Quality pays: Hulu trumping YouTube

YouTube is apparently getting beat at the profit game by Hulu. Here's why.

Over at All Things Digital, Peter Kafka has some interesting news for those that believe YouTube won the online video war: it's actually losing.

Hulu.com, that stodgy competitor created by News Corp. and NBC, is beating YouTube, at least in terms of profit: Hulu is making roughly $12 million in profit, while YouTube is bleeding cash, according to Screen Digest analyst Arash Amel, with whom Kafka spoke:

Amel's model assumes that while Hulu is showing far fewer video streams to many fewer people than Google, it is able to sell ads on most of them-perhaps 80 percent of all streams have a paying advertiser, he thinks. Google, meanwhile, is thought to be able to sell ads on just 3 percent to 4 percent of its views.

Just as important, but not widely discussed: Amel believes that YouTube's costs are much more significant than most observers guess. That's because YouTube isn't just paying massive bandwidth and hosting costs for all those clips. It's also paying out huge licensing and content fees to copyright owners like music labels. Amel thinks YouTube is paying more for those fees than it does for infrastructure/bandwidth.

Perhaps we should be blaming the entertainment industry for charging such high fees and for withholding its content from YouTube, but this misses the mark. The entertainment industry wants to make money, and apparently feels that YouTube doesn't adequately protect its intellectual property. There is no reason that YouTube couldn't displace Hulu: it simply needs to show equal care for the industry's IP.

It also needs to improve quality. This is, of course, possible, as Monty Python's recent foray into YouTube suggests.

This will be hard as long as YouTube's model thrives on user-generated content, a significant portion of which turns out to be user-pirated content. (I should know, I was booted from YouTube for uploading a video that I shot at an Arsenal game last year. I didn't have broadcasting rights....)

This isn't to suggest that YouTube should become Hulu. It just means that YouTube needs to find advertising models that are suitable to its content...like user-generated commercials.

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