Last Updated Apr 2, 2010 12:01 PM EDT
Here's what Hulu CEO Jason Kilar said to the New York Times:
Mr. Kilar points to his company's new profitability as evidence of the success of Hulu's business model -- collecting various types of video in one place and making it free, supported by ads. Revenue topped $100 million in 2009 and could reach that number this year by early summer, he said."Aggregation works for consumers," he said. "It makes it easier to find and discover and enjoy premium content, and it works for advertisers, because with that aggregation you get greater reach."Notice someone left out of his equation? Those who produce premium content. Hulu does pay studios and networks:
Of that gross revenue, one source with knowledge of the company's financials estimates that Hulu will keep about 35%-40%. (Hulu's deals with the big content providers yield a 20%-30% of net revenue split to Hulu, but the one-off deals with other content providers sometimes go as high as 50%-50%. So the aggregate net revenue is about 35% of the gross, or $70-$100 million in 2010.)On the cost side, Hulu has a couple of hundred employees, bandwidth and tech costs, and sales costs and commissions on the revenue that its salesforce sells. The one element of Hulu's network deals we did not appreciate at the outset is that, if a network partner sells an ad, Hulu gets a 30% cut and does not cover ANY of the costs, including the bandwidth costs. This means that on perhaps 50% of the company's revenue, Hulu's 30% split is almost pure profit. This helps the company's profitability significantly.But consider what it costs to produce the premium, longer-format content that Hulu pushes. Friday Night Lights cost just over $2 million per episode. Mad Men runs $2.3 million an episode. Both of those are apparently below the $3 million per episode of many network shows. Sitcoms run far less, but even then a single season costs millions to produce.
The argument, of course, is that the producers don't need to cover the costs off a Hulu because they already get money from the original broadcasts. But that depends on the networks essentially underwriting so a Hulu can have television at a cheaper price. What happens when enough viewers move to the Internet to get video with ad rates a small fraction of what television gets? There's no more money to pay for new programming.
It's the same problem news organizations face. When there's not enough money, either quality suffers or people get out of the business because it can't support them. It's why Viacom (VNV) took The Daily Show and Colbert Report off Hulu -- having new and popular programming there kept many users away from the Comedy Central site, and the direct ad revenue it might have seen. Expect more of the same as all the people at the Internet table look around when the bill comes, wondering who will pick up the tab.
Coin stacks image via RGBStock.com user lusi, site standard license.