Hulu: Redefining the Way People Experience TV

27 Pages·2017·2.139 MB·English

by  Henry W. McGee, Christine Snively

9-318-002
REV: DECEMBER 4, 2017
HENRY W. MCGEE
CHRISTINE SNIVELY
Hulu: Redefining the Way People Experience TV
On May 3, 2017, Hulu CEO Mike Hopkins announced a new service designed to significantly shift
the company’s position in the fast-changing television landscape. Hulu had been launched ten years
earlier as a joint venture by entertainment giants News Corp., later renamed 21st Century Fox (FOX),a
and NBCUniversal to distribute their television programming over the Internet. Over time, the joint
venture had attracted additional partners and expanded its ad-supported business model to include
revenue from customer subscription fees. Now, Hopkins explained to a group of advertising executives
and reporters gathered in New York’s 5,500-seat Madison Square Garden, Hulu intended to “redefine
the way people experience TV.”1
During his one-hour presentation that also featured stars of Hulu original programming Elisabeth
Moss (The Handmaid’s Tale) and Jeff Daniels (The Looming Tower), Hopkins announced the launch of
Hulu Live TV, a service that would offer live streams of the country’s “Big Four” broadcast networks—
ABC, NBC, CBS, and FOX—as well as a package of some of cable television’s most popular networks
including ESPN, CNN, Bravo, and HGTV.2 The $39.99 per month service included Hulu’s full-suite of
on-demand programming, plus a digital video recorder (DVR) capable of storing 50 hours of
programming. “By bringing together thousands of live, on-demand and library shows and movies—
and serving them up in a uniquely personalized way—Hulu can now be a viewer’s primary source of
television,” Hopkins declared.3
The launch of Hulu Live TV occurred in the midst of major transformations taking place in all areas of
the television industry including advertising, distribution, and production.4 The Internet had
revolutionized every aspect of the business and allowed customers to view television shows, sports, and
full-length movies on their laptops, connected televisions, or mobile devices. Increasingly, cable customers
were “cord-cutting” and cancelling their TV subscriptions in favor of Internet-delivered programming. By
offering a package of live broadcast TV and cable networks, Hulu was creating a potential major new rival
to the well-funded and established distribution players in the space—cable, satellite, and telephone
companies, also known as Multichannel Video Programming Distributors (MVPDs).
a In 2013, News Corp. spun off its newspaper and publishing assets. The remaining entertainment and television businesses
changed its name to 21st Century Fox. (Source: Rachel Abrams, “News Corp. to Rename Entertainment Side 21st Century Fox,”
Variety, April 13, 2016, http://variety.com/2013/more/news/news-corp-to-rename-entertainment-assets-1200375601/,
accessed September 2017.)
Senior Lecturer Henry W. McGee and Case Researcher Christine Snively (Case Research & Writing Group) prepared this case. This case was
developed from published sources. Funding for the development of this case was provided by Harvard Business School and not by the company.
HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or
illustrations of effective or ineffective management.
Copyright © 2017 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
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At the Madison Square Garden event, Hopkins also announced an expanded effort into one of the
industry’s most competitive areas—production of scripted television programming. The company had
made modest forays in the past, but Hopkins declared that Hulu’s critically-acclaimed series The
Handmaid’s Tale was the harbinger of a significant new investment area for the company.
Hulu faced fierce competition on all fronts. The company was just one of a number of players
leveraging digital technology to launch “virtual” MVPDs, or vMVPDs. By 2017 several companies
outside the traditional distribution system, including Google and Sony, had launched vMVPDs.
Incumbents AT&T and Dish had also entered the vMVPD space to capture the growing demand for
programming streamed over the Internet.
In the programming arena, Internet-based companies Amazon and Netflix were engaging in a fierce
battle with established pay TV companies like HBO and the broadcast networks. The rivals were each
investing billions each year to produce original content and lure viewers to their platforms. “[A]t this
point, ‘arms race’ might be an understatement,” observed Hulu programming executive Craig Erwich.5
Immediately after Hopkins announced the rollout of Hulu Live TV and the company’s ramped up
programming investments, questions arose across the industry. Could Hulu’s new offering compete
with established MVPDs? Some analysts questioned the low $39.99 price point. Was it sustainable?
