This has been the year of streaming television. Broadcast channels, cable networks and technology companies are all making the leap into a future where TV refers not to a box in the living room, but to any kind of video delivered over the internet to the screen of the consumer’s choosing.
Netflix and Amazon dominate the race to capture consumers’ attention and entertainment budgets, first building big audiences at home in the US and more recently pushing into Europe and Asia.
But a sleeping giant may be getting ready to wake up and make its move. Hulu, the digital video service jointly owned by Walt Disney, 21st Century Fox and Comcast, has been splashing cash on top-quality content including the hit Fox drama ‘Empire’ and ‘Seinfeld’, the classic US sitcom.
Viewership is up 85 per cent and subscriptions have risen 60 per cent from a year ago, Fox told shareholders on its third-quarter earnings call. Hulu announced in April it had reached 9 million subscribers. The loss-making company, however, is still being outspent by Netflix, which has 43 million US members, and Amazon, which gives its estimated 40 million Prime members access to its instant video offering for no additional charge.
Now one of Hulu’s owners is talking openly about international expansion — an area from which the service has previously shied away. “Today it’s a very relevant part of the landscape for customers in the US,” said James Murdoch, Fox chief executive. “I think in a number of years we have decisions to make around, do we take it to other countries? Probably more likely than not if it continues to be successful here.”
Mike Hopkins, Hulu chief executive, says the company is looking at international opportunities but has no specific plans. “If you look at adoption and broadband penetrations around the world, it’s compelling and something we will take a look at,” he told an industry conference in October.
Since taking over executive duties from his father Rupert Murdoch in July, the younger Murdoch has been outspoken about the continuing strength of the TV industry while also calling for better advertising and a re-evaluation of Netflix’s dominance in streaming. He said Fox is licensing more content to Hulu as “the business rules are changing and our thinking is evolving”.
Whether Hulu will be able to accelerate its growth and swing from loss to profit depends on whether its trio of owners have the stomach for an investment plan that risks cannibalising their lucrative relationships with cable and satellite companies.
Fees to carry their channels in pay-TV packages make up a significant proportion of media owners’ revenues. They also derive millions of dollars in advertising sales from traditional television.
Both of those revenue streams will come under pressure if more consumers opt to “cut the cord”, trading pricey cable bundles for streaming options such as Netflix, Time Warner’s HBO Now — and Hulu.
Netflix has so far borne the brunt of the industry’s anxieties over cord cutting, with media owners asking if they are getting fair value in return for licensing their content to streaming platforms. In addition to Murdoch suggesting his company might reconsider its deals with Netflix, Jeff Bewkes of Time Warner and David Zaslav of Discovery Communications have also questioned whether the streaming company is friend or foe.
Reed Hastings, Netflix chief executive, has responded that Hulu presents a bigger risk, because it allows viewers to watch episodes of network shows without commercials the day after they air on traditional TV. “Hulu is even more of a cord-cutter’s dream than Netflix is,” he said on the company’s most recent earnings call.
Analysts agree, especially in light of reports that Hulu has approached Time Warner to become an investor and bring more of its programmes on to the service. “If Hulu does become a stronger service, we think it only increases pressure on cord-cutting and advertising,” says Todd Juenger of Bernstein Research. “It’s one thing if potential cord-cutters are considering giving up the pay-TV bundle and having Netflix as their primary alternative. It’s different if they have Netflix and a stronger Hulu.”
The question of Hulu’s owners’ willingness to unleash the streaming company’s potential is not a new one. The service was launched in 2008 as a joint project of NBCUniversal, now owned by Comcast, and News Corp, then owner of Fox, with Disney taking a stake in 2009. The parent companies have long been seen as unwilling to invest robustly and have put Hulu up for sale more than once.
In 2013, it drew interest from bidders including AT&T and the Chernin Group, whose chairman, Peter Chernin, was involved in Hulu’s early development when he was News Corp’s chief operating officer. But Hulu’s parents abandoned the sale and promised a $750 million infusion instead.
Since then, Hulu has hired more than 300 employees, ramped up marketing, signed advertising partnerships to improve targeting and boosted its content budget. It outbid Netflix for exclusive rights to Empire, beat Amazon and Yahoo to secure Seinfeld and inked a multi-year deal with Epix, an entertainment network, for movies including the ‘Hunger Games’ franchise and ‘Transformers: Age of Extinction’.
It has picked up original shows, including the cancelled Fox sitcom ‘The Mindy Project’. It has also signed agreements to make Hulu available through cable operators’ set-top boxes and partnered with Showtime to offer the premium network’s online service at a discounted rate to Hulu subscribers.
But rising costs have led to Hulu’s owners anticipating that losses will accelerate. Disney said the equity loss from its stake dragged down operating income at its broadcast division in the third quarter.
“The question is, when are the partners going to put in a substantial amount of capital to fund long-term US expansion as well as international expansion?” says Rich Greenfield, analyst at BTIG Research. “Hulu needs to make money — $750 million was fine but now they need $1.5 billion.”
Hulu has tried for international growth in the past. The company launched a service in Japan in 2011 but sold the business three years later to Nippon TV as it focused on the US.
Barriers to international expansion are plentiful. Hulu would have to navigate a complicated array of rights agreements and territorial sales and some of the shows it offers in the US — including those owned by its parent companies — might have been sold to other providers overseas. Disney recently announced plans for its own streaming service in Europe.
In the US, Hulu may also find itself increasingly in competition with its owners. Variety has reported that Disney-owned ABC is developing original shows for its own streaming platform — not Hulu. NBC has announced a subscription video service focused on comedy that will show both original and licensed content.
“There is room for more than one successful global streaming player,” Greenfield says. “They want somebody to foot the bill.”
Financial Times
