Can Hulu crack Japan’s crowded online video market?

By Tony Brown

The announcement on Aug. 10 that US online-video site Hulu was planning to make its first foray into Asia Pacific with the launch of services in Japan did not come as a particularly big surprise, considering that Hulu had never made a secret of its international ambitions.

Nonetheless, the development is still potentially highly significant, since it signals the first major entry of one of the big US “over the top” (OTT) players into a region that has the kind of high-bandwidth broadband networks that make the OTT guys drool.

Announcing the launch of the service, Hulu CEO Jason Kilar said that the company selected Japan as the first part of its Asia Pacific expansion strategy because of the high demand from Japanese consumers for video content.

Hulu, jointly owned by NBC Universal, News Corp., Walt Disney and Providence Equity Partners, launched its Japanese service on Sept. 1 with a relatively simple business model: For a flat fee of ¥1,480 (US$0.19) a month, subscribers get access to all of Hulu’s movies and TV dramas, which can then be viewed on some connected TVs as well as PCs, tablets, games consoles and even mobile handsets.

Hulu has entered into an exclusive mobile marketing partnership with mobile market leader NTT DoCoMo. Although the companies have not released full details of the deal, DoCoMo has said that it will use its LTE networks to stream Hulu content to tablet users.

A tough nut to crack

Although Hulu might be correct in assessing Japan as the best launch-pad for its Asia Pacific adventure, the company must also be savvy enough to realize that succeeding in Japan will be tough.

Even the country’s powerful private terrestrial broadcasters – Nippon TV, TV Asahi, TV Tokyo, Fuji TV and Tokyo Broadcasting System – have failed to excite much user interest in their online-video offerings on either a subscription-based or ad-supported basis.

Having grown frustrated with their dismal online offerings, the normal fierce rivals have teamed up with advertising giant Dentsu to launch a new service that will enable viewers to watch their content on connected TVs, with the five broadcasters making a total of 6,500 programs available at a cost of about ¥300 per one-hour episode.

But it is not only local broadcasters that are eager for a piece of the online-video pie. Sony launched a local version of the Qriocity video-streaming service in January, offering just 200 local programs priced between ¥500 and ¥1,000 per viewing, though the service has since expanded its content range.

Meanwhile, leading specialist online-video players Gyao, owned by Yahoo Japan, and Nico Nico Douga, owned by Niwango, have found it so tough to generate sufficient revenues in Japan that they are both expanding their operations overseas.

Japanese fixed-line operators are also eager to expand their own online-video services, largely as an extension of their IPTV services. NTT is enabling subscribers of its NTT Plala IPTV service to stream content to their smartphones, tablets and PCs, and leading cable operator Jupiter Telecommunications (J-Com) is planning a similar service.

What’s more, Hulu’s ambitions in the mobile market might well be tempered by the fact that tens of millions of mobile subscribers in Japan already have access to free-to-air broadcast mobile TV via the One-Seg mobile-TV-broadcasting service.

Content the key, as usual

Hulu has arrived in Japan with an array of licensing deals with the majority of US major content suppliers, including CBS, NBC Universal International Television, Sony Pictures Entertainment, Twentieth Century Fox, Walt Disney and Warner Bros.

Moreover, the company says that “additional content will be rapidly and continually added to the service” and, significantly, that it will also look to secure “Japanese-produced content and content from across the Asian region” – though the company has launched with no local content.

If there is one thing that any investor in Japan can tell you – especially the good folks at News Corp., which bowed out of DTH player SkyPerfecTV in 2003 – it is that good local content is absolutely critical to success.

Even though it has nearly 4 million subscribers, SkyPerfecTV has never been able to truly dominate the market, principally because it has relied too heavily on foreign content rather than focusing on developing a strong platform of local content. Hulu is obviously well aware of this and is eager to strike deals with local content producers to bring their content to the Hulu platform.

That seems to be the obvious path to travel, especially since Hulu is attempting a subscription-based revenue model with no ads. Hulu claims that it has selected the ad-free model for Japan because it fits in well with the unique requirements of the market.

The pressure is on

Regardless of the business model, the pressure must surely now be on Hulu to start putting together a respectable range of Japanese content to try to localize the platform and ensure that it does not follow the same path as SkyPerfecTV. But that is far easier said than done.

By far the biggest content providers in Japan are the five major terrestrial broadcasters, though there is a strong independent production sector as well. This includes J-Com, which produces content for the terrestrial broadcasters’ regular digital and satellite channel operations.

Considering that the terrestrial players and J-Com have their own strong online-video ambitions, it is hard to envision what value these companies would get from supplying their top local content to a market newcomer like Hulu. Hulu will most likely have to scout hard for Japanese content producers that do not have their own online-distribution ambitions – a tough task if ever there was one – if it wants to get the type and volume of new local content it is going to need to make Hulu Japan a success.

This, of course, is where things start to get tricky for Hulu. Good-quality content – even on a nonexclusive basis – does not come cheap. And do Hulu’s shareholders really want to shell out serious cash for new Japanese content, considering that they have no experience in such a complex market?

After all, even though Hulu Japan is being offered as an online service, it is still at its core a pay TV service, and quite frankly, what experience does anyone at Hulu have of running a pay TV service in Japan?

Even the Japanese find it difficult to run pay TV services in Japan.