Could Hulu offer original programming that was engaging enough to attract and retain subscribers?
And while Hulu had powerful parents, were their interests all aligned with these new initiatives?
MVPDs and the Evolution of Television Programming Distribution
MVPDs played a central role in the rapidly-evolving U.S. television industry, which generated $120
billion in revenue in 2016.6 MVPDs traced their origins back to 1948 when community antennas were
placed high above towns in rural areas to enhance reception of local TV signals. The programming was
then retransmitted to customers via cable. The new cable TV operators, in addition to simply
retransmitting local stations, began offering a range of programming choices. Local affiliates of “The
Big Three”b broadcast networks which had long dominated the airwaves—ABC, CBS, and NBC—saw
the imported signals as competition and successfully lobbied the U.S. government for restrictions on
the practice, effectively limiting the growth of cable TV.7
In the 1970s, regulations on importation of distant signals were relaxed. In 1975, Time Inc. used
newly-developed satellite technology to distribute its fledgling pay-TV network, Home Box Office
(HBO), to cable systems across the country. Within months, entrepreneur Ted Turner used satellite
technology to distribute his local Atlanta TV station WTBS nationally, creating the country’s first
“superstation.”8 The new satellite distribution technology and further deregulation ignited explosive
growth in the industry. By the end of the 1990s the number of national cable networks had grown to
171, with 65 million U.S. households subscribed to cable.9
In the 1990s, improvements in technology also allowed consumers to obtain the new channels
without using cable via direct broadcast satellite (DBS).10 In 1991, Primestar launched the first satellite
TV service in the U.S., followed by DirecTV in 1994 and Dish Network in 1996. Further competition to
cable distributors came in 2005, when telecommunications (telecoms) providers began offering video
service in geographies already served by incumbent MVPDs. That year Verizon launched its Fios TV
service, and in 2006 AT&T launched its U-Verse offering. Telecoms offered bundled packages of
Internet, TV, and phone service to consumers. By 2016, some parts of the U.S. had access to up to five
b With the launch of primetime programming on FOX in 1987, “The Big Three” became known as “The Big Four.”
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MVPDs (i.e., two cable MVPDs, two DBS MVPDs, and a telecom MVPD) competing with one another
to deliver video programming.11
Increased competition spurred a huge wave of investment by cable MVPDs in order to build higher
capacity hybrid networks of fiber optic and coaxial cable. These “broadband” networks allowed cable
companies to deliver high-speed Internet access. The growing investment required and the benefits of
scale also led to tremendous industry consolidation. By 2017, the top four MVPDs accounted for over
72 million of the industry’s 98.7 million customers.12 (See Exhibit 1.)
Sources of Revenue
MVPDs generated their revenue from customer subscription fees, ad sales, Internet service, and
equipment rental, which including the set top boxes that enabled cable channels to be viewed and
stored via a Digital Video Recorder (DVR).
MVPDs sold bundled packages of television channels to customers for a monthly subscription fee.
Basic packages contained around 10 channels, standard packages included over 100 channels, and
deluxe packages could exceed 250 channels. Premium channels such as HBO and Showtime typically
cost an additional fee and could be added on to an existing bundle. By 2015, the average cable
household in the U.S. received 189 television channels, up from 129 in 2008.13
As the number of available channels grew, many cable subscribers paid for television they did not
watch. As one observer noted, “When you sell things in bundles you can charge for a whole bunch of
things nobody really wants—customers will pay for the entire bundle in order to get the one or two
things they actually want.”14 Programmers argued that bundling helped keep many niche channels on
the air that would otherwise struggle if viewers had the option to subscribe to channels ‘a la carte.’15
In addition to subscription fees, cable operators collected revenue from ads aired during time that
was allocated to them from their program suppliers.16 (See Exhibit 2 for ad revenue by operator.) Ad
pricing was based on both audience size and demographics (advertisers paid a premium to reach
adults between the ages of 18 and 49 due to their superior spending power). However, TV advertising,
which could not be precisely targeted, was facing growing competition from the Internet and its ability
to deliver specific audiences.
Often sold as part of a bundle of products including TV programming and telephone service, a fast-
growing source of revenue for cable companies was the provision of Internet service via their high-
capacity fiber optic cables. For Comcast, the largest cable MVPD, Internet service accounted for $13.5
billion of the company’s $50B in revenue. (Refer to Exhibit 2b for Comcast revenue by source.)
