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.
Business Insider Emails & Alerts
Site highlights each day to your inbox.