The Future of Web Video: Hulu, Youtube, and the Bottom Line

Back when 600 pound search gorilla Google bought Youtube for $1.65 billion in 2006 (1), the video sharing site was popular, but a bit of a question mark. Despite its tremendous reach and page views, Google had to find a way to make revenue off a motley collection of pirated television clips, amateur videos, and wannabe Myspace bands. And by 2008, Youtube still wasn't making a profit for Google (2). Part of the problem is the sheer growth of Youtube. According to the Telegraph, Youtube as of 2007 consumed as much bandwidth as the entire internet just seven years previously (3). The other part is that like much of the internet, the majority of content is dross. No one is going to pay to plaster ads over a bunch of teenagers hitting themselves in the head with errant diet coke-and-mentos rockets. In 2008, experts estimated that only 10 to 20 percent of Youtube's videos were professionally produced and thus marketable (4).

The result is that so far, Youtube is still a losing proposition (but Google, the cash-cow it is, can easily absorb the losses); in 2008, the site lost $240 million. Until they find a way to bring enough ad revenue to cover the tens of millions per month in bandwidth costs (such is the price of sharing large video files) and the nearly 1 million per day spent on maintaining the site, it's not likely to change (4, 5).

In fact, part of Youtube's problem might be its popularity. Since it's the professional, high quality content that advertisers are interested in, they've flocked to a site with less of an unruly image: Hulu.com. Hulu is the place to watch streamed copies of television shows or movies, with 20 to 30 second commercial breaks sprinkled in (but far less ads than broadcast television). Hulu carries content from sources like Comedy Central, PBS, USA Network, Bravo, Fuel TV, FX, Speed, Syfy, Style, Sundance, E!, G4, Versus, A&E, and Oxygen (6). The result is a mishmash of the latest shows, usually available a day or a week behind the broadcast schedule, combined with large amounts of old vintage shows (catch up on Saturday morning cartoons with all four seasons of X-Men Evolution, or tune in for five seasons and counting of Stargate SG-1. Science-fiction your style? There's now the shlock of Alfie the alien there too). Hulu offers a clean and navigable interface that is specifically keyed to finding show clips and full episodes, a far cry from Youtube's rather cluttered and unfiltered search functions.

The approach Google is taking is not really to fight Hulu, but become the go-to destination for storage. In the end, Google doesn't care so much if people watch the video on Youtube or whether they watch an embedded version on someone's Facebook wall, as long as they are watching it. Google also has the great advantage of demographics data; it can tell ordinary video producers on the site or big advertising companies who is watching what videos and when. The result is that despite faltering steps to providing full-length, Hulu-like content (old episodes of Star Trek or Bewitched), Youtube is being taken further in the opposite direction. As CNN writer Jesse Hempel reports, "...establishing [loyalty] with users, Google's David Eun suggests, will pay off in the future when consumers are looking for a tool to organize the proliferating volume of online videos they require for information, entertainment, and online conversations. 'It's not the Red Cross,' he says. 'We are building a business here'" (7).

But Google's attempts are still focused on turning Youtube into a small but marginally profitable enterprise, and that means more ads. Now watching a music video results in a popup link telling you how to buy the song. New masking ads play before the actual content loads (7). Google has been cracking down heavily on content posted illegally or even under a claim of fair use. Is an ad-cluttered, sterile future really what Google thinks will build loyalty? Who is going to watch a 30 second ad before a clip when the clip is 25 seconds?

Even with the surging popularity of Hulu, the main issue facing the proliferation of content on the web is that the major networks are cagey about it, and understandably so. If viewers online are not added to television viewership, then Hulu draws away viewers from the TV broadcast, affecting its audience numbers and meaning it makes less by charging for ads. On the other hand, an ad on Hulu is going to cost much less than on television, meaning that if a show gets most of its views online it still might not be considered profitable enough to sustain the series. In this age of "everything can be found online for free", old stuffed shirts are either excessively protective of the old ways or haven't figured out how to make a business online. It's a delicate time not just for television but the entire entertainment industry in general.

The result is uneven user experiences and gaps in content production. Hulu, for instance, currently only works in the United States; users from other parts of the country are locked out, for now. Hulu's streaming resolution (up to 480p "high quality" resolution) often pales in comparison to Youtube's 720p high definition options, but at least it has a set quality compared to Youtube (videos from 2006 or even 2007 are often horribly blocky or compressed, having lagged behind advances in internet speeds.)

Some companies are convinced their fortunes lie outside both: for instance the upcoming EpixHD.com is a web site founded by three movie studios, planning on a subscriber-based business model where subscribers have access to elements of Hulu and the Internet Movie Database at their fingers (8). Even Hulu is considering making some of its content non-free (9). But will that result in a lessened appeal for viewers?

The internet is still very much a wild frontier, and internet video is even more so. What kind of business model will ultimately work is very much up in the air, as is the future of big-budget television productions if no one watches them on the television or audiences are scattered watching other things online. In the meantime, enjoy catching up on Burn Notice, House, and Warehouse 13 online--you never know when you might have to pay for that privilege in the future.