Hulu Estimated P&L: One Tough Business

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.

See Also:
Everyone Loves Hulu…But It’s Still Screwed
Why Hulu is Screwed, Part 1
VC Firm Goes Insane: Dumps $100 Million in Hulu 

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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