Will Hulu’s looming content shortage become its Achilles heel?
In previous blogs we’ve looked at whether Amazon Prime would be able to overtake Netflix. This time around we’ll dive a little further into the streaming market and see whether two other players named Hulu, can outpace HBO Max.
The streaming market is an interesting case study as many new global and local parties enter the market with their own unique content proposition. Or better said, stopping licensing deals at competitors and creating their own streaming service. In this article you’ll see how this will be a major challenge for Hulu and how HBO with its experience with creating original content and its loyal subscribers is able to be a serious competitor in the industry. Whereas Hulu is trying to make ends meet and being held back by all kinds of licensing deals it once prided itself with.
A history of cable and premium television
I want to set the stage before we go deep into why HBO moved into the streaming market to begin with and whether Disney owned Hulu can catch up. An important aspect of HBO’s current day strategic decisions are stemming from its origins in cable. Cable in the United States entered the market in 1948 as an alternative to bad reception of over-the-air television in the states Arkansas, Oregon and Pennsylvania. Four years later there were a modest 14,000 cable subscribers in the US. Cable proved a real game changer as it had superior quality over long distances and during the 1950s cable operators integrated multiple suppliers to add more variety to their programming. In 1962 cable reached 850,000 subscribers and now local broadcasters were facing an existential threat from cable providers that could serve a diverse programming.
In 1984, the Cable Act was enacted to create a regulatory framework which would create a massive inflow of funds into the cable infrastructure and programming.
HBO, which stands for the Home Box Office was founded in 1972 van Time Inc. HBO’s main focus during its formative years was to be a premium commercial-free movie channel through cable. This is exactly the time when the FCC loosened its grip on cable providers where it restricted the options for programming to protect local television operators. Three years later, in 1975 later it launched the satellite service in the United States.
In 1980 HBO launched Cinemax, a competitor for Showtime. The channel was a success as it undercut the price of Showtime and was able to generate funding to create films and license them to other parties. The films proved that premium television providers were capable of creating high quality productions. In 1984, the Cable Act was enacted to create a regulatory framework which would create a massive inflow of funds into the cable infrastructure and programming. Over $15 billion was invested from 1984 to 1992 to lay down a strong network of connections across the nation. At the end of the 1980s around 53 million households had cable subscriptions. In 1989 HBO created a dedicated channel for comedy, aptly named the Comedy Channel. This easing of regulation and private investment, sparked a wave of creativity at HBO, resulting in hit series during the 1990s such as the Sopranos and The Wire, which have become staples of modern television. But HBO was not alone in its operations. The opening up of the cable market spurred a wave of competition where in 1995, 139 cable providers offered their programming nationwide on top of local networks. Three years later this number had grown to 171. Another influx of investment followed by cable operators, who invested $65 billion from 1996 to 2002 to upgrade their infrastructure to support broadband connections through a single wire. This opened up an extra business model for cable providers, who could now use the same connection to deliver internet and other related services.
During the 2000s HBO found success with Deadwood and True Blood, peaking with Game of Thrones which became a worldwide phenomenon. Not only as HBO set the tone with their series, it also attracted popular stand-up comedians. In 2001, AT & T and Comcast merged into a single entity, having over 22 million subscribers and in doing so becoming the largest cable provider in the United States.
The beginning of Hulu
In 2007, NBC and News Corporation announced video streaming service Hulu. It received a $100 million investment from Providence Equity Partners, partnering up with AOL, MSN, MySpace and Yahoo. A private beta was launched in October 2007, and became open to the public a year later. Techcrunch was impressed by the interface, but also highlighted the achilles heel of the streaming service, that TV shows will remain on the service until five weeks and disappear as new episodes are released. Techcrunch said, ‘This is Hulu’s greatest weakness. Try as it might, it has not yet escaped the programming mentality of broadcast television. Hulu still imposes a schedule of sorts on Web viewers, even if that schedule comes with a five-week window of flexibility. But on the Web, five weeks may not be enough.’ Further noting, ‘Hulu may be limiting its appeal by not keeping all of its videos up indefinitely (who knows when a particular video clip could take off as the next viral hit?).’ Brad Stone at the New York Times noted that the costs for the service might soar rapidly as it wants to deliver quality content, but also has to split the revenue from its advertising. James L. McQuivey, Analyst at Forrester Research said to the NY Times, ‘The content is good, and they are distributing it in all the right places. But over time they will have pressure to increase the quality of the streams and that is going to raise costs even more.’ This is one of the major challenges of growing streaming services as they try to deliver the optimal service filled with content. To deliver the service reliably, they need servers around the world to prevent content from not loading properly on the device of the end user. Add up all the employees from customer service, marketing, maintenance and development and your costs start to skyrocket, extending your route to profitability.
Seven years after the launch of Hulu, HBO announced in 2014 that it would launch a stand-alone over-the-top service in the United States. It would be a service provided through broadband internet and geared to attracting millennial audiences to HBO. Variety observed that many start-ups were playing around in the streaming market. And for good reason, because in 2014 the amount of cable subscriptions was decreasing. Statista revealed that the amount consumers with a cable subscription decreased in the age groups 18 to 34 year olds. The amount of subscriptions among 18 to 24 year olds decreased from 77% in 2013 to 71% in 2014. In the 25 to 34 year old demographic, it decreased from 73% to 67%. These are significant drops in viewership.
HBO steps into streaming
In 2015 HBO revealed that its service would be named HBO Now. The launch would be accompanied by the start of the new fifth season of Game of Thrones, which had a massive following at the time. Not long after, HBO reached an exclusive deal with Apple, where the service would be available without requiring a cable subscription. But HBO let go of its stringent requirement of needing a television subscription. Cablevision Systems would be the first pay-TV provider to sell HBO Now without a television subscription. Variety noted that it was still unclear whether this would become a trend amongst under providers, as it might harm the business model of current cable companies. In 2013, Comcast already offered HBO without its cable subscription.
