Hulu reportedly spent $2.5 billion on content last year. While that's considerably less than Netflix's (NASDAQ:NFLX) $8 billion content budget for 2018, keep in mind that Hulu only operates in the United States and Japan. It also has just 17 million subscribers, about 100 million fewer than Netflix when you include trial members.
The lofty content spending, along with the launch of a virtual pay-TV service last year, resulted in the company losing nearly $1 billion, according to BTIG analyst Rich Greenfield. That showed up in the results of parent companies Disney (NYSE:DIS), Twenty-First Century Fox, Comcast, and Time Warner. What's more, management at those companies says the losses will increase next year.
"We now expect that equity loss for the year to be approximately $250 million higher than last year," Disney CFO Christine McCarthy told analysts on the first-quarter earnings call. Considering Disney's 30% stake in the company, that implies total losses will increase over $800 million this year. That's in line with Greenfield's estimate that Hulu's losses will grow to $1.7 billion.
Such a loss could have a big impact on Hulu's parent companies. But here's why investors shouldn't worry.
Moving money from one pocket to another
While Hulu has some original content and licenses the back catalog of certain classic TV shows from a few television studios, most of its content comes from licensing shows from networks owned by its parent companies. So when Hulu "spends" money, it's just a matter of accounting.
Last year, Disney generated about $500 million in revenue from licensing its television and film programming to Hulu, according to its 10-K. That $500 million more than covers Disney's $276 million share of Hulu's losses from last year. Other stakeholders don't disclose details on licensing revenue.
While expenses are going up considerably this year, the parent companies' revenues should increase, as well. Hulu launched Hulu Live last year, which distributed channels like ESPN, Fox News, NBC Sports, and TNT. Who owns those networks? Hulu's parent companies. Selling a streaming bundle can help offset losses at traditional distributors, even if Hulu itself isn't making money off the service.
Will Hulu ever become profitable as a stand-alone business?
Netflix generated over half a billion dollars in net income last year. It still spent a ton of cash -- more than it brought in -- but from an accounting standpoint, it's profitable. It's significantly more profitable in the United States, where it's more mature.
Netflix also is absolutely massive -- about three times bigger than Hulu in the U.S. plus an even bigger audience internationally. But Netflix was still a profitable business back when it was primarily operating in the U.S. and just starting out in streaming. Of course, Netflix didn't have much in the way of competition when it came to subscription streaming-video services.
Hulu will certainly require a continued investment from its parent companies for at least the next few years as it works to grow its subscriber base. With the potential for Disney to take control of the service next year after the acquisition of Fox, that investment might continue to climb as it works to attract a substantial subscriber base along with its other forthcoming streaming services.
"It takes an investment for sure," Disney Chief Strategy Officer, Kevin Mayer, said. "And we're happy to undertake that investment for the outcome which we know is going to happen, which would be a big profitable service."
If Hulu plans to be profitable at its current level of spending, it needs to grow to a size comparable to Netflix in the U.S. It's done relatively well recently, increasing its subscriber count by 5 million over the last 18 months or so. By comparison, Netflix added 6.8 million subscribers in the U.S. during roughly the same period.
In the meantime, Hulu can afford to take some losses on paper because its parent company is putting most of them -- if not all of them -- back into its pockets elsewhere on the income statement.
Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool recommends Comcast and Time Warner. The Motley Fool has a disclosure policy.