Cost Pressure
Programming expenses were among the largest costs incurred by MVPDs. Due to contractual
agreements between the Big Four networks and their affiliates, MVPDs had to obtain network
programming from the local station owners. These “retransmission fees” had become an integral part
of broadcasters’ revenue and they regularly pushed for higher prices. MVPDs also paid fees to carry
the growing array of non-broadcast networks, including powerful services such as ESPN, which
commanded a fee of $7.21 per subscriber per month.17 Sometimes contentious negotiations between
MVPDs and their program suppliers resulted in temporary network “blackouts” for consumers.
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MVPDs passed on the growing cost of programming rights to subscribers, driving significant
increases in subscription prices. By 2016, a bundled package containing cable TV, Internet, and landline
phone service cost an average of $187 per month.18
The Cord-Cutters
In response to the price increases, a growing number of consumers decided to cancel their cable
subscriptions but retain Internet service. In Q1 2017, cable and satellite providers lost 762,000
subscribers—five times as many as in Q1 of 2016.19 (See Exhibit 3 for pay and non-pay TV households.)
Some analysts expected the number of cable subscribers to drop 6% by 2020.20
By retaining their Internet service, these “cord-cutters” still maintained access to an exploding array
of new Internet distributed programming services. Connection speeds had improved dramatically over
the years, and high-speed Internet allowed viewers to easily stream television shows and movies.21
The new programming services were referred to as “over-the-top” (OTT) because they bypassed the
traditional cable bundles and were streamed directly to consumers on an a la carte basis.22 Since the
cost of multiple a la carte services could soon add up, there was a debate over the amount of savings
cord-cutters achieved, but one analyst calculated that the average reduction could be $104 per month.23
In 2016, about 15% to 20% of all TV households never subscribed to pay TV.24 These “cord-nevers”
tended to be younger and grew up with cell phones and other multimedia devices. About 25% of
millennials (those born between 1980 and 2000) consumed television only through (OTT) streaming
devices, exceeding the national average of 15%.25 A Comcast representative explained, “[A] lot of
people [think] that millennials don’t watch TV. It’s actually wrong. Millennials watch a lot of TV. They
just want to access it differently, and they want to have it in an economic model that is more affordable
for them.”26 One industry observer further noted that OTT services “provide more flexibility on cost
due to the month-to-month arrangement, have lower switching costs between similar services, and
avoid much-hated ‘hidden fees’ like set-top box rental and [regional sports networks].”27
User adoption of online streaming platforms was accelerated by sales of digital media players and
Smart TVs (i.e., Internet-ready TVs), which made it easier for consumers to access programming
without cable. Set top boxes like Apple TV and Roku and other devices enabled streaming programs
directly to televisions. By 2015, half of all U.S. homes had a television that connected to the Internet via
a set-top box or with built-in Internet streaming functionality, a 26% increase from 2013.28
Traditional MVPDs attempted to address the issue of “cord-cutters” and “cord-nevers” in a number
of ways. In 2010, Time Warner urged the industry to adopt a service called “TV Everywhere” which
would permit cable and satellite subscribers to watch their bundle of services on a variety of mobile
devices. However, the concept developed limited traction because consumers had to go through the
cumbersome process of registering each individual service to gain access. Cable companies also began
to experiment with “skinny bundles,” which offered a limited number of services at a lower price, but
remained reluctant to offer channels a la carte.29 One expert noted, “The bundle is the Gibraltar of the
media business. It keeps the entire ecosystem alive, which is why it is so heavily and successfully
defended. But there are hairline fractures beginning to appear [. . .].”30
Original Programming—The Golden Age of TV
In the late 1990s through the 2010s, a powerful driver of growth for MVPDs was the explosion of
original programming “once confined to the large networks and a few premium channels,” one
observer noted.31 This period was often described as the “Golden Age of Television,” because of the
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wide range of new high-quality shows commissioned by the cable networks. The networks viewed
original programming as essential to attract viewers and increase negotiating leverage with MVPDs
for higher rates and better placement in bundles.
