Will live programming, streamed online, help TV networks keep up with Netflix and Amazon? A new service from Hulu aims to answer that high-stakes question.
Decorative Piñatas? Check. Free chips and dip? Check. Life-size effigies of Homer, Marge, and the rest of the Simpsons family? Also check.
Welcome to Hulu. The video-streaming service’s headquarters in Santa Monica have the feel of a startup’s command center: They’re colorful and communal, with luxuriously stocked snack stations, ridiculously named conference rooms (“1203 FluffyPanda Place”), and throwback mini-arcade. Just as at Google, employees have their own geeky nickname, Hulugans (new workers are dubbed Nulugans), and wear the obligatory uniform of T-shirts, jeans, and sneakers. Follow Hulugans around, and you’ll see them optimizing search algorithms and analyzing minute design details—on a recent day the topic of conversation was a virtually imperceptible change of hue in the company’s green logo. Colleagues give each other “Hudos” to commend one another on a job well done (they’re a virtual currency that can be redeemed for gift cards and charitable donations).
If it sounds like a scene out of HBO’s Silicon Valley, that’s perfectly appropriate. After all, that show’s characters and Hulu’s staff have something in common: For all their new-economy trappings, both owe their existence to old-school media conglomerates.
But at least the show’s fictitious startup, Pied Piper, is actually trying to develop a “killer app” that will revolutionize an industry. Hulu, by contrast, is trying to save one: the exclusive club of legacy TV networks. The site is the on-demand viewing hub for the programs those networks already distribute for big bucks elsewhere. And the Hulugans’ paychecks essentially come from companies whose histories predate the dawn of Netflix and the iPhone: 21st Century Fox, NBCUniversal, the Walt Disney Co., and Time Warner—the entertainment giants that own Hulu. Those corporate roots set Hulu apart from its purely techie rivals, and that’s something all the piñatas in the world can’t conceal.
Hulu’s hybrid nature and its hesitance to shake up its parents’ business models help explain why it’s currently the “oh, yeah, I forgot about them” player in streaming services. The privately held Hulu has about 12 million subscribers and is reportedly worth roughly $6 billion—making it one-eighth as big as Netflix and one-tenth as valuable. It’s a go-to source for “catch-up” TV but not for original programming. Missed the last episode of Modern Family? For $8 a month, you can watch it on Hulu. That—and not much more—has been its promise.
But the company’s soon-to-launch new service could change Hulu’s image—and open up a new front in the battle over streaming media. Sometime in May, Hulu will introduce a package of live-television programming, delivered over the Internet in real time to TVs (via “over the top” gadgets like Apple TV) and mobile devices. It will cost just under $40 a month, significantly less than most viewers’ cable packages. It’s the company’s most ambitious undertaking to date, with a user experience at its core that’s made intuitive and personalized by savvy deployment of artificial intelligence. It won’t be the first Internet-based live-TV offering: Players like Google’s YouTube and AT&T’s DirecTV already compete in that arena, and others are suiting up to join them. But Hulu’s live product should have an edge thanks to its user-friendliness and the sheer depth of its offerings, because it will combine live TV with its extensive, preexisting archives of network shows.
“We’re lucky in that we’ve got four of the biggest media companies on the planet invested in us and wanting us to succeed,” says Mike Hopkins, Hulu’s CEO and a former Fox exec. “We’re able to tap into their brainpower. We’re not out on an island here.” Hopkins and his backers are careful to temper expectations about what success would look like. If Silicon Valley’s motto is “Move fast and break things,” Hulu’s is “Move gently and slightly modify things.” It won’t mean vanquishing the tech giants who have hit Hulu’s owners where it hurts, luring away their once-loyal viewers. But it could soften the blow.
The billions that Netflix and Amazon have shelled out on original programming have helped them attract subscribers while freeing them from dependency on other media conglomerates. YouTube, meanwhile, has cobbled together a mix of user-generated content, music videos, and quirky original programming—think millennial-centric channels like Smosh and HolaSoyGerman—that account for more than 1 billion hours of viewing per day, almost on par with all of traditional television programming put together.
