouTube. Hulu had 22 million unique viewers in November, including those visiting via partner sites like Yahoo, while YouTube had 152 million, according comScore.

And since 2007, Netflix's video streaming service has taken off. It had 23.8 million paid subscribers in the U.S. at Sept. 30. More recently Amazon began offering video streaming for subscribers to its $79-a-year Prime service, which gives customers free two-day shipping. Anthony DiClemente of Barclays Capital estimates the number of Amazon Prime users is slightly less than half of Netflix's subscriber count. By contrast, Hulu has just three million subscribers-although it said this week the figure is double what it was a year ago. Both Netflix and Hulu Plus, the subscription service, are $7.99 a month. Hulu's partners contemplated throwing in the towel last year when they put Hulu up for sale. But that effort was abandoned, with only Providence being bought out. Wall Street Journal

Public radio station - and BCAP Associate Member - WITF will be awarded the DuPont-Columbia Silver Baton award - considered the broadcasting equivalent of the Pulitzer Prize - for its coverage of natural gas drilling and its environmental impact in Pennsylvania. The award, announced this week by CNN anchor Christiane Amanpour at the Alfred I. DuPont-Columbia University Awards Center, will be presented Jan. 22 at Columbia University's Low Library during an event hosted by Amanpour and Byron Pitts, chief national correspondent for CBS Evening News. The award will be presented jointly to WITF in Harrisburg, WHYY in Philadelphia and NPR for their work on "StateImpact Pennsylvania," in which WITF reporter Scott Detrow and WHYY reporter Susan Phillips focused on Marcellus Shale drilling. It was one of 14 stories, selected from hundreds of entries, based on the strength of reporting, storytelling and impact on public interest.

The citation notes that StateImpact Pennsylvania "showed the significant impact of natural gas drilling on Pennsylvania residents, and is an important model for reporting on local issues. Reporters Susan Phillips (of WHYY) and Scott Detrow (of WITF) covered the public policy, fiscal and environmental impact of the state's booming energy economy, with a focus on Marcellus Shale drilling." It is the first time WITF has received the Silver Baton award. Earlier this year, WITF was presented with two Edward R. Murrow Awards, recognizing outstanding work in public radio. "It's been an extraordinary year for WITF's journalists and, by extension, for our listeners, viewers and readers," said Kathleen Pavelko, WITF President and CEO. "I could not be prouder of our entire team in earning these recognitions, unique in WITF's history." Harrisburg Patriot-News Congratulations to everyone at WITF!

Quote of the Week: "My right hand. It can shake hands and sign autographs without stopping. I am constantly impressed with its durability and stamina." - Former Gov. Ed Rendell responding in a Q&A story by Politico this week when asked "Which is your favorite body part on yourself and why?" Philadelphia Daily News (Rendell, when asked when he last used profanity, gave an answer many of us probably would: "Watching the Eagles play.")