The successful investment in original cable programming effectively ended the large broadcast
networks’ domination of the television industry. In 2015, for example, not one program from the big
four—CBS, NBC, ABC and FOX—earned an Emmy nomination for best drama series, one of the
industry’s highest honors. The top prize that year went to the HBO series Game of Thrones, which soon
surpassed The Sopranos in popularity, a key contributor to the network’s success. During its six-year
run, The Sopranos won 21 Emmy awards, drove up subscriptions, and generated millions in DVD sales.
By 2002, largely due to the success of The Sopranos, HBO was more profitable than the broadcasters.32
American Movie Classics (AMC) successfully used original programming to rebrand itself from a
network that primarily showed classic films into AMC, a ratings and awards powerhouse featuring
critically-acclaimed original series such as Mad Men and Breaking Bad. Driven by the success of its
original programming, the network doubled its revenues and profits between 2012 and 2016. (See
Exhibit 4 for the network’s financials.) “Producing high-quality original programs has become vital for
the long-term survival of any cable channel…” one observer noted.33
Over-The-Top Content and the Era of Peak TV
Online-only subscription-based streaming services contributed to the “Golden Age of Television.”
For major broadcast networks and cable channels, the OTT platforms provided an important new
source of licensing revenue that not only boosted profits but could also be reinvested in new
programming. Contracts varied. Some shows were made available in their entirety, some rights holders
released a few seasons of a show at a time, and some shows were only available for a set period of time.
To help fuel their growth, OTT companies followed the lead of cable networks and invested heavily in
exclusive, original content. Though costly to produce, an original series could attract new OTT subscribers,
convince current subscribers to renew their subscriptions, and reduce the pressure to engage in increasingly
expensive licensing contracts with third-party content providers.34 In 2016, the number of scripted original
programs offered by OTT services more than doubled from the previous year to 92.35
The major push into original programming by OTT companies was initiated by Netflix, a
subscription video-on demand (SVOD) service that was by far the most powerful of the new OTT
programmers. Founded in 1997 as a mail-order DVD rental service, in 2007 the company expanded to
offer online streaming of movies and television shows.36 By 2017, Netflix had more than 50 million
subscribers in the U.S.,37 far more than its major cable rival HBO.
A key factor in Netflix’s expansion was its investment in high-quality original programming.
Although considered an enormous risk at the time, in 2013 Netflix paid $100 million to produce two-
13 episode seasons of House of Cards, a political drama starring two-time Oscar winner Kevin Spacey.
The gamble paid off as the series earned critical acclaim and generated new subscribers for Netflix.
Spurred by the success of House of Cards, the company rapidly ramped up productions, and CEO Reed
Hastings announced plans to produce five new original series per year.38
Other OTT services soon followed Netflix’s lead. Amazon Instant Video, which allowed streaming
access to over 5,000 movies and TV shows, began developing its own premium (Emmy-nominated)
content. YouTube, by far the largest streaming service with over 176 million users in the U.S., added
original scripted series’ to its YouTube Red subscription channel. (See Exhibit 5 for OTT service users
by provider, Exhibit 6 for OTT categories, and Exhibit 7 for OTT subscriber growth.)
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Riding the success of its original programming strategy, by 2017 Netflix had increased its
programming budget to $6 billion, far outstripping its broadcast, cable, and OTT competitors.39
Amazon, for example, had allocated $4.5 billion to original programming and NBC spent $4.3 billion,
while CBS invested $4 billion in original programming.40 HBO devoted half of its $2 billion content
budget on original content.41 New entrants in the space signaled their seriousness by the size of their
programming commitments. In June 2017, the social network Facebook, with over 3 billion users
worldwide,42 announced that would spend $1 billion to add original content to its platform. (See
Exhibit 8 for digital players producing original content.)
Tracking the exploding number of programs generated by the competition between OTT, cable, and
broadcast companies, John Landgraf, CEO of cable network FX, dubbed the new landscape “Peak TV.”
