While 99% of companies are fending off questions about how the recession is affecting business this earnings season, one small company doesn’t have worry about that.

We all know that print advertising is dead, and the economy is putting a major strain on television advertising. But one small segment of the marketing/advertising arena is still growing at a supersonic pace… internet commercials.

Even that segment may be a bit too generalized. I’m talking about the advertising you see before and during videos on sites like Hulu.com and YouTube. These two are the behemoths of the industry, but their strategies and business models couldn’t be further apart.

YouTube still has the no. 1 spot in the online video market. With over 100 million monthly viewers, YouTube will retain its top spot for a while. Unfortunately, the company, owned by Google Inc. (NASDAQ: GOOG), can’t seem to make any money from this powerful position.

Less than 10% — some estimate as low as 3% — of its content is equipped with ads. That’s a very difficult business model considering Google has to pay for the company’s enormous bandwidth and storage expenses. According to Credit Suisse, YouTube is expected to lose nearly a half a billion dollars in 2009.

Hulu, which should pass Yahoo! as the no. 2 online video supplier when the April numbers come out, is a very different animal. Most — if not all — of its content is attached to ads. You have to sit through 10-50 seconds of commercials before you ever see any Hulu content.

YouTube made its mark by allowing millions of wannabe stars upload their own amateur video free of charge. While this is what drives the majority of YouTube’s traffic, it doesn’t provide any revenue.

Hulu is still a private company. It just landed a huge deal with Disney to start featuring its content on Hulu’s site. This deal is similar to its initial deal with NBC and its deal with News Corp (owner of Fox Broadcasting Company). The deal also gives each of the three investors a 27% share of Hulu.

That doesn’t mean, however, that you won’t be able to cash in on this up-and-coming giant. In the next few years, once the IPO market recovers, there’s a good chance we’ll see a Hulu IPO.

The company doesn’t release any financial numbers to the public, but that hasn’t stopped many media speculators from venturing a guess. The number we see most often is $1 billion in ad revenue per year and growing — already about five times YouTube’s revenue.

That’s simply not enough for us to go on, but it does give us hope that an IPO is coming down the pipeline. If there’s actionable advice, we’ll let you know.

Sincerely,
Jim Nelson

May, 1, 2009

Jim Nelson

Jim Nelson began his investing career during the tech boom at age 14 – with purchases of Starbucks and AOL. Early inspiration came from an old Tweedy Brown whitepaper: “What Works in the Market.” He graduated with a degree in Political Science from Pittsburgh University, Nelson focuses on income investing, including dividends, covered calls, and fixed-income. Additionally, he covers MLPs, ADRs, utilities, consumer staples and tobacco. Nelson is the managing editor of Lifetime Income Report.

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