Hulu A Better Business Than YouTube? Not So Fast

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Hulu A Better Business Than YouTube? Not So Fast

Debating whether Hulu or YouTube is a better business has been a favorite exercise for pundits and analysts for some time, and this week provided some new fodder. In the latest Techtonic Shifts column, Newsweek’s Daniel Lyons declares Hulu superior because it can attract a greater number of premium advertisers (he cites research by ScreenDigest analyst Aresh Amel).

Lyons isn’t wrong—Hulu will probably continue to get better advertisers. But I believe that YouTube will have a much bigger business once it decides to move to the dark side and actually try to make money (gasp!) from the addictive service.

Right now, YouTube probably makes more revenue from banner ads than Hulu does from total advertising YouTube doesn’t release those numbers publicly, but here is our calculation:

More after the jump...

—If you take publicly available figures for YouTube of about 345 million worldwide monthly visitors (80 million in the U.S.);
—And assume seven pages per visit (that’s conservative: Compete.com says YouTube visitors surf about 14 pages per visit), and limit the number of monthly visits per month to one;
—And assume that the company will be able to sell ads on 75 percent of its pages
—And, finally, assume one banner ad with a $4 CPM per page (it currently runs one banner ad per page)

Then, YouTube should be generating about $100 million to $110 million a year in banner ad revenue.

Video advertising likely earns YouTube about $40 million per year in revenue if you assume 15 percent of its videos carry advertising with a $15 CPM, and that half of that is paid to content owners.

What makes YouTube’s business better than Hulu is its ability to use its massive audience to pursue different revenue streams—that includes not only various types of advertising but also, say, selling products. If YouTube were to include a “buy this” button on some of its videos (that referred viewers to a product they could buy online and tied into a video they were viewing), revenues from affiliate fees from the sale of those products could easily double the size of the business at no additional cost. Let’s say this feature is included in only 5 percent of its videos, and only 1 percent of viewers who watched those videos bought a product: YouTube would keep about $150 million in additional revenue a year through affiliate fees. That’s a lot of dough.

So even if YouTube isn’t profitable now, it could add an extra $150 million in revenue by basically snapping its fingers. And because there are no hosting costs, that is pure profit. Suddenly YouTube’s business doesn’t look so bad after all.

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Rory Maher Feb 24, 2009 1:33 PM ET

Posted In: Advertising, Companies, Google, YouTube, NBC Universal, hulu

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Tom Lves

How is revenue even relevant? All anyone with an interest in YouTube cares about is margins.

Also, when you make predictions about what could be achieved with ramped-up advertising, you imply a massive assumption - that all other variables remain constant, including but not limited to the CPM and your viewership.

But CPM and viewership drop when a site as large as YouTube serves more ads - a form of inflation. Eventually both asymptote-out at some ceiling. That ceiling may well be below Hulu's, but what matters for determining that is the economics of the environment in which they operate.

YouTube I think suffers from an enormous liquidity problem - but opposite to the usual kind - it's just too easy to run a YouTube clone. This seriously limits their advertising. One ad too many and the community deserts. Nobody loves YouTube; they love what they see there. And that could just as well be anywhere else. Somewhere with fewer ads.

Jeremy

Commerce click through rates are closer to .01% - only in specialized trials ( http://www.jblogg.com/?p=433 ) have I seen it go above 1%, but thats not sustainable across a site like you tube.

John S

I am in the same camp with Mikey. A 75% sell-through rate, especially given their inventory, is way too high. Remember that advertisers who are buying display only want to be on the most trafficked/visible pages, and that if the remaining is CPC, not CPM, then given where CTRs are most likely to be for YT, then not much of that 75% is actually monetized…

The analysis, nonetheless, is interesting to consider. Given the purchase price, however, I imagine the payback period and IRR will continue to be ugly - not a good use of capital if the IRR is below their cost of capital…

Mikey

Where does 75% of pages with banner ads come from? I remember reading somewhere that only 4% to 6% of videos are monetizable due to YouTube's uncertainty about rights. Yes, you've got the home page and search pages, but I don't see at all how one would get to anything close to 75%.

Rory - out of curiosity, how did you get there?

Frank Maloney

Just been to YT, visited 6 pages, and only saw advertising on the homepage: A 300 X 250 for Nordstrom and a sponsor slot for Grey Goose.

This will no doubt come across as pendantic, but really, your analysis is about as meaningful as my last bout of flatulence. Nature may abhor a vacuum, but that is no reason to fill it with trash.

..also don't they share revenue with users?

Fuzzy Math

The conversion rates on users purchasing a product are ludicrous. The clickthru rate is unlikely to be 1% and the conversion rate will be a small fraction of that.

But agree that YouTube has a lot to gain from a move towards outright capitalism.

Rory Maher

Thanks Ryan. International CPMs actually tend to be a bit higher than US CPMs and I was being intentionally conservative on the page view count (though admittedly, not by as much as you say) to illustrate my point, which I agree with you on - that youtube is a different beast altogether.

Rory Maher

Thanks Liz. I agree and hopefully the potential will cause them to include that feature to sell more products. The numbers really add up.

Ryan

I would speculate that their CPM on banner ads is much lower than $4. Especially considering how many of them are international. In Canada most of the banner ads I see on Youtube are Adsense.

That being said, your estimate of # of pageviews is probably off by 10x, so the overall revenue number may be close.

Hulu is just TV on the Internet, Youtube is a different beast altogether.

Liz Gannes

Hi Rory,

YouTube does already have an affiliate "buy this" product, though it could definitely be expanded.

http://newteevee.com/2008/10/07/next-big-thing-for-youtube-e-commerce-links/

Liz

Rory Maher

Thanks Steve. Appreciate the clarification and we updated accordingly.

Steve

Hi Rory,

Thanks for your article.

I just wanted to clafify something. I believe Andreessen was referring to Facebook (not You Tube) when he said they could make 1 billion dollars by selling out the Home Page. If you look at You Tube's home page now you will see that they do sell video and banner ads against it.

Steve