The Wall $treet Journal says Apple is thinking of making a bid for Hulu and Seattlepi.com says Microsoft’s is no longer interested, which leaves Amazon, Apple, Google, Yahoo, and any unnamed parties. I can’t think of any unnamed parties, by the way, so I’m guessing one of these will walk with Hulu, which went into play a couple weeks ago following an unsolicited (and still unidentified) bid.

Of course the three big network owners of Hulu will guarantee five years of continued program access with the first two years exclusive. That’s because they have no money in Hulu and each stands to walk with $600+ million from the sale, but only if there is a sale. Without such an exclusivity period there will be no sale and no $600+ million. None of these networks can buy out the others for antitrust reasons so the “networks might balk” story is just to sell newspapers (or electrons). Hulu will be sold.

It will be interesting to see how much Hulu will cost the winner, though. The company appears to be managing the press brilliantly to generate buzz. Any of the interested parties could do the deal all in cash, no problem. But who will end up with it? Here’s my score sheet.

Apple will buy Hulu if the price is right, but how much higher than $2 Billion they will go? I suspect Apple may actually be just meddling here, trying to make it more expensive for the eventual winner.

Microsoft has already telegraphed that $2 billion is too high, but since they probably can’t afford to not be in this business that suggests they will put some smaller amount (still $1+ billion) into content deals.

For that matter, all the losers will be looking for content, so I’d say $4+ billion is up for grabs in Hollywood beyond Hulu. New cars all around!

Amazon just did a content deal with CBS (so did Netflix — remember them?) so buying Hulu would round out their content for Amazon Prime, likely bringing-in millions more customer accounts. But there, too, it depends on what is Amazon CEO Jeff Bezos’ price target. He and Jobs are very similar in that they will have a maximum in mind and probably won’t go higher.

My gut suggests that the auction will finally come down to Google and Yahoo, if Google can get this past the feds despite its dominant position with YouTube. Yahoo CEO Carol Bartz probably sees this as her best chance to avoid being fired so I think she’ll bid high. I suspect, too, that Yahoo’s unsolicited interest was what started Hulu in play in the first place, though that’s just a guess on my part.

Buying Hulu could also be Bartz’ undoing, though, because she could blow half her cash or more (I suspect Google will go to $3 billion and Yahoo will beat that) and then find herself in a position where she can’t make a profit on her purchase, especially since she’ll have to do her own CBS deal at that point and CBS CEO Les Moonves won’t make that cheap. Amazon reportedly paid $100+ million to CBS, but Moonves will try to hold out for closer to the $600+ million he would have received had CBS been a Hulu owner, seeing anything less as charity.

The fascinating scenario here, of course, is that Yahoo way overpays, damaging itself fatally in the process and ends up being acquired by one of the others, probably Microsoft.

No wonder Ballmer pulled out of the bidding, he’s playing the long game.

These boys need bikes!

New York Magazine wrote recently that YouTube was planning to throw large sums of money at celebrities who would then make short form (three minute) videos for the site. The numbers mentioned were staggering (up to $5 million per celebrity channel) but the business model is crazy. It’s the three minute thing that makes no sense. I’m sure if YouTube is planning something like this it is specifically for videos that are not three minutes long.
Youtube already owns the Internet market for three minute videos. While there are probably instances where YouTube might throw some significant money into getting the odd celebrity to do something in this space, it is traditional TV-length videos and movies where Youtube actually needs help.
Looking at total video views, Youtube is the clear winner, but when it comes to longer-form videos, both Netflix and Hulu have more viewers than does Youtube. And Youtube can’t really afford to lose this battle, hence the emerging strategy.
Now let me tell you exactly where this is going, because if you are a couch potato it is important.
The big risk (or big opportunity depending how you look at it) has always been that Apple would spend $1 billion optioning TV pilots and by doing so effectively grab control of television. I’ve written about that right here. But somehow Steve Jobs was too cheap or didn’t have the confidence to know which pilots to choose (I suggested buying online rights to ALL of them, solving that problem). Only now it’s YouTube, not Apple, and it’s Netflix and maybe Hulu because once one does it they’ll all have to do it — even including Apple.
And the one to dominate in this land grab will be the one that spends the most money, with the key being to grab control of longer formats. YouTube already controls the three-minute video. It’s Netflix- and Hulu-length videos they’ll want next.
New York Magazine says Youtube is putting $100 million into such productions, but I can’t believe it will be that little, especially if other players choose to compete. We’ll easily hit that $1 billion number.

If that happens, the TV industry in the United States will be thrown on its head, because producers will be selling online rights first, denying those to the traditional networks. That opens the possibility that TV series may succeed online while never even making it to TV. Or they could succeed online and only later make it to TV.
In one sense it is the beginning of the end for traditional broadcast and cable TV, though visionaries might see it more as the end of the beginning. That’s how I see it.
The result will be an even more fragmented video market that will see lots more hits of all sizes from little vertical shows aimed at specialty audiences right through to Glee-sized hits that will work well because they have global reach over the Internet and can aggregate huge audiences without having to be a hit everywhere.
Some see emerging ISP bandwidth caps working against this but I don’t. AT&T is the first to impose such a cap in the USA for hard-wired customers but I am sure we’ll see exceptions for AT&T-provided content. Just as Comcast has bought NBC-Universal, AT&T will get in the content distribution business, too, if only to better compete.
Netflix is already rumored to be commissioning a TV series from Kevin Spacey. I’m sure we’ll see a lot of this happening and I think it is all good. After all, more video outlets probably means more Cringely, and all three of my kids need new bikes.