Hulu, in contrast, is doubling down on a premise that seems very 2007—that viewers still want to pay a lump sum for content they can view on regular TV. But that bet, in turn, stems from another insight from the media wars: Live content still matters, even in an age of time-shifted, on-demand binge viewing. While streaming has gone mainstream—half of American households subscribe to at least one streaming service—nobody to date has successfully integrated live and “archival” TV on one easy-to-use platform. Hulu could be the first.
It’s true that real-time viewing has declined drastically over the past decade. In the U.S., 18- to 24-year-olds are watching live TV an average of about 15 hours a week—down more than 35% since 2011. But live-TV viewing, especially news and sports, still pulls together unmatched numbers of people at the same time. That critical mass is invaluable to advertisers and media players alike: It’s no accident that tech companies including Facebook, Twitter, and Amazon have shelled out millions to ink streaming deals with sports leagues. Hulu’s new offering should have most of the news and sports from its parent networks—including, pending talks with NBC, the 2018 Super Bowl—along with the kinds of scripted hits, like Fox’s Empire and ABC’s Black-ish, that many people still want to watch live for fear of missing out on break-room banter.
Hulu hopes to capitalize on those joys of communal watching. And if it does, its owners will have pulled off something sneakily remarkable: They will have significantly boosted their presence in digital media without having to change much about their broadcast-oriented business model. But the new effort carries risks for the networks too. The service is another leap in the “disintermediation” of TV content from the networks that produce and distribute it. Want to catch Modern Family in real time? On traditional cable, you have to know where to find it or do some cumbersome searching. On the new Hulu, you’ll no longer have to flip to ABC or even need to know that it airs on that Disney-owned network. The content you like will just bubble to the top of your Hulu “Lineup” page.
Leslie Moonves, the chief executive officer of CBS (whose shows also run on Hulu), admits that such technology pushes networks to the back of viewers’ minds. “I truly believe people know that 60 Minutes and Stephen Colbert and NCIS are on CBS,” Moonves says. “But, gun to their head, that’s not the most important thing [to viewers]. The brands are 60 Minutes and Stephen Colbert and NCIS.”
In short: Hulu’s live-TV experience runs the risk of eroding viewers’ already dwindling loyalty to its owners’ brands—meaning its gains could be its owners’ losses. Still, in a media environment dominated by fast-changing technology and rapidly shifting partnerships, its backers are willing to take that chance. If there’s an inherent put-down of traditional television in the live service’s tagline—“TV come true”—the suits seem willing to swallow their pride and see if the evolution pays off.
When Hulu was born, TV bosses weren’t yet sure who their biggest online threat would be. But they had seen enough of both piracy and Apple to know they had reason to be concerned. They had witnessed the impact of iTunes on the music industry and were watching the rise of media-sharing websites like Pirate Bay, which gave users free access to copyrighted TV and movie content—none of which they’d actually paid for.
Hulu was first conceived around 2006 by executives at Fox and NBCUniversal, back when the latter was owned by General Electric. Creating their own web platform, the networks reasoned, would give them a venue where they would fully control what they put online and when, how it was monetized, and how quickly to embrace change. And it would let them dip their toes in this world without cannibalizing long-standing businesses. Because it offered archival content, the site wouldn’t directly compete with the cable and other providers that pay huge retransmission fees for the right to carry network programming. Rather, it would complement them, while giving owners another source of revenue.
“It was an insurance policy,” says Doug Creutz, an analyst with investment firm Cowen and Co. “The media companies [said], ‘We don’t want to be put into a position where our existing distribution gets destroyed and we only have one option.’ ” A former Hulu employee concurs: “They were seeing their content getting exploited for free and they said, ‘Look, if we can have direct access to consumers, that could be good for us in the long run.’ ”
Fox and NBC launched the service in 2007, with help from Rhode Island–based Providence Equity Partners, which took a 10% stake. Hulu was initially ridiculed for its old-media roots. As one blogger characterized it at the time, Hulu was a tech company with “crazy parents and an unwieldy amount of cash.” But the service got good reviews. However murky its owners’ intent may have been, Hulu had a great product: The user interface was simple and fun to navigate. And Hulu was a pioneer in merging social sharing and TV viewing, making it easy to embed clips from favorite shows on other sites or send videos via email. That early promise lured Disney, which bought about a third of the company in 2009. By 2010, Hulu had expanded beyond a free-access, ad-supported model to a paid-subscription option that let users view a more extended library of content and get day-after access to current shows. (It later offered ad-free viewing for an additional $4 a month; it quietly ended its free service last year.)
