There is much debate about what will happen to Hulu once Disney takes control. However, continuing to invest in the service is the smart move as Hulu can act as the bridge to Disney’s DTC future.
Hulu reflects the market today
More than any other service, Hulu embodies this transitional moment in television history. It stands astride the old linear world and the new digital frontier. Consider what the 20 million Hulu subscribers find inside the Hulu experience:
- An on-demand service – Hulu basic – providing newer television shows
- A pay TV service – Hulu Live – including linear and DVR functionality
- Online originals such as the Emmy-winning The Handmaid’s Tale
- Ad-free viewing available to much of the on-demand content
- Ad-supported viewing is available at a lower price.
77% of U.S. households still subscribe to traditional pay TV, and over half of U.S. homes have both pay TV and at least one SVOD service. Online originals now regularly attract audiences as large as traditional TV shows. For example, Stranger Things 2 attracted 15.8 million viewers in the first three days of its release. The Walking Dead’s season 8 premiere on regular television attracted 15 million viewers in the same period.
Consumers are living between two worlds, and that is exactly the turf that Hulu has staked out.
Disney’s future is direct-to-consumer (DTC) online
Disney has realized that it must evolve with its audience. It will deliver an SVOD service in 2019 which will showcase its most desirable content. The company to price the family-friendly service aggressively below Netflix.
Disney has also delivered ESPN+, which Bob Iger, Disney CEO, has already proclaimed as the future of the sports network:
“Over time, our intention would be for that app to be the app that people experience ESPN on.”
ESPN+ provides access to a variety of non-premium live sports and ESPN originals for $4.99 a month. It also acts as an aggregation point online for other sports. Users can subscribe to premium sports, like MLB, from within the experience.
Disney sees its future as a series of services that it sells direct-to-consumer online.
Hulu – the bridge to the DTC future
There is no question that consumers are moving their TV viewing to online sources. The 20 million active Roku users each watch 2 hours and 40 minutes a day through the Roku TV platform. That said, most are not ready to give up the ESPN channel or abandon favorites like ABC and the Disney Channel. That is where Hulu comes in.
vMVPDs allow consumers that are watching more online and less on traditional TV to save money while retaining access to their favorite TV channels. Hulu Live is a great example. For $39.99 a month, subscribers get access to ESPN, Disney Channel, ABC, and 70+ more channels including sports and news. A ‘Live’ subscription also includes Hulu on-demand content, and DVR support is $5 more per month.
It will take time for consumers to adopt Disney’s new DTC online services. Hulu can help consumers find them. Disney can add in ESPN+ to Hulu as a premium add-on and do the same when the new Disney DTC service appears next year. It can also continue to evolve Hulu’s model as market conditions change.
Keeping Hulu together will not be easy
It will not be easy for Disney to keep Hulu going once it assumes majority control. The relationship with Comcast, which owns a third of Hulu, will be particularly challenging. Control of Hulu, and the vMVPD Hulu Live, makes Disney look more like a competitor to Comcast than a partner. If Comcast pulls NBC hit shows like This is Us, The Good Place, and Superstore it could seriously undermine the value proposition of Hulu. Finding a way to keep Comcast and other content providers on board will be a critical test for Disney.
Hulu lost nearly a $1 billion last year as it invested heavily in original productions. However, given the value that Hulu brings Disney, it is certainly worth continuing to bankroll the service for a while. As well, Disney’s prowess in content production may help Hulu cut those cost considerably.
No one can say with certainty where the television market will be in 10 years. However, in the short-term Hulu can help Disney navigate the journey far better than a set of disparate DTC services can.
Why it matters
Hulu embodies where the market for TV services is right now in the US.
Disney sees its future as a set of direct-to-consumer online services.
However, most consumers will take time to transition away from traditional TV to DTV apps.
Hulu can help Disney bridge the gap between where consumers are today and where they will be in 10 years.
 Not all Hulu Live subscribers get access to all their local channels through the service.