Although Hulu’s product is cool, we believe its economics are lousy. A month ago, we created a basic estimated unit P&L for Hulu, which illustrated why. Today, we have updated this P&L with more refined revenue splits. Our conclusion remains the same: Hulu is going to have a devil of a time making money.
Specifically, our recent research suggests that Hulu’s revenue splits are:
- 70% to content provider (TV network)
- 20%-30% to Hulu, depending on whether the video is viewed on Hulu.com or a third-party distributor.
- 10% to third-party distributor, if any (AOL, MySpace, etc.)
We’ve described the assumptions underlying our unit P&L in detail after the jump. But here’s the conclusion:CONCLUSION
In our model, even with a $30 CPM, Hulu’s gross margin is a meager 20%. It’s hard to be profitable with this low a gross margin, and with our SG&A assumption, Hulu isn’t (in fact, its operating loss is -30% of revenue).
Importantly, these economics don’t change much as bandwidth costs decline (especially if Hulu runs high-resolution video). We’ve run a “future” scenario in which bandwidth costs are 50% less, and the company still has a hard time making money. Thus, even if Hulu implements a low-cost P2P distribution platform, the economics are tough. Unless the content contributors are willing to settle for a very low royalty, it’s just hard to be a video middleman.
Feedback: [email protected] We’ll refine the model with more information as we get it.
Hulu: Estimated P&L
Here are the assumptions underlying our updated hypothetical Hulu P&L, using our basic “Economics of Online Video” model. The detailed spreadsheet is here. The key assumptions are:
High CPMs: We’ve used a range of $10-$50, with a $30 base case. This is high relative to average video CPMs these days ($10ish). Yes, Hulu will have high-quality, advertiser friendly video. And, yes, some niche sites have reported the occasional $500 CPM. But given the current industry average, $30 seems reasonable. (And even if it’s far higher, Hulu’s economics are poor–it’s the royalty split that kills them).
Percentage of Videos That Are Monetizable: 100% Most video sites have tons of crappy or offensive user-gen videos that big advertisers won’t touch. In those cases, the hosting sites bear the costs of serving videos that aren’t monetizable. Happily, this won’t be the case for Hulu: All of its videos should be able to carry ads.
Percentage of Videos Distributed Through Other Sites: 50%. Hulu intends to distribute video through third-party sites as well as on its own site. We’ve assumed a 50/50 split of own site vs. distributed.
Distribution Fees Paid to Distribution Partners: 10% of revenue. To encourage others to distribute its videos, Hulu will presumably pay modest distribution fees. We’ve assumed 10% of revenue.
Royalty Payments to Content Providers: 70% of Revenue. This is the big one. NBC and NWS aren’t going to give all that video to Hulu for free. CBS is currently using a 90%/10% rev-share split with many of its distribution partners. Our research suggests that NBC/NWS will take a 70% royalty payment. In our model, even if it’s 50%, Hulu still loses money.
SG&A: We’ve assumed 50% of revenue, but this assumption isn’t critical. What matters here is the gross margin–the amount of revenue Hulu will have left after it has paid royalty, distribution, and serving costs.
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