But the unusual ownership consortium had its drawbacks. The TV partners not only were fierce rivals, but didn’t want to make moves that could threaten their other revenue streams; the PE folks wanted a fast return on their investment. “We the owners were not fully aligned on what the future should be,” admits Kevin Mayer, Disney’s chief strategy officer and a Hulu board member. The partnership got more awkward after cable giant Comcast took a majority share in NBCUniversal in 2011. One condition regulators placed on the deal was that Comcast could be only a silent partner in Hulu. As a result, NBCUniversal had to relinquish its board seat, and Comcast execs were forbidden from even talking to other Hulu owners about the startup.
Around that same time, rumors were circulating that an IPO was imminent, and several companies expressed interest in buying Hulu. But the media giants decided to hold on to their baby. Providence, reportedly frustrated with the outcome, asked for and got a buyout. (The firm declined to speak with Fortune.) Its departure left Hulu completely media owned.
Hulu’s internal lineup changed too. In 2013, CEO Jason Kilar, a respected former Amazon exec, stepped down, and the board brought in Hopkins, who in turn swapped out most of the leadership team. Among his recruits was Elaine Paul, now Hulu’s chief financial officer and a former senior vice president of corporate strategy at Disney. Before long, Hulu’s management was cut from the same big-media cloth as its owners.
Hopkins, who has made-for-TV hair and a toothpaste-commercial smile, began acting like a network chief, investing more heavily in marketing and original content. (Hulu hasn’t yet had a breakout original hit.) It bought exclusive online rights to the archives of broadcast hits like Seinfeld, CSI, and The Golden Girls. These moves coincided with steadier growth; Hulu, which had about 3 million subscribers in 2012, has four times as many now. And by 2016, Hopkins had embarked on the project, code-named “Curiosity,” that would lead to Hulu’s live product. “We talked about it a couple of times back when I was still at Fox,” says Hopkins. “The marketplace just wasn’t ready for it then.”
By “marketplace,” Hopkins is at least partly referring to Hulu’s owners. By 2016 their reality had shifted drastically. Where once the media giants had worried that Apple would trample their legacy business, now the threat was a polycephalous monster, with Netflix, Amazon, and YouTube biting off different chunks of their revenue and viewership from different directions. Hulu was just one small head of that monster—one whose teeth the networks could pull at will. And with live TV over the Internet already in development elsewhere, the benefits of backing Curiosity outweighed the risks.
In August 2016, Time Warner announced that it had bought a 10% stake in Hulu for a reported $583 million, effectively valuing Hulu at $5.8 billion—and bringing the service the rights to programming from CNN. The following January, at the Consumer Electronics Show in Las Vegas, Hulu showed off a teaser of its live-TV “experience,” one enticing enough to prompt tech blog the Verge to pose the question, “Could Hulu be the company to get Internet TV right?”
Ben Smith, Hulu’s head of experience, is responsible for making sure the answer is yes. As he demonstrates his new toy in a darkened screening room in Santa Monica, he’s visibly excited. “The last 20 years of TV have been about content rights or technology,” says Smith, a former product manager with Sonos and Microsoft’s Xbox. “Surprisingly little has been about the viewer’s experience.”
Hulu wants to break that pattern. The interface is simple, but meticulously thought out: Every tab, color scheme, and photo box seems carefully programmed to please. The onboarding process, which takes two to three minutes, walks subscribers through a series of questions. You start by selecting your favorite television and movie genres. A large sampling of shows appears on the screen, prompting you to click the ones you like. This information is fed into algorithms that recommend other shows. A sampling of these, both live and on-demand programming (including recent episodes you may have missed), then appears on your “Lineup,” the main menu for navigating through content. The Lineup is dynamic, changing with your habits and what’s popular. And thanks to artificial intelligence that starts analyzing your tastes at click one, it continually gets smarter: “It needs about 30 days to start making decisions for you,” says Smith.
Of course, streaming services like Netflix and Amazon have long made “smart viewing” recommendations. But Hulu’s innovation is to do so with both live and archival programming, without viewers having to differentiate between the two. That’s particularly alluring for sports lovers, who often have to chase their teams around multiple networks and platforms. Smith, for example, is a big hockey fan. If he wants to catch Los Angeles Kings games, he can select the Kings during onboarding from a tab that says “sports,” and his Lineup will show him every upcoming game, regardless of who’s airing it.
