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Repackaging TV: How Hulu Turns a Profit

Hulu’s in the media spotlight recently, but where does its money come from and go to? We’ve done some thinking for you.

Hulu cash

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Hulu‘s been a hot-to-trot media topic for ages–its got big, network TV partners, it’s achieving success with consumers, and it might just be the model for future TV systems, so perhaps this isn’t surprising. What is unusual though, is how its finances work.

Hulu licenses video content from over 200 suppliers. It streams this material over the Net, through its servers and wrapped in its own user-interface. The streams are accompanied by ad placements, and Hulu and its partners get revenues that depend on how many views the videos get. This isn’t too far removed from how some traditional TV channels work, though obviously Hulu’s “screen” isn’t necessarily a television, and the same licensed content can be served up in a variety of ways to maximize income with little extra cost. YouTube works in almost the same style, except that it only licenses some of its official “TV-like” content, and mainly acquires clips for free as user-uploaded material.

Recently Hulu’s been innovating, and offering a Hulu-Plus package on top of its main service. Users pay a monthly subscription fee for complete seasons of TV shows. Hulu-Plus is also ad-supported. As far as Hulu is concerned, having the constant and reliable revenue from a bunch of subscribers is good for its long-term business plans.

But how do Hulu’s financial plans actually stack up? Is it managing to be profitable among the clutch of similar content-serving video sites which we think are mired in profitless limbo? Here’s a summary of what we know about its finances for this year:

  • In 2010 Hulu will make $200 million to $250 million in gross revenues.
  • Hulu’s deals with content providers delivers 20% to 30% of net revenues to Hulu.
  • Some one-off deals with content providers have a 50%-50% split on revenues.
  • On average, a believable figure is 35% split for Hulu from the gross revenues.
  • This means Hulu’s net revenues will hit $70 million to $100 million in 2010.
  • Hulu has about 200 staff (50 to 60 in ad sales).
  • Hulu’s other big cost outlay is for network and server infrastructures.
  • If network partners stream an ad, though, Hulu gets 30% of the revenues, but doesn’t bear any costs associated with it, including network costs.
  • With the partner side bearing the cost, Hulu’s profit on its 30% revenue split is almost 100% for these events, which may equate to half of Hulu’s revenues.

Lets assume Hulu’s staff costs it $35 million in all-up costs: This leaves it some $40 million to $70 million to cover network/server costs as well as general business fees. The math could then easily result in zero profit or a net loss for Hulu, based on this thinking.

The upshot: Hulu could easily turn a profit in 2010. Despite the complex back-and-forth of revenue that result from shared revenue on ad impressions, the overall result is positive for Hulu. The main reason for this is that the content partners bear the costs for some of the ads–leaving Hulu’s share of the revenue as profit. And although the content partner bears that extra cost, they get a bigger chunk of the raw revenue. And the network burden of serving the ads is easily carried by their massive existing server infrastructure. The agreement may even bring them extra bargaining power inside Hulu–you can easily imagine partner execs dictating which shows Hulu carries in order to maximize ad profits for everyone.

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Hulu’s potential profit situation has even fueled speculation it may try for an IPO.

What the online video business does reveal is that Hulu is less about delivering futuristic TV experiences for its users, and more about being a money mill to generate cash for its TV-show producing lords and masters. It’s also a nice little system that gives these content providers a claw-hold in future TV delivery models. And since the music industry was badly surprised (and then badly ravaged) by the digital music revolution, it’s clear that the TV business is desperate to avoid the same thing happening. As recent thoughts about YouTube’s potential profitability suggest, it’s working so far. And with other news that suggests Hulu serves more video ads than king of online video YouTube itself, perhaps Hulu is actually leading the charge.

To keep up with this news, follow me, Kit Eaton, on Twitter.

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About the author

I'm covering the science/tech/generally-exciting-and-innovative beat for Fast Company. Follow me on Twitter, or Google+ and you'll hear tons of interesting stuff, I promise. I've also got a PhD, and worked in such roles as professional scientist and theater technician...thankfully avoiding jobs like bodyguard and chicken shed-cleaner (bonus points if you get that reference!)

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