What are YouTube and Hulu Really Getting?

My colleague Michael Hickins has an interesting post about profitability of major video sharing sites. The more I read and considered his reporting and conversation with YouTube, the more questions I found myself facing. With all the speculation of how well YouTube or Hulu might be doing, there are complexities that could well mask what the owners of the companies are actually getting from their properties:

1. Is the notion that there’s ad revenue on only 3 percent wrong, or is Google monetizing in other ways as well? Although it’s been incredibly successful, the company surely realizes that too much dependence on advertising revenue can leave it vulnerable. Could YouTube be an experiment to find new ways to make money, or at least to move beyond simple search advertising?
2. What would it take for either of these ventures to break even? That would mean knowing what they make, on the average, for video that offers some revenue and then calculating, at the average revenue rate, what percentage of video would need to generate revenue for the venture to be at least self-sustaining.
3. Is home-grown infrastructure really cheaper? It’s odd that Google is arguing this point, as it also wants to play in cloud computing, where the sales argument is that a company can do better by outsourcing than by trying to build the infrastructure. The real question might be how higher utilization of outsourced services might effectively drive down costs.
4. There are also complex tax considerations for any of these companies. For example, operating expenses (opex) are immediately deductible, while capital expenses (capex) must be depreciated over time. In either case, the spending could actually be identical, but by effectively recognizing the expenses up front, a company could make its numbers look worse on the books, leading to more favorable tax treatment.
5. Also along the tax hand-waving lines is the notion of royalties for Hulu. Are the owners essentially paying royalties largely to themselves? If so, does that become a way to keep money in-house while creating a loss on the books that provides an important offset of parental corporate profits?
6. As far as royalties go, is there really any fundamental difference between that and sharing ad revenue, which YouTube/Google does for at least some of the people producing videos? And how long before the company has to expand the number of people who get a cut of ad revenue for creating the work that draws audience in the first place?
7. Could YouTube also be an important experiment for Google? The company has made its fortune in search advertising, but that is being a one-trick pony, and once the trick gets stale, the company is in trouble. No, it doesn’t look as though it will happen in the short term, but even the money machine has shown it can be hurt by the general economy, and smart management thinks far beyond next quarter’s results. Perhaps YouTube is supposed to be a mechanism to branch into at least other areas of advertising, like display and video. This is a 180 degree flip of seeing advertising as a way to make financial sense of the site. Instead, the site becomes the excuse for expanding income sources.

No answers here, only the thought that much of the popular analysis many of us have done about these companies, and similar ones, has really missed the boat. For all we know, the big “losses” may be intentional and ultimately useful.

ATM image via stock.xchng user yukh, standard site license.