Peter Kafka

Recent Posts by Peter Kafka

When Will Hulu Catch YouTube? It Already Has

Lots of chatter today about comments from research outfit Screen Digest, which suggest that video upstart Hulu will catch up to YouTube next year. The U.K.-based company says that next year, both will generate $180 million in U.S. revenue.

But I had questions about the data, reported by the Financial Times. So I called Arash Amel, the Screen Digest analyst who provided the numbers. Glad I did, because Amel’s analysis is actually much more provocative: He believes Hulu is already making more money than YouTube.

The short explanation: The numbers that the FT reported are gross revenue–total money received from advertisers–not net revenue, what’s left over after paying for the video.

If you’re talking about net revenue, Amel says, then Hulu, a joint venture between News Corp.’s Fox (NWS) and GE’s NBC (GE), is already making a small profit–perhaps $12 million a year. And he believes that Google’s (GOOG) YouTube is still losing money every year. (News Corp. is the owner of Dow Jones and this Web site.)

(UPDATE: I shouldn’t have used the word “profit”, and Amel didn’t when he discussed this with me. My former boss Henry Blodget correctly points out that what Amel is saying is that Hulu is generating a modest gross profit, not an operating profit. Henry is less than impressed with this. But it’s better than what YouTube can claim.)

The longer explanation: Amel’s model assumes that while Hulu is showing far fewer video streams to many fewer people than Google, it is able to sell ads on most of them–perhaps 80 percent of all streams have a paying advertiser, he thinks. Google, meanwhile, is thought to be able to sell ads on just three percent to four percent of its views.

Just as important, but not widely discussed: Amel believes that YouTube’s costs are much more significant than most observers guess. That’s because YouTube isn’t just paying massive bandwidth and hosting costs for all those clips. It’s also paying out huge licensing and content fees to copyright owners like music labels.

Amel thinks YouTube is paying more for those fees than it does for infrastructure/bandwidth. This dovetails with what an industry source told me last week.

Amel won’t be publishing a full report on his analysis until next week. But he was able to break down his numbers for me over the phone. There is one obvious problem here. While he’s worked out a set of fairly detailed numbers for Hulu, he can’t get any more specific with Google other than that it’s “loss-making.”

Hulu:

2008 gross revenue for US: $70 million

Net margin (factors in infrastructure costs and payments to affiliates and content owners): 15 percent to 18 percent

Net revenue: $10.5 million to $12.6 million

YouTube:

2008 gross revenue for U.S.: $114 million

Net margin: None

Net revenue: None

But wait a minute. These are U.S.-only numbers. And YouTube generates a huge amount of its traffic from non-U.S. surfers, while Hulu is only available in the U.S. Doesn’t this help YouTube’s case?

Nope. It actually hurts it. That’s because YouTube’s costs (for both infrastructure and licensing/content fees) don’t go away when it shows a stream to a viewer in, say, Spain. But the potential for generating ad revenue shrinks significantly.

Big picture: YouTube is the world’s dominant video site, and that’s worth a lot–once Google figures out how to sell more ads against more of its content, for more money. In the old go-go growth days, there wasn’t a lot of pressure on the site to do that. Now there is. And Hulu, designed primarily as a bargaining chip for the big networks, who were afraid of getting crushed by Google, has become a most pleasant surprise: A money maker.


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I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

— Phil Zimmerman, PGP inventor and Silent Circle co-founder, in an interview with Om Malik