He reported that a record 545 scripted original series had aired in 2016 (up from 420 in 2015).43 The
new OTT programming proved popular with audiences and critics alike. In the 2016 Emmy
nominations, Netflix muscled into third place behind HBO and FX.44
Hulu
In 2006, concerned about the growing number of movies and TV shows posted illegally on the web,
some Hollywood executives began to consider launching a site that would allow them to directly
monetize their programming.45 On March 22, 2007, NBCUniversal and News Corp. announced plans
to launch a new streaming service that NBCUniversal President and CEO Jeff Zucker described as a
“game changer for Internet video.”46 The announcement was met with skepticism; executives at Google
referred to the unnamed venture as “Clown Co”47 as only two networks initially signed on, and neither
group had much experience with the Internet.48
In March 2008, the new network, Hulu,c officially launched, providing users with access to select
clips, full movies, and episodes of popular FOX and NBC television shows. Users were shown ads
during programming—two minutes of commercials for every 22 minutes of programming, one quarter
of the commercials typically aired during a program.49 Hulu let users select the sort of commercials
they watched, rate them, and sometimes participate in interactive puzzles or games during commercial
breaks.50 Hulu split ad revenue among its content providers. The site quickly became popular with
users. Ten months after the site’s official launch, Hulu was named “Website of the Year” by the
Associated Press and had 227 million viewed videos.51
Hulu continuously added new content to its library as the site grew in popularity.52 In addition to
FOX and NBC content, Hulu added programming from a host of other television networks like ABC.
In 2009, Disney (ABC’s parent company) acquired a 30% stake in Hulu.53
Hulu was entirely supported by ads until June 2010 when the company unveiled Hulu Plus, a
premium subscription option for $9.99 per month, in addition to its free model. Hulu Plus featured
fewer advertisements, a greater assortment of content, and could be accessed on mobile devices.54 It
was accessible via PCs, gaming systems, and other hardware with streaming capabilities, while Hulu’s
free service remained available only on PCs.55 Analysts suggested the new subscription model would
help Hulu generate more revenue and better compete with Netflix.56
c Hulu, in Mandarin, has two meanings. An ancient Chinese proverb described the Hulu as a “holder of precious things.” It also
translates to “interactive recording.” The company saw both definitions as relevant to its mission. (Source: Jason Kilar, “What’s
In a Name?” Hulu Blog, May 13, 2008, http://blog.hulu.com/2008/05/13/meaning-of-hulu/, accessed September 2017.)
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Hulu’s subscription service grew steadily, with 1.5 million subscribers by 2011, 3 million by 2012,
and over 5 million by 2013.57 In April 2015, the company announced it would drop the “Plus” moniker
from the premium service in an effort to reduce customer confusion relating to Hulu’s brand.58 Soon
after, Hulu released a third offering, an ad-free subscription option for $12 per month. Some
programming still featured commercials, relegated to the beginning or end of a program.59
In August 2016, Hulu announced it would stop offering its free service and users would have to
subscribe to one of its two paid services—one with limited commercials and another with no
commercials.60 By 2016, Hulu had more than 12 million subscribers.61 It remained jointly owned by
FOX, Walt Disney Co./ABC, Comcast/NBCUniversal, and Time Warner, which bought a 10% stake in
the joint venture in 2016.62 Hulu was valued at $5.8 billion.63
Competitive Landscape
In 2016, over 112 million video-on-demand subscriptions for television and movies were reported
in North America, up 19 million from the previous year. Industry experts predicted that the number of
Amazon Video subscriptions alone in the U.S. would grow from 30 million in 2015 to 49 million by
2021.64 Netflix was expected to have 59 million subscribers in North America by 2021, up from 53
million in 2016 (52 million of which would come from the U.S.). Netflix’s North American video on
demand revenues were expected to grow from over $5.3 billion in 2015 to over $6.8 billion in 2021.65
New competitors—including broadcast and cable networks—entered the growing space, and
approximately 55% of streaming services employed a subscription model.66 In 2015, HBO launched
HBO NOW, an OTT service giving consumers access to HBO shows for $14.99 per month.67 That same
year, CBS, the only one of the “Big Four” networks without an ownership stake in Hulu, unveiled its
“CBS All Access” streaming package, allowing users to stream CBS shows for $6 per month.68
Hulu also faced competition from additional streaming services offered by its owners. While the
joint venture’s partners licensed programming to Hulu, they also maintained individual sites which
