Even when Hulu has a hit original show, it's not that big.

The streaming service, jointly owned by Disney (DIS 0.70%), Twenty-First Century Fox (FOXA), Comcast (CMCSA 1.66%), and AT&T (T -0.18%), said its most-streamed episode of 2018 was the first episode of The Handmaid's Tale Season 2.

The Handmaids Tale has brought attention to Hulu originals, but the couple dozen of original series, miniseries, and films Hulu produces per year still don't drive a huge amount of demand for the service. Originals accounted for just 2% of content demand for Hulu, according to data from Parrot Analytics. By comparison, Netflix (NFLX 1.08%) originals account for nearly 40% of content demand on its platform.

Disney CEO Bob Iger has said he thinks there's an opportunity to expand original content on Hulu once it takes a controlling stake of the business through its Fox acquisition. Should investors worry that Disney could be making a bad investment?

Hulu's homescreen on TV, tablet, and smartphone depicting The Handmaid's Tale.

Image source: Hulu.

Where's the value?

It's important to point out Hulu has relatively few original series and films compared to Netflix. While Netflix is producing 700 original series and films this year, Hulu has produced a total of 43 series and films over the last five years or so, and it has ordered or started development on about 50 more for the next couple of years. So, where Netflix originals account for about 46% of titles on the service, original titles only make up around 3% of Hulu's content library.

So the fact that original titles only account for about 2% of content demand for Hulu isn't that surprising. Especially considering overall demand for Netflix originals indexes at about the same rate.

But what's concerning about Hulu's originals is that none of the shows are really over-indexed, not even The Handmaid's Tale. The average title on Hulu generates about 2.5 million demand expressions per month, according to data from Parrot Analytics. Hulu had just six original titles that exceeded that average in March.

While The Handmaid's Tale may be a big hit, it's still relatively small compared to a lot of licensed content on the platform. To be fair, even Netflix couldn't produce an original series that outperformed the demand for The Walking Dead in any given month. But Netflix is becoming more reliant on original content to fill out its library and drive demand while Hulu (thanks to its relationship with its parent companies) should have a steady pipeline of licensed content.

If people are subscribing to Hulu and mostly watching licensed content, what is the value of its original productions?

Netflix's content boss might be able to explain

At an investors conference earlier this month, Netflix content chief Ted Sarandos said there are three ways content (both licensed and original) creates value: A single piece of content could drive a consumer to sign up for the service, it could help retain subscribers, and it could bring additional attention to the platform from both consumers and creators.

The Handmaid's Tale is an example of a piece of content that might drive consumers to sign up for the service. That's evidenced by the spike in demand for the show for its season 2 premiere (for which Parrot Analytics doesn't have data). But once a new subscriber signs up and watches The Handmaid's Tale, he or she may find a lot of interesting licensed content and stick around as a subscriber. So, originals may drive more signups than licensed content even though they don't account for any more watch time than licensed content.

The Handmaid's Tale also accounted for 20 of Hulu's 27 Emmy nominations this year, the most nominations for any drama series on a streaming service. It won Most Outstanding Drama last year but failed to go back-to-back this year. The Emmys are an opportunity to shine a light on the quality of content available on a network, and Netflix has made a big push to get more award nominations in recent years. In turn, Hulu and Netflix are able to draw more talent to their production operations and create a virtuous cycle of bringing in more subscribers and more content creators.

Indeed, Hulu seems to have accelerated subscriber growth over the past year since The Handmaid's Tale started gaining recognition. Management says it will end the year with 23 million subscribers. That's up from 17 million at the start of the year. Previously, Hulu reported 12 million subscribers in March of 2016.

Using the full force of Disney and Fox's combined production capabilities to produce more original content is probably a good investment. Hulu's 23 million subscribers equal about one-third of Netflix's subscriber base. There's a lot of room to grow the service, and differentiating the product with originals that draw greater attention to the brand is one way to do it.