Earlier this week, Hulu announced stellar 2018 results: 48% subscriber growth (8 million additions), bringing year-end subscribers to 25 million. Ad revenue of almost $1.5 billion, up 45% in 2018, with 50% growth in the number of advertisers. And median average viewer age of 32, which is 25 years younger than the average broadcast TV viewer.
All of this continues to come at a huge cost; by some estimates Hulu is losing upwards of $400 million per quarter. With Disney set to assume a 60% stake in Hulu after the Fox deal closes, managing Hulu’s growth and financial performance is going to be very important for Disney. Fortunately for Hulu, Disney is highly incented to see Hulu succeed because the company is poised to play a linchpin role in what is certainly Disney’s biggest 2019 priority, the successful launch of Disney+, its new SVOD service.
In fact, if Disney should be “going to school” on every aspect of Hulu’s business as it fleshes out the Disney+ launch plan. While Disney+ will offer more family-oriented content than Hulu, there are fundamental lessons and best practices Hulu can provide in subscriber acquisition/retention, user experience, operations/delivery, device integration, monetization and other areas. Hulu has no doubt experienced virtually every issue imaginable for an SVOD provider; Disney should squeeze every ounce of insight from these.
As I wrote last week, a developing trend for SVOD providers is to distribute via big third parties (e.g. Amazon, Apple, Roku, etc.), in turn de-emphasizing the direct-to-consumer opportunity. Disney will likely use some third party distribution, but with Disney’s well-loved brand, DTC is much more attainable and valuable than for most SVOD providers. Hulu has been mostly DTC from early on; it knows the DTC playbook as well as any company. Coupled with BAMTech (now Disney Streaming Services), Disney has a wealth of DTC knowledge under its own roof.
What may end up being the biggest impact Hulu can have on Disney+ is tapping the 25 million Hulu subscribers to build initial interest in Disney+. Promotions, bundling, free trials, exclusive content, you name it, Disney should pull out all the stops in harnessing Hulu’s massive subscriber base. Aside from promotions in Disney’s own properties, Hulu’s existing subscriber base is likely the most target rich environment for gaining new Disney+ subscribers.
All of this demonstrates why bumping up its stake in Hulu to a controlling 60% is very strategic for Disney. Following the Fox deal closing, Disney will have by far the most valuable breadth of content in the world. But translating its value into new SVOD and advertising revenue streams, while balancing legacy businesses, is the real challenge Disney faces. Hulu dramatically increases the odds of success for Disney+.