This column has a global audience so sometimes I have to defend my tendency to see things from an American perspective.  But I’m not sure there even IS a defense for this particular item so I’ll just jump into it, because I think even readers from Kazahkstan and Kuwait (my two big K’s) may ultimately find it interesting.  It’s about Apple and Hulu and the direction Internet TV is going in the United States.

It’s not headed where you think it is.

Hulu is the ad-supported video distribution site set up by NBC-Universal and Fox.  It’s where, in addition to the TV network pages, viewers can go to watch thousands of television shows, old and new, supported by commercials.  Of the four big broadcast (as opposed to cable) networks in the U.S., Hulu until recently had half of them with CBS hiding out at TV.com and ABC residing solely at ABC.com.  But now ABC, which is owned by Disney, has decided to join Hulu and the pundits think that’s generally a big deal, not only because of the whole three-to-one thing but because Steve Jobs is the largest shareholder in Disney and on the Disney board and this would appear to be a kick in the face to Apple’s iTunes, where people rent or buy the same shows without commercials.

Is it or isn’t it a big deal?  And what does this move mean for Apple?

There have always been two general methods of distributing Internet video — downloading or streaming — and three business models — buying, renting, or watching with commercials.  Conventional wisdom — what THEY say — has it that streaming (YouTube) is better than downloading (iTunes) and watching with commercials (Hulu and TV.com) are better than renting or buying (iTunes again).

No, they aren’t, at least not as businesses, not yet.

Business Week, among others, made a grand effort this week to present Hulu as a masterstroke that will hurt or kill iTunes rather than what it is — an expensive streaming service that doesn’t make money.

My wife and I last night watched an episode of Chuck on Hulu.  We started on nbc.com where I thought we might see the show in HD but that wasn’t the case.  And even the standard definition version at nbc.com didn’t play well despite our dual-core 2.4-GHz system with four gigs of RAM and an eight megabit business broadband connection.  So we switched to Hulu where the 480p version stuttered a bit so we dropped to 360p where it played fine except for having to rebuffer a couple of times during the show.

In contrast to this with iTunes you have to wait for downloading but then none of this performance stuff happens. If you want HD you get HD, but then again you are PAYING for HD.

We watched the episode (fun) and all but one commercial was for Rwandan relief.  There is no way Hulu or NBC-Universal were making a profit on that stream, and this was a very popular show.

When you buy an episode on iTunes everyone in the production food chain makes a profit.

Hulu and its ilk are money-losing services that rely largely on concessions in various guild contracts that pretty much keep the writers and producers and actors from sharing in profits that aren’t there anyway, at least not yet.

How is this a threat to iTunes?

Fox owns a big chunk of Hulu, yet American Idol performances are exclusively available on iTunes, not Hulu.  Why is that?  Because American Idol performances on iTunes make a lot of MONEY, that’s why.  Adam Lambert downloads alone make more money every week — a LOT more money — than do ALL the shows on Hulu put together.

So Apple is being criticized and seen as an Internet antique because it is making a profit?  I don’t get it.

I’m not saying here, by the way, that there is no room for commercials on Internet TV.  Nor am I saying that Apple won’t possibly move to commercials or streaming at some point.  This is not gratuitous Apple ass-kissing. What I AM saying is that it is a lot easier to move from paid to free than it is to go from free to paid.  Hulu can’t choose to emulate Apple and become profitable that way because viewers would flee.

As I’ve written over and over, Apple is moving slowly and steadily toward becoming primarily a content provider.  Microsoft is trying to do the same but without Apple’s discipline.  Apple is putting in place all the pieces it needs to make a run at dominating the future of TV, but they know it takes time to get all those bits where they need to be.

What’s needed are devices and services and bandwidth at a given price point where it all works smoothly not just from a technical but also from a commercial standpoint.  Apple is there right now when it comes to downloading and selling or renting, but not for streaming or commercials — the numbers aren’t right yet, nor is the mix of devices.  But the time is coming soon when it will be right, certainly in no more than two years and maybe less.

Now here’s the key for all the pundits who see Apple failing or faltering: you are looking in the wrong direction.  It doesn’t matter how many networks are part of Hulu.  In time they will probably all be there.  But Hulu will remain an artifact of network labor agreements and will be vulnerable for that reason.  Hulu can’t afford to PAY its way.

Follow the money.

Apple has at this moment just under $29 billion in cash and not many good ways to get a reasonable return on that money.  Only Microsoft has more cash than Apple and Microsoft is being pulled in a lot more directions so Microsoft doesn’t have Apple’s flexibility.

What will Apple do with that money?

Most of it will remain unspent is my prediction, but I’m guessing we’ll shortly see $3 billion or so per year go into buying Internet rights for TV shows — not old TV shows but NEW TV shows, shows of all types.

TV production in the U.S. is approximately a $15 billion industry.  An extra $3 billion thrown into that business would change its dynamics completely.  Most production isn’t done by networks but by independent producers who are hungry for revenue and risk reduction.  Three billion Apple dollars spread around that crowd every year would buy Internet rights for EVERY show — more than every show in fact.  Whole new classes of shows would be invented, sapping talent from other parts of the industry.  It would be invigorating and destabilizing at the same time.  And because it is Apple — a company with real style — the new shows wouldn’t at all be crap programming.  They’d be new and innovative.

And just as the artistic heart of TV shifted to cable with HBO in the 1980s, so it will shift to the Internet and Apple.

And where will be Hulu?

Nobody will care.