offered limited streaming access to shows on their broadcast networks as a way of capturing viewers
and the ad revenue that was moving online. Increasingly, however, the venture’s owners were starting
paid subscription streaming services. For example, in 2016, Time Warner’s Turner Classic Movies
network debuted Filmstruck, a service offering classic and cult films for a monthly fee of $6.99.69
Although Comcast’s NBCU division had unsuccessfully launched Seeso, a comedy streaming service
for $3.99 per month, the company was rumored to be preparing a new service modeled after CBS All
Access that would offer programs from NBC plus many of the company’s cable networks including
Bravo, USA, and SyFy.70
Hulu Live TV and “Skinny Bundles”
The rise of cord-cutting and the rapid growth of Hulu and its OTT competitors led the television
ecosystem to quickly mutate. A number of companies saw an opportunity to use the Internet to become
vMVPDs that provided “skinny bundles” of OTT and cable programming. While not a true “a la carte”
option, which would allow customers to pick and choose which channels they wished to receive, such
vMVPD packages consisted of 10 to 20 channels and were marketed to “cord-cutters” and “cord-
nevers” as a cheaper and simpler alternative to cable.71 In 2015, Dish Network launched Sling TV, the
first multichannel live TV service that streamed over the Internet. For $20 per month, subscribers had
access to 30 live TV channels including AMC, ESPN, and more.72 As the service grew in subscribers, it
added a broader selection of content and more bundled options. In 2016, Sony launched PlayStation
VUE in the U.S., offering 60 channels for $39.99 per month. The service was available through
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PlayStation as well as other streaming devices such as Roku. Later that year, DirecTV launched its
vMVPD, DirecTV Now, for $35 per month.73 In April 2017, YouTube TV launched its own live bundle
(initially available in select cities) featuring local channels, Bravo, Disney, ESPN, and others, for $35
per month.74 (See Exhibit 9 for vMVPD offerings.) Some industry observers predicted that the market
for live skinny bundles could top 15 million U.S. subscribers by 2020. “Over time, we expect [virtual
MVPDs] to be able to innovate faster than traditional distributors,” one analyst noted.75
Given the potential size of the vMVPD market and Hulu’s success in the OTT space, the company’s
executives were confident in the new service’s prospects. With Hulu Live, CEO Hopkins declared, “we
can get people who have opted out of the system.”76 Hopkins explained that for $39.99 per month Hulu
Live TV would give subscribers online access to roughly 50 television channels including live streams
of the Big Four broadcasters.77 (See Exhibit 10 for channel listings of Hulu Live TV.) Hulu Live TV
would also provide subscribers with access to its extensive programming catalog, the option to add
premium channels such as HBO, and a friendly user interface with a powerful recommendation engine.
Explained one senior Hulu executive, “You shouldn’t have to think about whether something is live,
recorded or on demand, or care about which device you’re using. TV is about connecting with the
shows, movies and sports you love—and we want to make that really easy for you, no matter where
you’re watching.”78
Despite the entry of numerous players into the space, the vMVPD business model had its share of
skeptics. Some analysts questioned Hulu Live TV’s $39.99 per month price point and predicted that it
would result in “razor-thin” margins for the company.79 Programmers did not publicly revealed the
fees that they charged Hulu, but based on one analyst estimate, Hulu’s channel offering cost about $34
per month to license (see Exhibit 11 for a cost breakdown and Exhibit 12 for other Hulu financials).80
Hopkins was comfortable with the economics of Hulu’s new MVPD business because it had three
sources of revenue: (1) selling subscriptions to a “skinny bundle” of programming, (2) upselling
subscribers to premium services like HBO Now, and (3) highly targeted advertising. “When you look at
the entire package,” Hopkins told an interviewer, “you have the SVOD [which] is a fixed cost business
by and large, packaged with this variable, over-the-top, pay TV business, and then infuse it when a really
powerful ad platform—when you put all that together, I think we got something pretty powerful.”81
Some industry experts wondered if Hulu Live TV would cannibalize the company’s existing SVOD
business or compete with the businesses of its owners. Hopkins noted, “I think our live service is really
in support of the traditional MVPD business. [. . .] We have our SVOD product and we have this new
live service, and I think both support that ecosystem.”82 Hulu executives felt that rather than being a
source of friction, its ties to its owners were an asset. As Brian Smith, Head of Experience explained,
Hulu was able to “start some conversations faster” about acquiring content.83 For example, in 2017
