Hulu A Better Business Than YouTube? Not So Fast

This story was written by Rory Maher.
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). And last week, Netscape founder and angel investor Marc Andreessen, appearing on the Charlie Rose Show , throws his weight behind YouTube, arguing that the video site has huge revenue-generating potential. 

Lyons isn't wrongHulu will probably continue to get better advertisers. But I side with Andreessen on this one: 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. Andreessen said in the interview last week that YouTube could be making $1 billion if it sold banner ads on its homepage. Not sure how he arrived at that number. But:

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: 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, as Andreessen pointed out, its ability to use its massive audience to pursue different revenue streamsthat 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. 

By Rory Maher