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After Netflix's Price Hikes, Hulu Heads the Other Way

By Evan Niu, CFA - Updated Apr 22, 2019 at 12:06PM

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Hulu gets aggressive with its most popular plan.

Last week, Netflix ( NFLX -2.10% ) announced its largest price hike to date, with its most popular Standard plan getting an 18% increase to $13 per month, as part of the company's broader push to expand operating margins. Rival streaming service Hulu just announced that it's heading the other way, saying today that it is cutting the price of its most popular plan, its entry-level tier that still has limited ads. The price for that plan will drop from $8 per month to $6 at the end of February.

Here's what investors need to know.

Hulu interface on a TV, a tablet, and a smartphone

Image source: Hulu.

A price cut and a price hike

Hulu's ad-free tier will remain unchanged at $12 per month, but the live TV plan is actually getting a price bump, from $40 per month to $45. The price increase is likely attributable to technology and infrastructure investments Hulu is making in order to improve streaming performance, as well as adding Discovery channels to its channel lineup following a partnership announced in September. However, Hulu often notes that its most affordable tier is its most popular.

The service announced earlier this month that it added 8 million subscribers in 2018 and now has over 25 million subscribers in the U.S. -- impressive subscriber growth of 48% for the year, even if it trails Netflix's 58.5 million paid U.S. memberships by a significant margin.

Disney about to get majority control

While Netflix is turning its attention from growth to profitability, Hulu is doing the exact opposite. The price cut is a clear effort to attract more subscribers, potentially those that may be balking at Netflix's price hike, even as the service loses an estimated $1 billion to $1.5 billion per year.

Hulu is currently owned by Disney ( DIS -2.62% ), Twenty-First Century Fox, AT&T, and Comcast, although Disney is set to become majority owner as part of its acquisition of Twenty-First Century Fox assets that is expected to close in the first half of this year. But Disney could end up owning the entire service in the near future. AT&T got its 10% stake in Hulu after acquiring Time Warner but has said it plans on selling that stake in order to pay down some debt. Comcast is likewise open to selling its 30% stake to Disney.

Meanwhile, Disney is slated to roll out Disney+ this year, its direct-to-consumer (DTC) streaming service. Just days ago, the House of Mouse disclosed that it lost $580 million from equity investments in DTC services, which was "primarily due to a higher loss from our investment in Hulu." Hulu's losses were attributable to "higher programming, labor and marketing costs," Disney said in a regulatory filing.

The media giant also expects to start providing more supplemental information regarding its DTC services once it starts consolidating Hulu's results. Parent companies consolidate financial statements of subsidiaries when they own at least 50% of the subsidiary, and Disney's stake will increase from 30% to 60% once the Fox deal closes. Parent companies that own less than 50% typically use the equity method to account for investments, which is how Disney currently accounts for Hulu.

Disney knows it needs to invest in its transition to DTC services, which will inevitably entail some losses along the way. On the last earnings call, CEO Bob Iger expressed optimism around Disney's imminent majority control, saying, "I think we've got an opportunity to invest more in Hulu to grow its subs."

Check out the latest Disney earnings call transcript.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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