when NBC relaunched its hugely successful comedy series Will & Grace, Hulu had exclusive SVOD
rights to the program’s original 194 episodes, the first time they had been available for streaming.84
Despite its access to programming from its owners, many felt that Hulu would also need to have a
strong lineup of original programming to succeed. “Content is still king,” one observer noted. “Original
programming is seen both as a strong value provider as well as means to bridge content licensing
gaps.”85 Although Hulu had experimented with original programming starting in 2011 with the
documentary series A Day in the Life, the company ramped up its commitment to scripted programming
in response to growing competition. Hulu increased its number of original dramas from four in 2016
to 16 in 2017.86 In April 2017, Hulu released The Handmaid’s Tale, a breakout hit based on the 1985
dystopian novel by Margaret Atwood. “The Handmaid’s Tale…finally makes a Hulu subscription an
actual must-have, instead of a convenience,” one industry observer noted.87
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Original programming was an expensive initiative for Hulu given the growing competition for
actors, directors, and scripts. “The cost of producing an original series is becoming similar to the cost
of making a feature film,” one expert explained.88 The OTT service CBS All Access spent $8 million per
episode on its revival of the Star Trek series89 while the popular Netflix series Sense 8 cost a reported $9
million per episode.90 HBO’s hit Game of Thrones cost approximately $10 million per episode.91
Competitors seemed to have bottomless pockets. One publication scoffed that with a $4.5 billion
programming budget, “Amazon is spending an insane amount of money to catch up to Netflix.”92 Hulu
vowed to keep up. One Hulu executive noted, “We’re absolutely spending on par with Amazon as far
as development goes.”93
What’s Next for Hulu?
Industry experts believed that the Hulu Live TV offering, with its multiple channels, could provide
the company with a powerful new way to compete against its rival Netflix.94 But could Hulu Live TV
attract the “cord-cutters” who were leaving traditional MVPDs? And could Hulu provide the same
level of signal quality and service as established providers? Rivals in the industry were skeptical. “I
don’t think direct-to-consumer is for the faint-of-heart,”95 said Comcast executive Matt Straus. “You’re
responsible for billing and the quality of service, and I can tell you that tolerance when video isn’t
working doesn’t exist.”96
Hopkins believed that compelling original programming was crucial to Hulu’s continued growth.
“Original programming,” he declared, “(is) the one thing you can have on your service that is exclusive
to you, and for us I think it’s really important that we continue to invest there.”97 But with established
players like Netflix and Amazon dramatically increasing their budgets and new entrants from the tech
field like Apple and Google joining the fray, could Hulu spend enough to effectively compete?
Importantly, how would the possibly conflicting agendas of its owners affect Hulu’s growth? Just
three months after the debut of Hulu Live, venture partner Disney made an announcement that took
the industry by surprise. The company’s CEO Robert Iger stated that Disney was embarking on “an
entirely new growth strategy.”98 Disney would forgo hundreds of millions of dollars from licensing its
programs to Netflix and would instead launch subscription OTT services featuring its own brands
including MVPD mainstay ESPN, Pixar and others.99 “The skinny bundle business has hardly even
gotten started,” one Forbes columnist noted, “but you must wonder what impact the Disney moves will
have on new services from Sling TV to DirecTV Now to Hulu’s live TV offering.”100
Hulu and its rival vMVPDs were creating new--and unproven--business models. Would the new
services appeal be limited to existing “cord-cutters” and “cord-nevers,” or would they capture existing
MVPD customers and hasten subscriber declines of the legacy players? In 2017, one analyst predicted
“a highly volatile period of entry and exits” in the live skinny bundle space over the next two years.101
Was Hulu Live TV well-poised to win? Hulu executives needed to decide how to best position their
offering. Did the $39.99 per month price point make sense? Was pursuing increasingly expensive
original programming viable? “Gone are the days when there is a clear formula to follow,” one
observer commented. 102 How should Hulu compete?
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318-002 Hulu: Redefining the Way People Experience TV
Exhibit 1 Pay TV Providers by U.S. Subscribers (in millions), 2017
Source: “Pay TV providers ranked by the number of subscribers in the United States as of June 2017 (in millions),” Statista,
June 2017, https://www-statista-com.ezp-prod1.hul.harvard.edu/statistics/251793/pay-tv-providers-with-the-
largest-number-of-subscribers-in-the-us/, accessed September 1017.
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