After being mocked by the tech world before even launching, Hulu is now the toast of the Internet. In less than a year, the company convinced old-world media companies to play by Web 2.0 rules. In doing so, Hulu has created a fantastic entertainment experience for everyone. The company is now also saying that its revenue is coming in far ahead of expectations. But while CEO Jason Kilar deserves a lot of credit for what he’s done, the company as a business has a lot of challenges ahead.
Hulu’s long-term success depends on its competitive advantages. These currently fall in three key categories: its brand, its media partnerships, and its innovation. All three face stiff resistance ahead.
To start, while the name Hulu may be as prominent as the name Coke in the Internet world, it’s still very weak amongst the general population. This will change if Hulu continues its exponential growth, but Hulu has a long way to go before its a bankable household name.
More importantly, in order to continue to realize this growth, Hulu is dependant on its main asset, its distribution partnerships with major content producers. By some sheer force of god (and ownership stakes by NBC and Fox), Hulu has made deals with a number of major movie and TV studios. Since no other site has a library like that at their disposal, this represents an incredible competitive advantage
Unfortunately for Hulu, licensing this content also represents its biggest weakness. No matter how successful Hulu becomes, studios will likely always hold the power, and therefore the profits. If Hulu begins to make significant money, studios will almost certainly squeeze them for every bit of profit possible. If Hulu refuses, the studios will simply take their content elsewhere.
Unlike Apple, which wields significant power over the music studios because consumers have invested in their iPhone/iPod monopoly, Hulu’s web site may never be able to hold a similar lock on consumer attention. The cost of switching from iPod/iPhone/iTunes to another platform is significant. The cost of switching from Hulu to another web site is not. The truth is, as intelligent and well designed as is Hulu is, I don’t really care if i watch the latest episode on Hulu or NBC.com if they both offer a similar end user experience.
In fact if the studios get really smart, they will eventually license their content to everyone that wants to distribute it online. This will further squeeze Hulu on the profit end, while putting the company smack in the center of a very competitive marketplace.
So where does this leave the company as a long term business? As is usually the case, they will likely win or lose on their innovation. To win long term, Hulu will have to create unique value that no one else can match. This could come in the form of compelling and unique personalization technology, or perhaps highly effective ad serving technology.
No matter what Hulu does though, it has already created a great service, and raised the existing standards for online video. The question is, how much money can it make, and will it be able to create a fantastic business for the long term?
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