Deal Radar 2008: Hulu

Hulu offers free online video content in the form of TV shows, clips, and movies to users in the US. Based in Los Angeles, the site is a joint venture between NBC Universal and News Corporation. More than 50 other companies also provide content, including FOX, MGM and Sony Pictures Television.

Hit TV shows can be viewed online the morning after they are aired on the networks. Users are able to customize their online viewing experience. The video player can be popped out and placed anywhere on the screen to allow users to multitask with other projects. The size of the viewing screen can be adjusted, the lights dimmed and the rest of the browser window can be muted so that users can better enjoy their viewing experience. They can also share full-length videos or video clips via email or on other sites like social networking sites.

Hulu operates on an advertising-based model. Advertisements are seen during normal commercial breaks. Advertisers pay more for these ads compared with TV ads. Distribution partners include MSN, Comcast, AOL and MySpace, among others. Hulu’s aim is to provide the largest collection of professional videos to the maximum number of people.

Hulu was founded in March 2007. Although it is owned by NBC Universal and News Corporation, it is run by an independent management team with other branches in New York and Beijing. In October 2007, the company received a huge Series A round of financing of $100 million from Providence Equity Partners for a 10% stake in the joint venture. CNN reported Hulu to be valued at $1 billion in May 2007. Outrageous? Perhaps!

In October 2007, Silicon Alley Insider provided an estimated P&L for Hulu with revenue splits. Based on their estimates, it seems Hulu will take a while before it shows any real profitability. In another post this March, the Insider, with some assumptions, guesstimated Hulu’s revenue to be just $1.5 million a year.

According to Quantcast, monthly traffic is approximately 960,000 people. The number of unique visitors, according to Compete, is about 1.4 million.

Hulu’s main competitors are regular TV and Google’s YouTube. The main claimed advantages of Hulu are its simplicity, ease of use and excellent software. These can largely be attributed to CEO Jason Kilar, a veteran of Amazon, and CTO Eric Feng, formerly with Microsoft.

As far as I can tell, the company, however, has a cap structure that will cause them to fail. I have seen these deals before during the bubble years, where a first round of financing is valued at a billion, and management teams are tasked with back-filling the valuation. I was offered a deal like this once in 1999, at the peak of the bubble for one of my companies. Jason Kilar perhaps is a veteran of Amazon, but it appears that he knows nothing about how to negotiate cap tables or valuation.

This segment is a part in the series : Deal Radar 2008