Perhaps most enticing: Within a few months of launch, Hulu will be able to send notifications before a live game airs. And it will do the same for real-time entertainment programming. Which network is The Voice on? Hulu viewers won’t need to care. “Navigation should not be about networks,” says Smith.
Hulu’s ability to keep things running smoothly, even when traffic surges, will be key: No one likes it when the Super Bowl is paused mid-touchdown. “We’ve got several options if the shit hits the fan,” says Tian Lim, Hulu’s chief technology officer, a former senior vice president of product engineering for Sony’s PlayStation. Under his watch, Hulu has upgraded its infrastructure and cloud-based back end and adopted a more rapid process for building, testing, and releasing software. That will come in handy as Hulu expands live streaming to (it hopes) millions of homes and mobile devices.
Hulu is also opening a 24/7 customer-
service center in San Antonio and will hire at least 500 “advocates” by 2018—more, if the live platform takes off. Hulu wants its subscribers to feel pampered. “We’re going with the assumption that by and large, all of our competitors are going to have access to the same cable and broadcast channels,” says CEO Hopkins. “The main way we’re going to compete is going to be with the experience itself.”
Hopkins’s remark about competitors is illuminating. The networks that own Hulu (and CBS, which isn’t a Hulu partner) are all hedging their bets on live-over-Internet TV: In varying combinations, they’ve licensed their programming to DirecTV Now, YouTube TV (which launched in April), and even Sony’s PlayStation Vue.
Maybe all those platforms will succeed; maybe none will. But any that do succeed will confront big-media executives with the same challenge: coping with the growing disconnection between their networks’ brands and their viewers. “How you articulate your brand in this environment is something we’re experimenting with,” says James Murdoch, the CEO of Fox. “This puts the burden on us—how do we make sure these brands continue to mean something to people?”
One way to do that is to launch their own, prominently branded direct-to-consumer streaming services. Disney, for example, has invested in streaming-media firm Bamtech as a potential platform for its own sports programming. CBS, which is available via Hulu, has withheld programs from some other streaming platforms, the better to promote its own CBS All Access. And NBC has experimented with letting viewers binge-watch certain shows by putting all their episodes online at once.
The fragmented environment also creates more pressure on networks to simply make better, more memorable shows. Many critics credit the enormous increase in competition with helping to create today’s “peak TV.” The number of scripted TV shows hit a record high of 362 in 2016, up 28% from five years earlier. The days of 1990s-style network block programming, in which you’d hang around for Sabrina the Teenage Witch because you couldn’t be bothered to change channels after Family Matters, are essentially over. But satisfied TV watchers aren’t mourning.
Hulu, meanwhile, still has a lot of room to grow. The service has never disclosed revenue figures, and the company declined to tell Fortune whether it is—or has ever been—profitable. According to Comscore, 75% of homes that access so-called over-the-top TV services subscribe to Netflix. YouTube has a 53% reach, and Amazon Video, 33%. Hulu is in fourth place, with 17% penetration. One question mark: How, if at all, will Hulu change direction in 2018, when the merger-related restrictions on Comcast and NBCUniversal expire, enabling them to join the board?
If Hulu generates strong but not blowout traction—as it has done to date—that might be the best outcome for its owners. The media giants will continue to slowly shape their shiny, web-based toy, reaping some revenue and relevancy, without upending their higher-margin relationships with cable TV and local affiliates. Stiffer competition from Hulu could even push those older distribution partners to make their viewing experience better—including by offering more live-via-app offerings. (Case in point: Comcast’s Xfinity X1 “Cloud DVR.”)
“We’re very keen to support disrupters in the marketplace,” says Fox’s Murdoch. “We think it needs to have new players, more user-experience competition. We think Hulu’s going to be a key player in that.” But Murdoch’s language is a sign of just how much television has changed. Watching TV in real time used to be literally the only way to do it. Now media leaders see real-time viewing as a “disrupter”—one more way to hunt for an edge in a fast-fragmenting business. We’ll microwave some popcorn and see how it all turns out.
A version of this article appears in the May 1, 2017 issue of Fortune with the headline “The Unfolding Drama of Real-Time TV.”