United States – Hulu

Contributed by Ian Murphy

February 2018

Key Takeaways

• Hulu continues to run a distant third behind Netflix and Amazon for subscribers in the U.S.

• Hulu’s relative success in internet streaming stems largely from the intellectual property owned by its corporate media parents Fox, Comcast, Time Warner, and especially Disney.

• With the launch of its live television service and attempts at “appointment programming,” Hulu has begun to incorporate more practices of legacy television into the online space than competitors like Amazon or Netflix.

Market

Hulu entered the U.S. market for internet-based streaming of television and film when it launched its beta version in late October 2007, as a joint venture between News Corp, NBC Universal, and the investment firm Prudence Equity Partners. The service opened to the public in March 2008. At the time, Hulu was positioned as a challenge to Google’s YouTube, which had become a bastion for unauthorized circulation of television shows, movies, and short video clips. In this context, Hulu served as a studio-sanctioned platform for the distribution of professional video content owned by both NBCU and News Corp, as well as over 50 other media companies. In addition, Hulu initially partnered with Yahoo, Microsoft, AOL, Comcast, and MySpace to syndicate content to their websites, so that consumers could watch Hulu’s videos from outside Hulu’s website. Disney joined as a partner in May 2009, adding full-length episodes of programming from its ABC network and other cable channels like the Disney Channel. Time Warner bought a 10 percent stake in August 2016.

Other streaming competitors that emerged around the same time attempted to acculturate users to paying for content, typically through monthly subscriptions (Netflix) or sell-through transactions (iTunes). Hulu launched as an ad-supported, on-demand video streaming service to try to corner the market on free internet television (and provide an industry-authorized alternative for rampant piracy). It served as a catch-up service for both television programming and movies; TV shows would be available after they aired on broadcast or cable, and only for a few weeks, while movies were made available after their theatrical and DVD windows were fully monetized.

In addition, users were often offered a choice in the ad experience they were willing to endure to watch Hulu’s offerings. Sometimes, this meant choosing one from amongst a series of possible ads. Other times, this meant choosing between watching one long ad before the show began, then watching the show uninterrupted, or watching the show with an allotted amount of shorter ad breaks throughout. Hulu reported in the first year that the long ad option was immediately popular; when given the option, 88% of viewers opted into the long ad over the course of the first year. In the beginning, Hulu also typically carried ads from a single sponsor on a given TV program. Such sponsors would often run the same ad during each of the commercial breaks, although CEO Jason Kilar stated that Hulu would work with the advertising agency to try to vary the ads.

In 2010, Hulu introduced a paid-subscription tier called Hulu Plus that cost $7.99 per month, which was the same price that Netflix charged its streaming customers at the time. This marked an important shift in Hulu’s strategy by expanding its revenue base to a mixed subscription/advertiser-funded model. Hulu Plus existed alongside the free version, but offered subscribers more content, fewer ads, and the ability to access Hulu through a growing number of devices beyond the website, including TVs, mobile phones, tablets, and eventually video game consoles and digital media players like Roku or Google’s Chromecast. This mixed model, adopted from cable television, made Hulu unique among U.S.-based streaming services, which tended to be subscription only (like Netflix or Amazon Prime), ad-supported only (like the websites or apps for broadcast networks), or built for transaction sales like Apple’s iTunes.

In recent years, Hulu has greatly expanded the options for accessing its service. In September 2015, Hulu added a second tier of Hulu Plus that eliminated ads entirely for $11.99 per month. Hulu phased out its free ad-supported version in August 2016, moving to an all-subscription model. In a corresponding move, Hulu expanded distribution deals with partners like Yahoo (through its streaming service Yahoo View), Comcast’s xfinity.com, People.com, Time.com, and Vulture, to allow them to continue showing free ad-supported content from Hulu in exchange for ad revenue sharing. As of December 2017, the $7.99 and $11.99 prices for the two tiers of Hulu Plus are still in place, although Hulu dropped the “Plus” from its name in 2015 as part of a rebranding effort to simplify the service for potential subscribers.

