THB #181: Hu Do You Lu?

There is a lot of discussion about Disney selling Hulu lately.

Here is the CNBC piece that does a nice job with the history of Hulu, then veers into a ditch, using “Always Wrong Rich” Greenfield’s take as a guide.

I have been writing about the Hulu issue since the Disney takeover of Fox. The problem hasn’t changed much. The challenge of Comcast owning a third of the company hasn’t changed much.

The problem with all the speculation is that it is, as it so often is, misfocused. There is a stunning disrespect for the reality that we are still in the early days of the streaming business - every company besides Netflix - and this weird idea that any streamer other than Disney+ and Netflix are anything but shells open to massive change virtually overnight at this stage.

The Questions of The Moment are…

What is Hulu now?

This first question is probably the hardest one to answer. With Comcast pulling it’s NBC content, CBS already only licensing older shows on the service, and Fox with a new deal that splits some shows and older Fox content with Tubi, the primary content base for Hulu is all Disney-owned content: Searchlight, 20th Century, Hotstar, Hulu Originals, some ESPN crossover (like Wimbledon right now), ABC, ABC News, FX, FXX, Freeform, Lifetime, Nat Geo, and older non-D+ shows from the Disney Kids channels. (I’m sure I’m missing something, but moving on…)

Take all that away and it’s an empty vessel.

So what would anyone - including Comcast - be paying for?

If we are estimating the low value of the service at $9.2 billion for Comast’s current third that they are contractually required to sell back to Disney next year, then the value of Disney’s stake is $18.4 billion.

I agree that Hulu’s focus has been soft since the launch of D+ and have written this repeatedly. However, this “we’re confused” position that some media is taking is just a lack of choosing to be clear.

Hulu (as laid out in Disney’s financials) is more successful than D+ domestically (its exclusive berth), in terms of subscribers and revenue. As of the last reporting quarter, it has 45.6 million paying customers to D+’s 44.4 million. On the quarter, Hulu generated $1.6 billion without Hulu Live TV’s added $1.1 billion. Disney+ grossed $841 million domestic.

A big chunk of that gross figure for Hulu is ads being seen by the majority of subs still paying for ad-based Hulu. (Disney doesn’t break out the numbers.)

Annually, that’s Hulu grossing $10.7 billion a year and Disney+, $3.4 billion, domestically.

Separate out the Hulu Live TV business, which might be free from the problem of losing all the Disney-owned content that isn’t freshly licensed by a new owner. That could be an ongoing $4.4 billion annual business on its own (that I believe it will grow as cord cutting expands).

But the other $6.3 billion evaporates pretty much instantly. Disney isn’t leaving its content behind nor its customers nor ad sales.

The grand future of Disney Streaming is international. $3.4 billion currently, with a combined Disney+ and Hotstar. They have only just begun. But that isn’t really an issue in the Hulu discussion. (Someone mentioned worldwide advertising… which doesn’t really exist. Silly.)

In the rest of the world (except India), Disney+ is merged as a service with Star (acquired from Fox). So they mix their kids content and their adult content.

Domestically, we have the 2 services - D+ and Hulu - that keep the kids and the adults separate. There is some blurring, but that is really a branding choice within Disney that can go any which way as needed. (There is also ESPN+, which is barely ever mentioned, but may play a bigger and bigger role moving forward.)

But here is the thing… in that rest of the world where Disney and Star are merged, the ARPU (Average Revenue Per Unit) is not any higher than Disney+ alone in the U.S., Canada, and a few other countries. Twelve cents a year different. Disney needs a higher price point, especially in the domestic market, where it makes a lot more on “the other half” aka Hulu.

How does Disney increase the ARPU for the majority of their domestic subscribers who are not yet part of the D+/Hulu bundle?

This is not a new issue. It is critical to the future of Disney’s streaming effort. They have gotten a very strong foothold by offering their strongest brand at a industry-low price. But they need to be more like Netflix on the pricing side. $14.91 per subscriber domestically last reported quarter.

The imaginary solution to this, for guys like Rich Greenfield, is that all the content moves to Disney+ one day and people start paying $14 a month and generating an added $13 a month in advertising per sub and everything is even, with whatever Disney was paid for its 2/3 of Hulu free to be changed into gold coins and bathed in like Burbankian gods.

But it’s never that simple.

Hulu has always had ads. People paying $7 a month for it are used to it. (I pay $7 a month more for commercial free and am very happy.)

Disney+ has never had ads. Will people pay the same amount for an ad-based subscription as they did for ad-free?

Disney faces the same question that Netflix does… how much will they have to discount and how much will they cannibalize their own base?

Disney’s math is mysterious, but it seems like roughly half of the D+ & Hulu subs are in Disney Bundle, as ESPN+, included with them in the bundle, has about half the subs of both.

The goal, in all of it, is to maximize the amount of money going into the big pot, no matter whether it’s ad-based, SVOD or advertising dollars.

Hulu’s challenge, for now, besides all this talk, is adjusting subscriber expectations in a changing content model (no NBC content… no longer an aggregator, really, etc).

ESPN+’s challenge is quite different. They are still wrestling with it’s place in Disney’s legacy television business, which still kicks out $28 billion or so a year. It’s another tier of enormous potential as cable continues to fall apart. Some rights packages allow ESPN+ to stream live sports. Some do not. That will evolve over time. Disney didn’t win the Indian cricket bidding, but in the next decade, I full expect ESPN to truly seek to be the Worldwide Sport’s Leader, a must-have for futbol, football, baseball, rugby, etc. It should be a key part of Disney’s worldwide streaming play.

The reachable target for all of the major streamers in the next decade will be, I believe, 300 million worldwide households with an ARPU of $15 a month. America may be $30 a month by the time that happens for some. The ability of some countries to pay more than a nominal fee will continue. That adds up to $54 billion a year gross or just short of double what Netflix grosses now… OR almost exactly what Disney’s content business grosses now.

If the package of content that Disney is now built on can be used to grow ad sales, as well as SVOD revenue, by a couple billion a year more than just the addition of D+ to the ad mix, no one will mind having spent $10 billion more on the Hulu brand.

It’s not an easy road to this. And it’s a much smaller idea of what can be the 10-year view than most people had a year ago.

How big is the marketing challenge in the USCan market - the only market in which Hulu currently exists - of adding “adult” content to the Disney+ brand?

Really good question.

No one knows for sure. I am positive that Disney has done a lot of market research on the issue.

I am in agreement that getting paid for both sides of the Disney coin is critical to the future of Disney Streaming. They need the ARPU.

But the same “just go ahead and do it” attitude being espoused in some quarters could be pushed onto Star internationally. Why hold onto another brand?

Do I care as a consumer? Actually, yeah… a bit. Not to the degree that I would cancel either service.

But would I also like HBO Max to have an HBO side and an Everything Else side? Yeah… actually… yeah.

Putting aside the issue of R ratings and what is “adult,” I don’t think my experience of HBO Max’s library - new and old - is well served by the absolute dominance of HBO over everything else in that deep, deep well.

And as far as Disney goes, I don’t need my Pixar mixed with Cocktail and Star Wars next to Ruthless People. (Neither movie, by the way, is part of Disney+ or Hulu at this time.)

Beware the analyst who thinks this stuff is an easy call with guaranteed results.

Until tomorrow…