When Fox and NBC Universal announced last March that they would join forces to put their TV shows online, the pundits of Silicon Valley howled with derision. Old media doesn’t get the Internet, they said. Michael Arrington, the influential editor of TechCrunch, rattled off the reasons the project would never succeed and suggested that Fox and NBC quickly name their joint venture before it got stuck with the moniker insiders at Google had reportedly given it: Clown Co.
So there was huge relief at Hulu, as the company is now called, when it previewed an early version in late October and the first reviews started coming in. The very people who had thrown brickbats were now tossing raves. “In one word: brilliant,” wrote blogger Om Malik. Even Arrington declared himself “very impressed.”
Hulu CEO Jason Kilar calls that the company’s “defining moment.” Says Peter Chernin, president of News Corp. (NWS, Fortune 500), which owns Fox: “They said big media was too stupid to do anything appropriate on the web, and that NBC and Fox were incapable of partnering. Both charges have been wrong from day one.”
Whether or not that’s true, the world will soon judge for itself. After one year and an estimated $15 million worth of development costs, Hulu, a video website supported by advertising, is set to debut in early March. A project that is the TV and film industries’ best effort so far to carve a place for themselves in the rapidly changing world of digital media is about to have its first major screen test.
Life used to be simple for media giants like NBC (GE, Fortune 500) and Fox. They produced content, the public consumed it, and advertising and ticket sales generated gushers of profits. Today viewers have their choice of all sorts of venues - digital and analog, legal and illegal - from Apple (AAPL, Fortune 500) to Netflix (NFLX) (see table). Some of the most popular videos are the ones viewers produce themselves and post for free on YouTube.
Into this shifting landscape was born the project that would become Hulu - a made-up word that happens to sound like Chinese for “interactive recording.” It was early 2006, and everybody in Hollywood was afraid the Internet would do to video what Napster had done to music. Indeed, a lively trade in pirated TV shows had already begun. Sure, some online outfits were willing to pay for access to high-quality programming. The problem, says NBC Universal CEO Jeff Zucker, was that “nobody was willing to pay us what we thought it was worth.”
Fox’s Chernin and NBC’s Zucker had independently concluded that the TV industry needed its own website - one that would provide a convenient and legal venue for its content while capturing some of the ad dollars that were shifting online. The idea gained more urgency in the fall of ‘06, when Google (GOOG, Fortune 500) bought YouTube for $1.6 billion. The two began seeking industry partners; Viacom (VIA) almost joined before CEO Tom Freston was ousted in late 2006. Reluctantly, Chernin and Zucker decided to proceed alone.
Money, it turned out, was not an object for Hulu. In May, Providence Equity Partners offered a cool $100 million for a 10% stake - giving the nascent operation an astonishing valuation of $1 billion.
Read more: Why YouTube should fear Hulu