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Hulu doubles down on dual revenue model

140211 Hulu splash

Hulu had a trio of content announcements and a new executive hire today, showing the company’s continuing commitment to the dual revenue Hulu Plus model. The subscription arm of Hulu receives the lion’s share of the premium content, though there was a little something for free viewers too.

In separate announcements, Hulu CEO Mike Hopkins said the company has extended its relationship with CBS, inked an exclusive deal for ABC’s Nashville and bolstered its kid’s library with exclusive access to Fraggle Rock spinoff The Doozers. Some of this content will be available to all Hulu users for free, but content from current shows generally will only be available to Hulu Plus subscribers. For example, the CBS deal brings Everybody Loves Raymond and Wings to all Hulu users, but episodes of Blue Bloods and Elementary will be available to Hulu Plus subscribers only.

The dual revenue model online is unusual. Both Netflix and Amazon have eschewed advertising as a source of revenue, instead relying exclusively on subscriptions to generate revenue. For Netflix, this has been a magic formula, generating over 33M domestic subscribers to date, with no end in sight for strong growth.

However, Hulu is also growing subscribers strongly. In December, Mr. Hopkins announced the company had added 2M subscribers in 2013 to reach 5M, a 66% gain. This despite the fact that Hulu Plus viewers watch ads during the shows.

Hulu 2013 Revenue SplitThe revenue picture for Hulu is very different to Netflix. Hulu Plus charges the same subscription rate as Netflix, $7.99 a month, and this generated around $120M in the fourth quarter of 2013. However, Mr. Hopkins says Hulu will earn $1B in 2013. That means most of the revenue is coming from advertising, not subscriptions. I estimate 59% of Hulu’s revenue comes from ads.

With ads the most important component of Hulu’s revenue structure, little wonder that the company has just hired a new head of ad sales, Peter Naylor, from NBC News Digital. He will be tasked with continuing growth in an already very effective ad organization. Hulu delivered the eighth most video ads in December 2013, according to comScore, but it did that with far fewer viewers than other sites. It was able to do this because viewers watch for an average of 50 minutes per viewing session. That means the average Hulu viewer saw 82 video ads in December, compared to 30 or less at other sites.

All of this must make Hulu’s owners (Fox, Disney and Comcast/NBCU) very pleased they did not sell Hulu to a pay-TV operator last year for a rumored $1B. The fights between broadcasters and pay-TV operators are sure to continue this year. Meanwhile, Hulu delivers essentially the same thing (license and ad revenue) without all of the encumbrances of pay-TV, and entirely under the control of the broadcasters.

Mr. Hopkins and Mr. Naylor have their work cut out to keep revenue growing. They must play a delicate balancing game in coming months. Maintaining subscriber growth and engagement times and increasing ad revenue could be at odds if the company tries to increase the number of ads inserted into the shows. For now, at least, they seem to have a formula that works.

Why it matters

Hulu is proving that the dual revenue model of subscriptions and ad revenue can work online.

The company continues to invest in premium content for Hulu Plus, to help continue growth in subscribers.

Continued ad revenue growth is also critical, though increasingly the amount of ads in the shows could be counterproductive.

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