Hulu's profitability=bright future for digital media

Last week Hulu announced that it is now profitable on just $100M in revenue . This is huge news for technology companies that are trying to enable digital media and traditional media companies who want to prove they can create real businesses online (beyond marketing).  There is a cultural precedent also being set. Big media is proving it can launch start-ups/successful joint ventures. To think that rumors are that Facebook (the darling of all web 2.0 start-ups) is cash flow positive on $800M in revenue means Hulu did something very right (with only $100M in revenue). Everyone doubted Hulu and thought costs would be too high to create a sustainable business. No one questioned it could attract audiences because of the premium content, but wondered whether it could make money.

Now if Hulu is truly profitable as they claim, here is my guess on a few of the factors that influenced it (please note that I dont have any first hand knowledge):

1) High CPMs and Sold Out Inventory- Advertisers want to be on Hulu. They believe in the audience and CPMs must reflect that. In addition, the ad sales teams must have the relationships from their previous media lives to be able to drive CPMs up, by likely convincing clients that online viewing is as important as TV viewing. The advertisers are also major brands that buy inventory in bulk. If the inventory is selling out, the CPMs are being driven up.

2) Favorable Terms-Since media companies created Hulu, terms must be favorable on licensing fees. Maybe there is a variable content license based on how high CPMs are sold at? Thrid parties have always had difficulties paying content licensing fees because margins are so low and it takes a huge amount of traffic for overhead fees to be overcome. Its a different story when the content owners (NBC and NewsCorp) have their own skin in the game. They want favorable terms that will incentivize both sides.

3) Exclusive content/premieres-Hulu is incentivizing audiences to come to the site by providing content that is only on Hulu. This includes everything from premieres to secondary material. This in turn drives up ad spending and allows Hulu to introduce new functionality and push other content on its users. They are also influencing user behavior, which will drive an important aspect of future Hulu: premium  paid services. If users are regularly visiting Hulu and are accustomed to watching content on there, what will happen when content is available but they cant watch it? They will pay a nominal fee to be able to watch their favorite shows.

What does this all mean? Digital media works and an ad based model can be successful. Traditional media companies use online channels as marketing tools with an added benefit of incremental revenue. Hulu shows that online channels can be much more than that.