Sunday, August 24, 2008

Which has a better business model: YouTube or Hulu?

There has been some conversation picking up in the past year about the online video advertising business model. Ad rates are rising, and clear distinctions in ad rates between user-generated videos and professional-content videos have emerged. Hulu is now able to command 2-3x higher ad rates as YouTube. For this reason, some people are saying that Hulu is a much better business than YouTube.

Yet I think people aren't really looking at the correct metric when comparing YouTube and Hulu's business potential. People are comparing views, ad rates, and engagement. I argue that the most compelling metric should be Revenue $ per GB. GBs are the driving variable cost units in the online video business (bandwidth, storage, and processing). Therefore looking at the return per GB makes a lot of sense.

Read this document on Scribd: Which is a better business: YouTube or Hulu?

Breaking down the #s, it is clear that YouTube has a much better business model. Despite the 3x higher ad rate for professional content, YouTube is able to generate 3x as much revenue per GB because the average YouTube video is 1/10th the length of Hulu videos, and YouTube videos are encoded in a lower-quality bitrate.

These #s may change if YouTube removes its video upload size restriction or increases its encoding bitrate. It is unlikely the upload size restriction will be removed by much, but it is likely that the encoding bitrate will increase as consumers gain access to HD cameras.

Nevertheless, unless professional content ad rates end up 9x greater than user generated ad rates, YouTube will continue to have the better business model.

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