In May 2017, Hulu beta-launched Hulu with Live TV, a stripped-down bundle of linear broadcast and cable channels, as well as live local station feeds in limited cities. Hulu with Live TV cost subscribers $40 per month and included access to its $7.99 on-demand service as well as 50 hours of DVR (with some limitations). There was a rush to internet-distributed live television in 2017, with an array of services from Dish’s Sling TV, YouTube TV, and Sony’s Playstation Vue, offering “skinny bundles” of live channels. Though they provided an alternative to expensive cable and satellite bundles, these services were still pricey and required internet service. They are growing slowly, as industry executives have estimated fewer than 3.5 million subscribers combined (out of 115 million U.S. television homes), as of October 2017.

Then in September 2017 Hulu announced a partnership with Spotify to bundle its ad-supported tier with Spotify’s Premium subscription music streaming service. This offer was marketed to college students and sold for $4.99 a month. Hulu also announced a partnership with Sprint, where customers of Sprint’s unlimited data plan would get free access to Hulu’s limited commercials plan. Such partnerships have become popular with other streaming services and mobile carriers, including T-Mobile and Netflix, and AT&T offering free HBO. Through this partnership, Hulu reportedly earns a share in Sprint’s subscriber revenue while also getting exposed to the growing number of consumers who watch video through mobile devices.

Hulu expanded its service in the midst of a growing U.S. market for internet-distributed video services. Comscore reported that in December 2016 more than 49 million homes used at least one internet-distributed video service, at an average of 2.2 hours a day. Hulu reached about 17 percent of homes that use such services, well behind Netflix’s 75 percent as of December 2016. With around 12 million subscribers as of May 2016, Hulu is a distant third in internet-distributed subscription video services in the United States, behind Netflix (over 100 million worldwide, and 50 million in the U.S.) and Amazon Video, a service that is part of Amazon Prime (an estimated 80 million in the U.S. though some Prime subscribers may not use the Video service at all) This market has become increasingly populated with services. As of the third quarter 2017, there are 202 subscription video services operating in the United States (both on-demand and live options), including 60 that have been introduced since the start of 2016.

Regulation

Regulatory concerns about Hulu are mostly tied to its corporate parents. Hulu served as a test case in the regulation of emerging internet-distributed video services, largely because it was built by legacy media content owners to control the conditions under which that content could circulate online. In 2011, Comcast, the country’s largest cable and internet provider, purchased NBCUniversal. Part of the Justice Department’s stipulations for approving that merger was an agreement that NBCU would vacate its position on Hulu’s board. This gesture was meant to allay concerns shared by the Justice Department and internet freedom advocacy groups that Comcast would unfairly discriminate against online competitors to its video services, since Comcast had economic stakes in content and served as the (sometimes monopoly) conduit through which the content travelled. Comcast had already been caught several times throttling traffic for certain services running through its network, including the popular file sharing protocol BitTorrent.

In December 2017, Disney announced a plan to buy most of News Corp-owned 21st Century Fox, including Fox’s 30% ownership stake in Hulu. If the deal is approved by the U.S. Justice Department, Disney will be Hulu’s majority owner.

Viewing Habits

Hulu tends to be used by younger people. A July 2017 survey by Morning Consult reported that approximately 31 percent of people aged 18-29 watch television on Hulu at least once a day. In addition, users have been moving away from watching on computers and through web browsers, and toward a variety of devices now linked to the television.

According to Hulu, those who do use the service tend to prefer some form of binging, claiming that “60 percent of viewers tell us they like to watch multiple episodes of a series in one sitting,” 32 percent prefer to watch week-to-week and 8 percent “frequently choose to binge an entire season or series in a single day.” Hulu reported that on average 66 percent of viewing of The Handmaid’s Tale happened within the first three days of the episode’s release, according to their viewer data. In addition, 60 percent of viewers who did not start watching until after the release of the season finale finished the entire series in one week, while 30 percent reportedly finished within three days.

Internet Pricing and Availability

According to Pew research, around 90 percent of American adults use the internet, and 75 percent have high-speed broadband service at home. Approximately 62 million people in urban areas, as well as 16 million in rural areas, do not have access to—or can’t afford—broadband internet. While its average internet speed still lags compared to many other countries, the U.S. did climb into the top ten as of the first quarter 2017. Traditional broadband growth has stagnated in recent years in the U.S.; approximately 10 percent of American adults only access the internet through their smartphone.

