Why Hulu is ditching free streaming, focusing on subscriptions

Ted Soqui | Corbis | Getty Images

Hulu is taking a final step away from its roots in free content and embracing a future that's all about paid subscriptions.

After rolling out its first subscription service in November 2010 — and adding an ad-free premium subscription service last year — Hulu is phasing out its free service, which has allowed people to watch, at no cost, the five most recent episodes of many ABC, NBC, and Fox shows, eight days after they've aired on TV.

The digital video service launched in 2008, offering free, ad-supported shows from its parent companies, NBC Universal and Fox, with Disney coming on as a joint-owner the following year.

Hulu had already been moving in this direction; it's been encouraging visitors to sign up for a free trial, and making it harder to find those free videos. The company has roughly 12 million paying subscribers, and it says the number of people watching free content on its site is minimal. But Monday's move is still notable, in that it shows Hulu's media giant parents — Disney, Fox, Comcast and most recently Time Warner — pushing to focus on subscribers.

They're looking to maintain the dual revenue stream business they have counted on for years in the combination of subscriber fees and advertising from broadcast and cable TV. And they're gearing up to launch Hulu's live TV service in 2017, which will be a next-generation TV bundle, cutting out the middleman and allowing the media companies to go straight to consumers.

How does Hulu fit into expanding OTT universe?
How does Hulu fit into expanding OTT universe?

Thanks to another deal announced Monday, with Yahoo, consumers will still be able to access those free shows on Yahoo's new TV-watching portal, Yahoo View, rather than Hulu. Yahoo View will be a new online video portal that will include Hulu's free shows, as well as short-form extras and clips from Tumblr.

"We're committed to delivering the best digital video content to our users," Yahoo's vice president of lifestyle products, Jess Lee, said in a news release. But this latest change, in the wake of Yahoo's sale to Verizon, speaks to the company's struggle to figure out its purpose.

It'll be interesting to see how Yahoo's approach to video might change once the deal with Verizon goes through; Verizon has its own approach to video, with its Go90 service. It's too soon to say whether this Hulu content would also appear on the Go90 mobile video service.

In light of an exploding number of options, Hulu is certainly positioning itself as a premium alternative. It currently costs $8 for the subscription that includes advertising, while the ad-free version costs $12. Subscribers can add Showtime for $9 a month.

The live TV bundle that's in the works will cost substantially more: about $40 a month. But that coming bundle will be a digital alternative for a cable or satellite TV package that could cost twice as much as that. And unlike those TV bundles that go through distributors, the media giants themselves will see the full benefit of both the subscription and the ad revenue that they bring in.

When Hulu was created nearly a decade ago, YouTube was the real rival to watch. Now it's clear that while YouTube and all that other user-generated content competes for users attention, premium content is in a field of its own. That said, there are more companies creating premium content than ever — including Netflix and Amazon.

The landscape has shifted in the past decade, so the media giants are focused on making sure that they protect their two key revenue streams, even if that subscription and ad revenue is coming via broadband streaming rather than cable TV.

Disclosure: Comcast, which owns CNBC parent NBCUniversal, is a co-owner of Hulu.

Disclosure: CNBC has a content-sharing partnership with Yahoo's finance site.