The Crisis at Hulu
Two competing business models seek to redefine the innovative company.
In 2007, the mere rumor of what would later be known as Hulu sent the media into a frenzy. Those headlines, however, weren’t singing the praises of a revolutionary new video service, but were laughing at NBC and NewsCorp’s seemingly off-the-cuff response to Google’s recent acquisition of YouTube in 2006 (fun fact: Hulu’s early critics fell in love with Netflix’s online streaming announcement just two months earlier). In less than a year, Hulu rose to being a leader and key player in the streaming video category, the television industry, and the digital ecosystem as a whole.
Reduced to its simplest form, Hulu streams videos. The site streams video from content providers like NBC, FOX, and ABC (although not an original partner, ABC now owns 1/3 of the company) and produces its own original programming. Hulu has a total of 488 content partners that provide 68,000 hours of video to users. Originally, the site acted as an aggregate and viewing area for shows, as well as a search engine that directed users to network sites where they could stream their shows. Today, the site only shows content that providers have made available. Hulu offers a paid subscription for $8/month to the site that provides users with additional features, aptly named Hulu Plus. Hulu Plus users receive more content and increased access to that content. With a subscription, users are able to watch all the episodes of a show’s current and past seasons. The standard version of the site usually only has the five most recent episodes of a show available to watch. Hulu Plus also allows users to stream content in more ways than on a computer, which is all that’s offered with the free version. Hulu Plus is available on many devices ranging from phones to gaming systems to televisions.
Although Hulu drastically changed the way in which we consume television, it did little to steer away from the decades old advertising model of broadcast television. When a regular user is watching something on Hulu, they are shown ads at the beginning and intermittently during their show. A main goal of the company is to provide the best user experience as possible and advertising is not exempt from that. Hulu’s advertising platform allows users to say whether or not an ad is relevant to them, pick the ad they want to see from a predetermined list, swap out the ad they’re watching for another one, and answer questions to better target ads in the future. Users can also watch one long ad at the beginning and receive ad-free programming the rest of the time or engage with the ad to skip it. Hulu is very quick to point out that it typically shows a quarter of the amount of advertising compared to traditional broadcast TV.
Hulu primarily uses this advertising pricing model, but also utilizes a freemium strategy for its Hulu Plus offering. For $8 a month users can watch more content on more devices than just a computer. Those two incentives are really the only additional features you get with a subscription. Some networks, like ABC and Fox, release their shows to Hulu a week after they’ve aired, but with Hulu Plus you can access them the next day. However, if you subscribe to a cable provider you can connect your account with Hulu and get immediate access. Hulu Plus subscribers are still shown advertising even though they are paying for the “premium” service. The site likely can’t afford not to show ads to Hulu Plus subscribers because the revenue from them isn’t enough to pay for the programming.
Hulu likely relies on this combination of advertising and subscription revenue due to the high cost of airing new episodes from shows. The New York Timesstates that Hulu pays content partners between 50 and 70% of advertising revenue depending on the licensing deal with the providers. This means Hulu only keeps between 30 and 50% of the profits from advertising. The company makes up for these losses with revenue from Hulu Plus subscribers. Hulu announced at the end of 2013 that it had passed the five-million Hulu Plus subscriber mark, which would translate to at least $480,000,000 in subscriber revenue alone ([$8 x 12mos] x 5M). That would account for a little under half of Hulu’s reported $1B in revenue for 2013, meaning the retained advertising revenue for 2013 was $520,000,000. If we assume that Hulu keeps 40% of ad revenue (the average of what’s estimated), then that would mean the company paid about $780,000,000 to its content partners last year. If Hulu were to ditch advertising and move to a solely subscription based service, it would have to raise it’s subscription price for its current subscribers to almost $30 a month or enroll 8.5 million new users to be able to continue paying its content providers as well as itself. The chances of one of those happening seems very unlikely because new shows can often be seen on network websites for free and most of Hulu’s full series shows can be accessed on Netflix for the same price as Hulu Plus.
Transitioning to a subscription only site seems out of the realm of possibility for Hulu, but what about relying solely on advertising? The company likely introduced Hulu Plus and original programming as ways to compete with Netflix who has become known for its extensive catalog of full television series and movies and widely acclaimed original series like House of Cards andOrange is the New Black. However, Netflix has lower costs from not showing new episodes of shows, more revenue coming in due to a tiered subscription system with higher prices, and has already shown itself to be a strong content producer in addition to a strong service provider. Hulu could remove it’s subscription service and the additional benefits that go along with it, but doing so would hinder it from competing with Netflix, as well as lower the its revenues.
Despite passing $1 billion in revenue last year, it’s clear Hulu is having a pricing identity crisis. NewsCorp and ABC are reportedly looking for buyers and debating what pricing strategy to focus on and move forward with. Hulu’s best bets seem to be to focus on advertising, building their original programming offerings, and acquiring exclusive access to certain programs. These would allow Hulu to continue earning money where it’s been most successful and to better compete with Netflix. However, the recent Supreme Court ruling on net neutrality, if upheld, could raise costs for bandwidth heavy sites like Hulu and Netflix, which would in turn force Hulu to increase advertising and risk alienating their users.
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