Hulu was an early attempt by the big networks of (the owner of ABC), NBCUniversal and Fox to put a foot in the digital direct-to-home space when it was founded back in 2006. (CBS decided to stay out of the consortium.)
Back then, Netflix was only sending out movies via DVDs in the mail. Hulu launched a website in 2007 to deliver its exclusive network shows and started spending money on ad campaigns with Alec Baldwin.
Hulu was meant as a Big Three network hedge against the growth of "web video" and later the streaming threat of Netflix. As time has gone on, Hulu has changed leadership, has considered an IPO, and has considered a sale.
Ultimately, it has chosen to proceed independently and begin focusing on advertising and a new $40-a-month skinny bundle as its future.
It is one of a handful of over-the-top (OTT) networks with scale and reported over a year ago that it had 12 million subscribers. However, I believe its current 4-part ownership structure remains its greatest challenge to its future growth.
Today, the ownership structure of Hulu is:
Once the AT&T Time Warner deal closes, Hulu will be 10 percent owned by a company that competes against it with its DirecTV Now skinny bundle offering.
Would Hulu be able to grow more aggressively with a single owner? I think so — and this was also likely the thinking behind a possible sale a few years ago — because:
What are the reasons for these networks to keep Hulu's ownership structure as is? A big one is having to absorb losses, which are starting to add up. According to the last Comcast 10-K filing, based on its 30 percent holding, total Hulu losses were $61 million in 2014, $321 million in 2015 and $560 million in 2016. In a world where there is already fear about cord-cutting, anybody buying out their partners for full control of Hulu would have to be prepared to argue that the growth prospects of Hulu far exceed the risk of short-term losses.
In the video-streaming business, even the king, Netflix, isn't showing huge profits. Netflix's net income in the years 2014 to 2016 were $268 million, $123 million and $187 million respectively. That's not exploding profits to match their growth in revenues and subscribers. Amazon is using its OTT losses to drive more Prime memberships in its core business.
What are Hulu's unique advantages today from a content creator's perspective? Beatrice Springborn, Hulu's head of original programming, recently spoke to The Hollywood Reporter about this and provided this list:
Is this really so compelling? There's lots of money sloshing around, with the possibility of others such as Apple entering the fray. Good content will get made somewhere. Now, if Hulu had exclusive first looks at content with people connected to Fox, Disney or NBC Universal, that would be unique.
After last reporting its paid subscribers more than a year ago, Hulu now seems to be focusing on advertising revenues. It recently launched a complex tier of services at the recent Upfront meetings including:
It's possible that Hulu may never report another paid subscriber number, hoping that its skinny bundle instead takes off as their primary revenue source.
With the metrics they are sharing, Hulu is trying to indicate that their slow-and-steady approach is winning. They told advertisers that their hours viewed per subscriber are up 20 percent year-on-year and that their total streams are up 50 percent year-on-year.
But look at this chart from Mary Meeker. Hulu's share of video traffic over the Internet is up in 2016 from 2012 (it would be a shocker if it weren't), but it is about equal in share today to Xbox One's and still vastly trails Netflix. It's now also behind Amazon Prime, which has probably only accelerated in 2017.
How does Hulu win long-term in a sea of new skinny-bundle offerings? Network TV exclusive windows? All the other skinny bundles will have network TV as an afterthought. More bets on series exclusives like "The Handmaid's Tale"? It's unclear whether the circumstances which led to them obtaining that strong IP is a repeatable process.
The biggest challenge Hulu faces is that it serves four owners. This critique of Hulu isn't a critique of CEO Mike Hopkins. How do you successfully lead a company without a single strong owner?
The solution to me appears to be that one of the four owners should step up and take control, buying out the others. Disney and Comcast appear to be the most likely candidates. Fox needs to get into digital more but is currently preoccupied with sorting out its news division and completing the Sky deal. And, as mentioned before, AT&T already has DirecTV Now.
With a single owner, Hulu will likely expand internationally more aggressively and better define its content offering and whether it will take a subscription or ad-based approach. There are likely to only be a handful of premium content subscription services and Hulu still has the chance to be one of them — but that window is closing.
Disclosure: Comcast, which owns CNBC parent NBCUniversal, is a co-owner of Hulu.