SAG Maintains Hulu Profit Myth

I tried explaining the problem with SAG’s assertion that Hulu is profitable to a leading SAG activist, Arlin Miller, who hosts a website known as part of the Membership First camp that now controls the top staff and leadership of SAG (including the large Hollywood Division although it no longer controls the National Board).

The response I received was, to say the least, disconcerting. Quite frankly, it appears as if Miller and those in Membership First who are behind his site do not seem to understand how financial statements work or how business models in new media work.

Miller contended that the discussion about profitability of Hulu is irrelevant because it is really gross revenue that matters to actors because they are the source of residuals – but Hulu is an exhibitor so it does not pay residuals!

Miller also continued to maintain that SAG had many sources of support for the claim that Hulu is profitable and pointed readers on the Actors Access forum where he posts regularly to thousands of citations of the claim that Hulu generated either $12 million in profits or net revenues last year. Of course, all of those sources based their conclusion on one research report from Global Media Intelligence which made it clear that its estimate of $12 million was net revenue not profit.

(I have obtained a copy of the GMI report authored by Arash Amel and will blog on it soon.)

When I responded to these claims, Miller made a very odd charge that nearly three years ago, when I was the leading candidate to become SAG’s NED and withdrew over differences on governance issues, I submitted to SAG a “fudged” resume. Miller refuses to provide any basis for the claim and since Miller was not involved in the NED selection process he would have no access to the resume I did submit. Of course, there is no basis to his claim but he has refused my request to either back up the claim or apologize. Another Membership First advocate, Robert Amico, made the same charge a few days earlier and when challenged by me on it, apologized and admitted he had nothing to back up his claim.

I have asked a senior SAG officer who was on the search committee at the time of my candidacy for an explanation.

Here is the response I posted tonight to Miller’s claim that it’s now, in fact, gross revenue that matters as well as his attempt to bolster SAG’s claims about profitability.

SAG said Hulu was “profitable” to the tune of $12 million in its Truth v. Fiction response to the AMPTP.

SAG did not say anything about Hulu’s revenues.

Since residuals are as Arlin reminds us all deducted from Gross Revenue (the top line number) not Net Revenue or Net Profit, why would you print the $12 million number at all?

If the fish you are after here is Gross Revenues then what’s the point of dealing with minnows like Hulu? (See below comment by analyst Amel.)

There are much bigger sources of Gross Revenue out there than little old Hulu.

Of course, Arlin engages in “gross” simplification to say that residuals are based on “gross revenues” as there are dozens of residual formulas depending on platform.

In the case of Hulu right now it would be the proposed move over residual formula which in fact does not key off of Hulu’s gross revenues at all. Hulu in this case is likely an exhibitor not the producer or distributor.

The AMPTP offer on this issue – which I gather SAG has already in fact agreed to as have the other guilds – is to pay no residual for a period of 17-24 days; then pay 3% (in year one of the CBA) of the “applicable minimum” for a 26 week period of streaming and then another such fee for an additional 26 weeks and then 6% of “Distributor’s Gross” for streaming beyond one year.

So for the first year, Hulu’s gross revenue (and that of the producer for that matter) is not at all relevant since the residual is keyed to a fixed minimum.

And in the second year the key is distributor’s gross, and Hulu is not a distributor. They are the licensee (more like a TV broadcaster). The residual cash flow generated by an episode of a SAG TV show on Hulu comes out of the pocket of the producer.

Of course, certainly the license paid by Hulu could go up or down depending on the deal they drive with a content producer for license fees. So let’s assume whether Hulu is “profitable” is relevant here.

SAG says it wants to make money if and when the studios make money. But Hulu is not “making money.” Thus it is unfortunate, in my view, that SAG put its credibility at risk in this manner.

SAG did not identify the source of the $12 million “profitable” figure. Since Hulu is privately held its financial statements are not part of the public record. Thus, unless SAG has access to information that is not available to anyone else in the public domain it has no basis for their statement.

If SAG got the $12 million number from published media sources, then those sources are all based on a report prepared by Arash Amel, an analyst with Screen Digest of the Global Media Intelligence group in London. I have obtained a copy of the 12 page report and will blog more fully on it soon.

In it, Amel wrote:

“We estimate that Hulu will generate gross revenues of over $65 million this year…After delivery costs and payments to affiliates and content owners, we think Hulu will have generated gross profits [the UK conventional term for net revenue] before SG&A of nearly $12 m – for a gross margin of 18% in 2008. Of course, revenue of this size will not make a dent in the bottom line of either GE or News Corporation this year, nor do we expect the gross margin to lift significantly in 2009 given trends in the advertising and video delivery sector.” (emphasis added)

You will notice that most of the media sources say that Hulu earned $12 million in “net revenue,” which is NOT the same as profitability.

If those media sources reported the $12 million as “net profit” rather than “net revenue” they made a mistake as did SAG. In fact, the Wall Street Journal’s Peter Kafka who blogs at the Journal’s All Things Digital has now admitted that he initially said Hulu earned a $12 million profit but has admitted he was wrong, that the Global Media Intelligence report stated the $12 million was just “net revenue” not “net profits.”

To remind those who may not be familiar with the intricacies of Income Statements, Net revenue is Gross Revenue (top line sales revenue) minus Cost of Goods Sold (as Amel described above the payments to affiliates and content owners for video product) prior to the deduction of Operating Expenses (such as salaries as part of what Amel called SG&A) and then interest, taxes, depreciation and amortization.

Funny that a union would forget about the fact that Hulu has to pay its employees first before it can figure out its actual profits!

To have positive “net revenue” only means that you sell your product for a higher price than you paid to obtain the raw materials that go into your product (in this case those payments to Fox or NBC for the videos). That’s nothing to write home about and it does not mean you can hand over any of those monies to investors.

To be “profitable” – to be able to hand over money to your investors – you have to pay the other expenses I mentioned above.

Of course the Guild can negotiate to be paid alongside regular employees as part of the operating expenses prior to shareholders – not a bad idea at all, in fact, but you can’t state that the company is profitable just because it has money left over after selling its product sufficient to pay its employees!

The only way to pay investors then is to deprive employees of their wages!

Is this just “minuchia” [sic]? [as Miller claimed]

Maybe.

But then why is it such a central part of SAG’s “education campaign”? Why is Arlin Miller wasting his time attacking a mere “professor” (which I never realized was a swear word)?

Perhaps for the same reason that he and some of his friends spread rumors and lies about me and my background – these facts make clear the problems that SAG’s current leadership has created for itself and they would rather obfuscate than admit their mistakes and figure out real solutions.