In 2015 the New York Times looked at the cord cutting millennials, who were opting for internet streaming video and how different life events changed viewing behavior. For television broadcasters the millennial is an important segment as they are a highly lucrative demographic for advertisers. They are starting their own families and spending habits change drastically, but when they become parents, the ease-of-use of a cable subscription makes it a viable option. The NY Times referenced research conducted by Nielsen who found that 80 percent of millennials with their own homes and who’ve started a family, subscribed to cable. A low 6 percent when for broadband only. But unsurprisingly, did income and geographic location play a major part in the selection of a television subscription. Highly educated millennials who lived in urban areas had easier access to high speed internet and therefore making internet video streaming a tempting offer. The device on which media is consumed is also vastly different per age group. Where 90 percent of the 68 year olds and above watch their shows on a television, the age group 14 to 25 watched their shows on the computer 41 percent of the time and 8 percent on a tablet device.
Highly educated millennials who lived in urban areas had easier access to high speed internet and therefore making internet video streaming a tempting offer.
In 2019 WarnerMedia announced standalone streaming service HBO MAX. It is yet another addition to the crowded streaming media market, which is also priced above major competitors, starting at $14.99 per month, which is $2 higher than streaming giant Netflix. To boost the product, the newly announced service would be free for AT&T HBO subscribers for the first year. At first glance the reveal of HBO MAX feels like it will likely under perform when taking into account its higher price point and the market place it is trying to conquer. But according to Variety, analysts there’s still enough room for growth and competition as traditional television will lose its appeal with larger audiences. In the second quarter of 2021 HBO Max amassed 47 million subscribers in the United States and reached around 70 to 73 million subscribers globally. This comes from a subscriber count of 55.6 million the same year prior. Additionally, HBO announced it would launch in 6 European countries in October 2021 and add an additional 14 the year after. Yahoo Finance noted that growth is slowing down in the United States and streaming services are looking for new territories to maintain momentum. Looking at Hulu, HBO MAX seems to have the upper hand. Hulu had 41.6 million subscribers in the United States in the second quarter of 2021, coming from 32.1 million the same period of the prior year.
Disney takes the wheel and content shortages
In 2019 Disney took full ownership of Hulu from Comcast for $5.8 billion. Disney wanted to turn Hulu into a strategic asset within its streaming portfolio as it would help tap into a more mature audience through shows like the Handmaid Tale. At the time, Hulu had 27 million paying subscribers, which was a fraction of the 150 million Netflix had. NBCUniversal, owner of Comcast, would leave some of its shows on the service, like Saturday Night Live and The Office for 5 years, meaning subscribers would not be directly affected.
In 2020, an interesting event happened, which seemed odd at first between two parties who were battling it out in the streaming arena. Hulu, HBOs prime television competitor, would offer a way out to move to HBO MAX through an automated upgrade for existing HBO subscribers. It would also be in this year that Friends would be moved from Netflix to HBO MAX. A notable blow for Netflix who loses a very popular show to one of its competitors. A year later, in 2021, Hulu launched a $2 per month plan for college students, 67% off its base price of $6. Hulu hopes to get a new audience on board and generate an influx of subscribers for Disney. Just like any emerging service, it tries to lock down younger generations onto its services.
But simultaneously, problems around Hulu started to emerge. Todd Spangler from Variety observed a looming shortage of marketable content for the streaming service specialized in making television shows available online. Spangler noted that NBCUniversal could pull all its content from the service in 2022. Not only NBC, but als Viacom CBS and Fox are eligible to pull their content away. If this scenario were to come out, this would leave Hulu as an empty shell with no redeeming features. Disney isn’t giving Hulu the resources to create original content either. Spangler said, ‘Still, compared with Disney’s bigger streaming mouth to feed — Disney Plus — Hulu is hampered by its U.S.-only confines in terms of payback on content investments.’ Hulu received an international product through the launch of Star, which would extend the product offering overseas. This is a crucial strategic step as the international catalogue for Hulu was virtually non-existent. In the same year Hulu appointed Kelly Campbell as the new CEO, after Randy Freer stepped down. Freer left Hulu as the company was undergoing reorganization to work closer with the direct to consumer branch of Disney. The Hollywood Reporter asked Campell how Hulu would overcome the redrawal of content by licensors, to which she responded, ‘We’ll continue to invest more in originals. We’ll also continue to tap into all the incredible content creators within Walt Disney TV. We intend to continue to work with third parties to ensure that we are holding true to the promise that Hulu brings consumers the deepest library of streaming television.’
HBO MAX has the upper hand
So will Hulu overtake HBO MAX? In the arena of streaming parties are battling it out to get the most market share possible. Hulu’s strong television library, once its strongest asset, has not become a liability as it has been torn apart through expiring licensing deals. So for the foreseeable future, it doesn’t look too bright for the Disney owned service. Hulu might be owned by Disney, but the luring exodus of content is looming on the horizon. Where competitors like Netflix, Amazon and Disney have been pouring billions in original content for years, Hulu has always been the portal for television.
To keep momentum Hulu needs to look for original content and fast, before customers catch on and move to the remaining services. HBO and its MAX product on the other hand is steadily growing with premium content, which doesn’t come as a surprise as it has been in the content creation game for decades. The fact that Hulu seems mostly region locked and only slowly opening up to international audiences isn’t doing it any favors either, especially now that HBO has set its sights on Europe. Hulu will have to go the same route as the others have taken and invest heavily in original content to keep and attract audiences across the United States. Undercutting competition through cheaper pricing options can only go so far when there’s nothing to watch.