Hulu Gains From Online Video Momentum

Today, viewers can watch online video content free on sites such as Google’s YouTube or by accessing a subscription-based service such as Netflix or Hulu Plus. While analysts believe that the availability of content in this way has led to cord-cutting and trouble for traditional cable companies, the recent financial performance of leading cable players like Comcast has indicated otherwise. Still, market reports by Convergence Consulting Group estimate that 1.6 million U.S. households will have replaced their cable connections with alternate video content models by the end of the current year. Researcher SNL Kagan estimates that by 2014, 46.3 million homes will have at least one TV with a broadband connection to the Internet and 7% of the country’s population, an estimated 8.1 million homes, will switch to online video content instead of cable.

Hulu’s Financials
Hulu was founded in 2007 as a joint venture between NBC Universal, News Corporation, The Walt Disney Company, and Providence Equity Partners to distribute online video content of hit shows, clips, and movies. After beta testing in October 2007, the site went live in the U.S. in 2008. At present, Hulu offers content from more than 260 content companies and has tie-ups with more than 625 advertisers.

Hulu earns revenues through both subscription- and ad-based services. The company offers two packages to users – Hulu.com and Hulu Plus. Hulu.com is a free online service that generates revenues through advertising sales. Hulu Plus is an ad-supported subscription service that charges users a fee of $7.99 per month for access to Hulu’s premium content on devices besides PCs. Subscribers of Hulu Plus can access content on set-top boxes, Internet TVs, gaming consoles, and other mobile handheld devices. According to the company, Hulu Plus is expected to surpass 1 million subscribers this year, and by this fall it will be at an annual run rate of over $200 million in revenues.

Besides subscription revenues, Hulu’s ad revenues are also growing significantly. According to a comScore Video Metrix report, 172 million unique viewers in the U.S. had accessed video content properties in December. Google led the video content segment with over 145 million viewers spending an average 274.3 minutes per month on online viewing. Hulu was the tenth-largest property with 26.5 million viewers spending 217.1 minutes per month on online content. But it was the leader in the ad impressions. The report estimates that 5.9 billion video ads were viewed in America last December. With 1.23 billion ad impressions, Hulu generated the highest number of video ad impressions.  While Google’s YouTube may be attracting more viewers, given the “unpredictable nature of its user-generated content,” it fails to attract as many ad dollars.

Hulu had revenue of $263 million in 2010 compared with $108 million earned a year ago. For the current year, the company projects revenues of over $500 million. Hulu doesn’t give out much financial details, but it did report that it turned profitable in the last quarter of 2009. Last October, the company was valued at $2 billion when it was evaluating an IPO to raise $200 million-$300 million. However, at the end of last year Hulu dropped the idea due to the absence of long-term rights to its online video content. Hulu is now working on alternate subscription-based models as it needs funds to be able to access high-quality content.

Hulu’s Competition
Hulu is facing stiff competition from other online players. With more than 20 million subscribers and a collection of more than 20,000 streaming titles, Netflix, is working hard to expand its library. Hulu is known to have a better collection of TV shows, while Netflix boasts of a better movie collection. But earlier this year, Netflix entered into a deal with Disney to license ABC and Disney Channel TV programming for streaming. Recently, Amazon entered the market with the launch of its library of more than 5,000 streaming titles available free to the Amazon Prime members. Google wasn’t far behind and launched a movie section for YouTube featuring full-length movie titles at the end of last year.

To address the competition, Hulu is expanding its content. Earlier this year, it tied up with Criterion Films to add more than 150 Criterion titles of streaming movie titles to its list of classic movies available to Hulu Plus viewers. It is also negotiating with Miramax for access to a 700-movie collection. Additionally, Hulu has launched a few original Web TV series. Earlier this year, it launched “Trailer Trash,” an animated show and last week launched “The Confession,” an exclusive series starring Hollywood actor Kiefer Sutherland.

According to eMarketer, nearly a third of all online ad dollars will be spent on video advertising in the current year. By 2014, the online video market is expected to be worth $5.71 billion. Forrester Research has a more conservative estimate of $3.01 billion. As of now, Hulu is well placed to address the booming ad market, and by improving its content portfolio, it will continue to address subscription-based revenues as well.

As of now, Hulu is much smaller than Netflix. Last year, Netflix reported revenues of over $2.16 billion and Hulu revenues of $0.26 billion. Netflix’s market capitalization of close to $13 billion is also significantly higher than Hulu’s estimated valuation of $2 billion. But, as both players improve their content, between the two of them, they will give cable players like Comcast, which has annual revenues of over $37.9 billion and valuation of close to $70 billion, a tough run for their money.

Recently, Comcast CEO Brian Roberts, dismissed Netflix by describing it as, “What used to be called ‘reruns’ on television is now called Netflix.” But studios are warming up to the idea of alternate video services providers. Recently, Warner Brothers released the Batman film “The Dark Knight” for rent and online streaming on Facebook. Comcast may try to ward off such competition by offering TV Everywhere and Video on Demand services. But it remains to be seen if its offerings will be able to compete with the under $10 a month subscriptions that Hulu Plus and Netflix offer.