SAG’s Hulu Mystery Deepens

Yesterday I blogged on the urban myth that Hulu, the online video service set up in 2007 by Fox and NBC, is already profitable. The myth appeared to start with a piece by Peter Kafka on the All Things Digital website when he misstated the research that he discussed with an analyst from Screen Digital. 

The analyst, in fact, stated that “net revenue” not “net income” was positive. 

Big difference. Henry Blodget at Silicon Alley Insider caught the mistake and pointed it out and the All Things Digital site agreed and apologized.
In fact, Screen Digest estimates that Hulu earned $12 million in “net revenue” which is, as Blodget explained, “what a company has left after deducting the costs directly involved in providing its products/services but before deducting all of its operating expenses.”
Now, it turns out that for some purposes “net revenue” can be a useful metric. But not for SAG.
SAG took the $12 million report and said, incorrectly, that Hulu was profitable. When I suggested that they were wrong, one of the leading Membership First advocates, Arlin Miller, who is known to be close to leading SAG activists David Jolliffe (chief of SAG’s negotiations committee) and Kent McCord (former 1st VP of SAG), responded. 
Miller argued on Actors Access that, in fact, there were three different sources besides Kafka that proved that Hulu was profitable. He provided excerpts from each of those sources, one of whom was Blodget. 
There is only one problem: all three sources, including Blodget, say that Hulu earned “net revenue” NOT “net income.” Blodget, for one, thinks it unlikely that Hulu has any net income – which would make perfect sense for an early stage start up. Start ups are SUPPOSED to lose money as they build out their brand and market share.
But Miller insists that SAG was right about Hulu profitability.
It turns out that Hulu is VERY important to the case being made by the Membership First controlled negotiating committee that Jolliffe heads. They have used the Hulu example in numerous publications including a so-called “White Paper” on what SAG says is NOW Media (as opposed to New Media – get it?) and most recently in a response SAG issued to an ad by the AMPTP.  In the ad response, where they contend that the AMPTP ad is “fiction” they say “here’s the truth” and then state, without any evidence, that Hulu is profitable to the tune of $12 million.
Since this response went out in the middle of tense negotiations while SAG was campaigning for a Strike Authorization Vote on the very issue of new media earnings for their members, how could they make such a terrible blunder?
Of course, one possibility, albeit remote, is that, in fact, neither David Jolliffe nor Doug Allen know the difference between “net revenue” and “net income.” Certainly Arlin Miller doesn’t (well, he does now, since I explained it on Actors Access last night).
A second possibility, again remote, is that a lower level staffer who did not know the difference or did not care to review the material put together the ad response without the knowledge of Jolliffe or Allen.  But that begs the question, who is minding the store at SAG?
A third possibility, one that I would only come to reluctantly, is that Allen and Jolliffe were fully aware of the fact that Hulu is NOT profitable but put together the statement anyway hoping no one would notice. Of course, that would not be mere misfeasance (as is the case for the first two possibilities) but actual malfeasance.  It would mean the Membership First party and SAG’s NED Doug Allen would be consciously attempting to mislead SAG members into thinking that new media is profitable when it may in fact not be.
None of these conclusions is an attractive one and so the mystery remains.
But let’s take this one step further. Let’s assume that this was a kind of innocent mistake – that SAG read the Kafka report and grabbed it and dumped it into the “Truth” response to the AMPTP’s “Fiction.” 
First, that raises a problem of oversight and diligence. Kafka reached his incorrect conclusion after a conversation with Screen Digest whose analyst was preparing a detailed analysis of Hulu. Kafka points out that the mistake was his, not that of Screen Digest which never said that Hulu was profitable.  
So why didn’t SAG also talk to Screen Digest and request a copy of the report and review it carefully before putting out its very important “Truth” response?
Second, and perhaps most important, what does this situation say about the argument SAG has been making at the bargaining table? Their theme has been “NOW Media” as opposed to New Media and they mean that the studios are allegedly already making money in new media properties such as Hulu. 
Well, that is clearly not the case at Hulu and in fact the entire internet related segment of News Corp’s business has lost hundreds of millions of dollars in the last three years and is expected to continue to do so over the next couple of years.
As I suggested above that is precisely as it should be in a startup business environment. But that would not fit the theory adopted by Membership First. They want to argue that there is money there now and they want a share of it. If they were right that would make sense. But it does not make sense to make up profits out of thin air – that’s what killed the dot com sector, after all.
Does that mean that SAG cannot argue for a piece of the new media pie? 

Absolutely not. 
It just means that the approach being made by SAG won’t work. And, in fact, their membership seems to agree in light of the rising tide of opposition to striking for a share of profits that do not exist.
Instead of trying to make up stories about the greed of the employers, SAG should understand and explain how the industry really works. There is a very good argument for a share of future profits in new media, even now. In fact, that is exactly what happens at startup companies like Hulu or Vudu or Facebook. Employees are hired by the hundreds at below market wages in return for a piece of the action, not in the form of residuals but in the form of stock options.
Why shouldn’t the actors who create the content be able to share as well in those future profits? And can they really depend on the studios to be their fair representative in the deals being done between Hollywood and Silicon Valley such as that between Apple and the studios or Vudu and the studios? 
No, SAG should have a seat at the table so that its interests are protected. I made this very point back in 2006 when I was in discussions with the Guild.  
Instead, the Guild has gone in another direction. It appears they have fallen into a kind of populist argument about greedy studio heads (see the work of Nikki Finke at Deadline Hollywood Daily, for example, on behalf of Membership First) without comprehending the role of long term investment in creating a new industry. Now this has led the Guild, or at least some of its members, into propagating their own “fiction.”