How YouTube, Hulu (almost, but not quite) make money

Over-the-top video providers like YouTube and Hulu are likely losing money today, but that could change with tweaks to their ad and distribution strategies, according to consultancy STL Partners.

STL is best known for its Telco 2.0 advisory practice, event and blog, which in turn are best known for forwarding new “two-sided” business models for service providers that place them in the middle of partner-driven digital value chains. The over-the-top estimates are a preview of its upcoming Online Video Distribution study, by report author Alan Patrick.

According to a report preview on the Telco 2.0 site, STL estimates that Hulu is losing around $9 million this year on revenue of $52 million, and YouTube will lose about $91 million on revenues of $118 million. The two sites are probably the most closely watched online video sites, with YouTube dominating the user-generated and -posted side of the business while Hulu has had breakout success working closely with content partners to post full shows and movie titles.

Service providers are closely watching the success and strategies of over-the-top video providers, both as competitors to telco IPTV offerings and also as potential long-tail content partners. In addition, streaming video is beginning to have a greater impact on carrier broadband networks, in some cases becoming as large a bandwidth consumer as download-oriented protocols like BitTorrent.

Just this week, research firm Ipsos MediaCT reported that almost six in ten (57%) US Internet users 12 years of age and older have streamed video in the past 30 days versus just one in five (22%) downloading video in the same time period.

STL Partners estimated the various aspects of YouTube and Hulu’s businesses to get to their revenues and losses. According to analyst Patrick, YouTube serves up enormous volumes of small files (likely more than 1 billion plus downloads per day at about 2.75 minutes on average). However, it places advertising on those videos at a very low ad-inventory fill-ratio – estimated at about 3-4% -- and a low CPM (cost per thousand ad rate) of about $10 at most.