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Comment by AndrewJ | Hacker News Reader

I'm considering buying in.

Anyone else?

So I'm a bit hesitant on Hulu's long term viability. They are extremely beholden to the networks and they are in a very scary position. They don't really hold the reins to their own destiny.

That being said... I think if you can get in early enough you can see some decent returns over the short term. I'd plan on about a 12 month window of getting out. I definitely wouldn't consider Hulu a buy and hold stock. The key here would be to watch out for Hulu being able to get some long term content deals (3+ years) with major networks. If they can lock in some content deals for a longer window they become much more viable for a long term run.

Why are you considering buying in?

Are you familiar with their financial situation? Do you know how much money they make? I can't find any reliable numbers. This is the best I could find:

http://www.businessinsider.com/hulu-ceo-talks-ipo--here-are-...

So their net profits are estimated $70M this year (before tax, I assume).

Their growth rate is the only thing that justifies 2B valuation.

So my main point is - we don't know enough to decide whether they are worth that much.

Following the numbers in that article here:

Say they're break-even on $70mm of annual revenue.

35% of annual revenue is gross profit - so of $70mm they keep $24.5mm - so say that's their operating expense number.

I think you'd have to expect a 3-5x bump in revenue (assuming gross margin stays the same and no significant growth in that operating expense number of $25mm) to justify buying at a $2bn valuation.

4x revenue growth from $250mm expected this year = $1bn revenue

$1bn revenue * 35% gross profit margin = $350mm gross profit. $350mm - $25mm operating expenses = $325mm pre-tax income. $325mm less 35% taxes = $210mm net income.

Assuming they can keep up a steady growth rate at this point and you can value Hulu at 15x their net income number, this implies a value of $3,150. Which is about a 15% annualized return number over 3 years off a valuation of $2bn today.

So some of the questions are - how much do you expect online TV to grow, what percent of that market do you think Hulu will have, and successful do you think Hulu Plus and any other initiatives will be, and do you think Hulu can keep their operating expenses relatively flat?

I think Hulu is problematic because of how its ownership structure is set up, you have these studios/content providers that are going to want the majority of profits.

When we buy businesses, we are anticipating the future cash flows that are going to be generated by the business but here - it's very possible that content providers could strangle the cash flow that is available to shareholders in favor of their own pockets.

I've seen this happen a few times in the past where a company has a handful of very large customers/clients that also own equity in the business.

I looked a bit at this space and came out most positive about Liberty Starz (when it traded in the low $50s). They should benefit from a renegotiation with Netflix over streaming rates but they are also moving into original programming.

Too many dependencies upon the cable companies, which impact the product. Wouldn't put my money in right now or ever, until I feel comfortable that this isn't an issue.

Very good point. This doesn't mean it is a bad investment, but there are enough factors outside of Hulu's control to make this anything but a sure bet. Digital on-demand distribution is going to be the future, but the real question is, will Hulu be the one to pull this off. That isn't clear at all at this point.

I don't know... I want Hulu to succeed, but I really don't think they stand much of a chance unless their Plus service improves. Netflix is annihilating them on that front.

Not that I very much doubt it will improve. Just that it should've done so sooner rather than later.

I don't know. For me it seems like hulu has got significantly less useful over the last year, with the TV networks increasingly pulling their content off hulu and sticking it on their own sites. What are hulu's assets, aside from an apparently-shrinking number of licenses to stream content with a very small number of ads that nobody watches?

I bet they're doing better with the ads now that they are asking users if they are relevant. It would be interesting to see some numbers in this area.

Occasionally there are amusing ads on Hulu which I find enhance my viewing experience. Also, the ability to purchase exclusive advertising throughout the show almost guarantees some level of engagement from viewers.

A recent episode contained Microsoft Office 2010 ads which I found to be a little repetitive/annoying and yet I now know _a lot_ more about some of the potential benefits of upgrading.

Personally as soon as I see an ad I just mute the sound and switch to another tab. The helpful "Your program will resume in N seconds" message tells me how long I have to wait, and I can always skip back if I do happen to miss a few seconds of the actual program.

I suppose some people watch hulu while not sitting with the keyboard and mouse, though, so the ads may reach them.

Not me. I vastly prefer Netflix's content delivery system over Hulu's. Hulu's PC player is stuttery at hires, and has a "comb" like artifact in fast moving scenes, whereas Netflix's works fine on the same machine.

I'm uninterested in Hulu as a business, but if this means the IPO window is open (thus allowing people to exit financially while retaining founders in management roles and in control), I'm elated.

I don't really know how it works to get into an IPO, but I'm very interested too.

Netflix and Hulu represent the (slow but certain) change of video broadcasting.

I'm no expert, but it's simple. You just follow the company until the day their stock is available on the market, and buy. An interesting IPO was Google's. Usually, Wall St. banks get first shot at buying stock initially before it's available to the wider public. Google thumbed their nose at Wall St. and allowed anyone to buy their stock directly in a kind of dutch auction. The banks were furious at this insubordination and thought this would surely hurt Google's chance to have a successful IPO. Of course, their stock has done quite well. It was first available around $85 I believe, and it's now over $500 (it previously hit over $700). I wouldn't count on Hulu taking this route though. ;) I would, however, caution any investment foray into the stock market with my standard advice: never put in more than you are comfortable losing entirely.

That's not correct. That's buying on the secondary markets. To get into the IPO you have to have an account and an allocation from a brokerage that is participating in the initial distribution.

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