The Digital Skeptic: Hulu = Netflix 2.0

NEW YORK ( MainStreet) -- Running a Hollywood movie studio might be Mission Impossible. But running an online movie studio? That's Die Hard, with a Vengeance.

Just ask Jason Kilar.

The Harvard-educated Kilar is the fellow who, back in 2007, help found Hulu, the online content service that now claims 30 million unique monthly users. Hulu resells content from 350 top-end content providers including MTV, Spike and The Onion. More importantly, it counts serious Hollywood goodfellas as backers: NBCUniversal -- that's Comcast ( CMCSA) these days -- News Corp ( NWS), Walt Disney ( DIS) and what Variety says is a $100 million stake by Providence, R.I.-based Providence Equity Partners. That's the company with similarly big stakes in Spanish-language service Univision and the ridiculously successful Yankees Entertainment & Sports Network.

It's safe to say Kilar is not killing it right now.

Last week, the Internet rumor mill lit up over a Variety report that laid out major restructuring at Hulu -- including the potential departure of Kilar. Apparently, sources say, his Comcast and Walt Disney captains are none too happy as plans apparently are to limit the content available on the service, tightening the windows when certain popular shows run and, overall, nudge Hulu further down the digital content food chain.

This would be just another executive reshuffling in Hollywoodland, save for one fact: Kilar's Hulu is seen as having major voodoo powers in the otherwise grim digital economy. It makes what appears to be serious box office -- $420 million in total revenue and 1.5 million so-called Hulu-Plus premium customers, each of whom pay $8 a month for premium content. Hulu makes its own shows and the company announced a major redesign earlier this week.

"We expect our subscription services to account for more than half of Hulu's overall business later this year," Kilar said in a company blog back in January. "We will remain relentless in our pursuit of better ways."

Which all may sound boffo, but a fast-forward through Hulu's numbers shows what company backers are cranky about: Yet again, investors are facing digital content play in a Netflix-like long, slow fade to black.

No Clue at Hulu
Sadly, as with most of the digital economy, it's far too easy to see what Brian Roberts, CEO at Comcast, or Bob Iger over at Disney stew over about Hulu. Yes, the firm has 350 content vendors. But assuming the $420 million a year in sales is correct, that works out to just $1.2 million in revenue per vendor. That's not per show or per series or per franchise. That is per company ... per year! Compare that with the $3.5 million Chris McCloskey, a spokesman for NBC, told Bloomberg his company charged for a single 30-second commercial during last year's Super Bowl.

For established content creators such as Disney, Hulu just does not make enough to pay enough for content.

Next, Hulu's revenue-per-subscriber figures is similarly bush league. Assuming 30 million unique monthly customers, and again, $420 million in total sales, that works out to a back-of-the-envelope $14 per year in average revenue per unique user. For networks such as Comcast, that's Armageddon talk. That operation did a cool $55.8 billion in top-line revenue last year while serving only roughly 22 million or so total subscribers. Again, back-of-the-envelope that grosses up to a round-number $2,400 in average revenue per subscriber. Sure, Comcast has a broadcast division, sells broadband services and other products. But even factoring those dollars, Hulu per subscriber sales are whole orders of magnitude too small.

Hulu = Netflix 2.0
Even more bizarre, Kilar has Hulu on track to only make things Coyote Ugly for its backers. At issue is so-called "cord-cutting." That's what the Pew Charitable Trust calls the process of multichannel TV subscribers -- that's Comcast's customers -- abandoning pricey pay-TV services in favor of lower-cost Web options such as Hulu.

So yes, Hulu's paid subs are growing at warp speed, but these customers are coming directly at the cost of lucrative subscribers from established media companies such as News Corp, Disney and Comcast. All Kilar is doing, therefore, is turning a high-end, high-margin cable subscriber into a low-end, low-margin Hulu subscriber.

Which leaves Hulu's backers in one serious stew: Somehow they must extract what little value there is in Hulu, but do it in a way that does minimal damage to their established businesses. And this Houdini trick must get pulled off in a brutal race-to-the-bottom digital content slum that's sinking similar content plays including Netflix ( NFLX) and YouTube ( GOOG).

According to the company, there is no actual definition for the word Hulu. My vote therefore is "There will be blood."

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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