Content

Initially, Hulu was a catch-up service for broadcast and cable programming and film, marketing its capacity for offering on-demand access through multiple devices, thereby untethering viewers (at least somewhat) from legacy programming restrictions. Founding CEO Jason Kilar estimated that in the first three months after its launch, over 90 percent of content on Hulu was from its two corporate parents.[1] Hulu has continued to diversify its content offerings. In June 2008, Viacom started offering episode of The Daily Show with Jon Stewart and The Colbert Report on Hulu, becoming one of the first major third-party content partners.

Hulu’s content strategy largely depended on developing a symbiosis between traditional means of accessing television and film and the emergent opportunities for distribution that the internet represented. For years, internet-based video-on-demand services have been in conflict with studios and networks over when television content would become accessible through their services after its initial broadcast. At the heart of such negotiations since at least 2013 are “in-season stacking rights,” which are the on-demand rights to all episodes of a show that is in the midst of airing. Initially, on-demand rights for MVPDs only included the “rolling five”: the last five episodes of a show that aired would be available for consumers to view on-demand. Networks eventually became more aggressive in “stacking” episodes by providing consumers access to all, rather than the most recent five, through cable video-on-demand services. SVOD services like Netflix and Amazon argued that this practice devalued the content for them and began to demand discounts on licenses to full seasons of programming.

By contrast, Hulu has proven to be more amenable in many cases to the demands of traditional television powers, including its corporate parents. In 2015, for example, Hulu outbid Netflix for on-demand rights to the Fox show Empire while also voicing support for Fox’s stacking practices. In addition, Hulu promoted current seasons of a given show so that viewers might tune-in live, and kept the original network’s branding: a show would clearly be marked with the familiar logo of Fox, NBC, FX, AMC or others, even when viewers were watching through Hulu’s service.

Hulu has populated its content library through a combination of variable-cost licensing—especially ad-revenue sharing agreements—and fixed-fee licensing. According to The Wall Street Journal, sometimes Hulu added full current seasons of content produced by the in-house studios of its parent companies Disney, Fox, and Comcast/NBCU without having to pay a license fee.[2] Instead, Disney, Fox, and Comcast/NBCU “can choose to direct their share of monthly subscription and ad revenue” to offset the costs of producing those shows in the first place.

Adding tiered levels of service initially signified Hulu’s experiments with new video on-demand windows that content rights holders might embrace. For some time, legacy content rights holders were concerned that Hulu might end up cannibalizing the linear television business. In 2010, Business Insider reported that Hulu paid content partners upwards of 80 percent of the advertising money it made, per the terms of its revenue-sharing agreements. Hulu created the subscription tiers—hiding much of the content on their service behind a paywall—in part due to pressure from major content suppliers who were frustrated by the relatively low ad rates that advertisers would pay. Jason Kilar argued that even from its earliest days Hulu was planned to eventually embrace a subscription model: “Hulu’s birth was a function of what rights as a team we could secure. The rights that were available were for free, ad-supported. Our strategy was to launch using those rights, get to scale, and be in a position to secure the more valuable subscription rights.”[3]

Hulu has begun to focus on exclusivity in an effort to differentiate itself in an increasingly crowded marketplace. Not only did Hulu get rid of its free tier, thus putting its service entirely behind a paywall, but it also started aggressively bidding on exclusive rights for high profile content like Seinfeld, and began to invest in original programming. Hulu quietly premiered a few original programming projects in 2013 like East Los High and Behind the Mask, which garnered small audiences. Hulu became much more aggressive in developing and promoting original programming in 2015, when company executives announced deals with JJ Abrams and Jason Reitman and pledged to increase their marketing budget by 70%. Hulu’s original programming expenses rose to $2.5 billion in 2017.

