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Wall Street Wants To See The Money, Pushes Hulu To Charge For Content
by Laurie Sullivan, Sunday, November 1, 2009, 6:14 PM

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Don't expect online video to pay off for advertisers and publishers looking to turn the Internet into a TV-like portal profit center in 2010. Content providers may have to wait a bit longer. Shaking her head onstage to a room filled with people, Needham & Co. Analyst Laura Martin told OMMA Video attendees Friday in Los Angeles the numbers don't quite add up.

For Wall Street, it's all about the money. Martin, who recently moved from Soleil Securities to Needham & Co., estimates it could take companies like Hulu 10 years to get it right. The creative geniuses behind Hulu have created a brand that consumers turn to when looking for quality videos, but don't know the first thing about squeezing out the profits.

Analysts keep pushing for Hulu to charge for at least some of the film and TV content. Martin believes the site should take a Google-like approach that provides out-of-print books, but charge for out-of-date movies and TV shows. She has a revenue model for new content, too.

But before consumers will pay a premium for newly created content, Martin believes the shows need to tell a story, and ad placement should look similar to television. That means running more than one sponsor per episode.

"The problem is, the 27-year-old geniuses have run amuck in these companies," Martin says. "They are clever, dynamic and understand social networks, and they go, 'oh, let's get on the Web -- let's innovate. It gives us lots of flexibility on what to do with the content,' and then they steal from the guys spending the $3 billion dollars and they don't do anything about it."

Martin says it's not difficult to take a $3 billion product and give it away for free, then pat yourself on the back for attacking millions of viewers.

Between $2 billion and $3 billion of "professionally produced" content sits on Hulu -- supporting Martin's $200 million aggregate market cap estimate for companies that own the site, including ABC, NBC, and Fox. But content owners are not doing enough to bring in the money for shows like "The Simpsons," "House," "Lost" and "The Office."

As the ad industry emerges from the worst recession, Hulu continues to grow by double digits. An ad-supported model could bring in the money. Hulu ranked No. 6 in online video sites, with 38.5 million unique viewers, Martin wrote in a research note, citing comScore's September numbers. ComScore ranked Hulu as the fifth-highest online video site, with 488 million videos viewed. Martin explains that this adds up to 1.9% of all videos viewed online in August.

The average Hulu viewer watched 12.7 videos in August, totaling 1 hour and 17 minutes of videos per viewer, compared with the average 3.7 minutes for online video across the Web.

The upside for advertisers to lock in more eyeballs resides in the approximate 38 million viewers. And it appears that brands are willing to pay a premium. Martin estimates that Hulu airs four advertisements per hour of programming at a $50 CPM, compared with 32 30-second spots in an hour for that same programming on TV at a $35 CPM.

"In the U.S., TV advertising revenue is $65 billion per year, plus video subscription revenue of $120 billion per year," Martin writes in a research note. "The market cap of the value chain at risk is $330 billion."

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