Hulu’s foray into original programming marked a pivot in its content library development, moving Hulu into the primary distribution window, where viewers could watch new content for the first time. But it has done so largely by mirroring the conventions of legacy television. For example, Hulu has largely stuck to a one episode per week release schedule for its original programming (with only a few exceptions like the now-cancelled Burn Notice), unlike Netflix and Amazon, which often release an entire season of a show all at once. This distribution strategy reflects Hulu’s decision to produce and market programming that is “appointment viewing”: that is, programming that people feel compelled to watch when it airs, or within a brief window afterward. In addition, Hulu has built out its library in terms of offering its own kind of channel bundles. For instance, it offers add-on subscriptions to libraries of premium cable channels HBO, Showtime, and Cinemax for an extra per-month charge. Also, the launch of its live television service has signalled Hulu’s interest in prioritizing the practices of linear programming. In these ways, Hulu is starting to feel more like a traditional cable company, but one that is targeting younger viewers—the so-called “cord-nevers”—who prefer to access content through the internet.

Consumer and Press Reaction

Although it is backed by four (and soon three) of the preeminent media companies in the world, Hulu has failed to achieve the same kind of recognition as Netflix and (more recently) Amazon. It faced some public resistance in 2010 when it launched its subscription tier, but recovered well in the intervening years in large part because it provided an alternative for accessing current programming of legacy providers outside of broadcast or cable distribution.

While Hulu continues to be less popular in the United States than Netflix its strong focus on original content is starting to bear fruit in terms of positive recognition from the press and consumers. This culminated in early 2017 with the widespread recognition of The Handmaid’s Tale. The show garnered thirteen Emmy nominations and eight wins, including the first award for outstanding drama series by a streaming service. This success helped to establish Hulu’s status as a producer of original television programming. Hulu executives reported that average daily users nearly doubled between March 2017 and September 2017, following the release of Handmaid, the launch of Hulu’s live service, and an interface redesign.

Subscriber Estimates

Exact revenue breakdown is hard to come by, but Hulu CEO Mike Hopkins told CNBC in May 2017 that “almost half our revenue is advertising.” Total revenue estimated for 2017 is $2.4 billion, according to analysts from JP Morgan Chase. Hulu lost around $560 million in the first nine months of 2017, according to quarterly SEC filings from Comcast.

Hulu reported around 12 million subscribers in May 2016. In 2017, executives decided to switch the user metrics that Hulu discloses to the press, from subscribers to “unique viewers.” In September 2017, Hulu reported 47 million unique viewers. In May 2017, Hulu claimed that 32 million of those viewers (approximately 68 percent), use the ad-supported version of the service, while the rest use the more expensive version without advertising. According to a survey published by Socratic Technologies in February 2017, 23 percent of consumers who subscribe to online video or music services reported paying for a Hulu subscription.

Broader Reach

Hulu’s only noteworthy efforts to expand internationally came when it launched in Japan in late 2011. This international streaming experiment lasted until 2014, when Hulu announced that it was selling its Japanese subsidiary to Nippon TV, which then licensed Hulu’s brand and content while assuming day-to-day operations. Now “Hulu Japan” is Hulu in name only.

However, international expansion became a point of contention between Hulu executives and its corporate parents. According to Jason Kilar, a “head of international” was hired back in 2008 to “ensure that Hulu would become a global service as quickly as possible.”[4] This aggressiveness was tempered by Fox, NBCU and then by Disney when it joined in 2009. Each of these companies already had traditional television distribution businesses in place all over the world. Kilar argues that the corporate parents felt uneasy about Hulu expanding into other territories “where Hulu’s success would clearly suggest that their traditional assets would decline in relevance.”[5] Japan was agreed upon because it “was the only territory where Fox, Disney, and NBCU did not have material distribution businesses via traditional means.”[6]

Hulu has not launched anywhere else in the world as of February 2018.

[1] Email interview with dossier author, January 9, 2018.

[2] Link is behind a paywall. Ramachandran, Shalini. “Streaming Era Sets Off Battle Over TV Rights,” The Wall Street Journal, 29 Nov 2015. https://www.wsj.com/articles/streaming-era-sets-off-battle-over-tv-rights-1448793184

[3] Email interview with dossier author, January 9, 2018

[4] Email interview with dossier author, January 9, 2018

[5] Ibid.

[6] Ibid.