Check out the latest Netflix earnings call transcript.
Just days after Netflix (NFLX -1.13%) announced a round of price hikes on its subscription plans, Hulu announced a change of its own -- in the opposite direction. The TV streaming service took $2 off of its cheapest ad-supported plan, making it a mere $5.99 a month.
When industry-leading businesses raise prices, that usually creates opportunity for smaller competitors to follow suit and rake in some more coin. Hulu's decision to go backwards might seem confusing, but it's really an aggressive move to pick up new subscribers at the expense of Netflix as the company tries to scale its operations toward profitability.
Comparing apples and oranges
It's worth first acknowledging that Hulu isn't exactly the same kind of service as Netflix is. While Hulu's new budget-friendly $5.99 entry TV plan has ads, Netflix's $8.99 entry (up from $7.99) is ad-free and doesn't include high-definition video. Hulu's ad-free version remains unchanged at $11.99 a month. Netflix's next tier -- which allows for two simultaneous streams and high-definition -- costs $12.99, and a third tier for ultra-high-definition and four simultaneous streams is $15.99.
Hulu also allows for add-on services from TV content producers like HBO, another potential perk that Netflix doesn't support. Additionally, Hulu has a live TV option akin to a traditional cable package for news, sports, and other traditional cable channels. That plan just increased by $5 to $44.99 per month, making it more expensive than similar services like Sling TV, which starts at $25 a month, and YouTube TV at $40 a month. However, Hulu's offering includes access to exclusive series and on-demand classic shows like Seinfeld and 30 Rock not available at some competitors.
It's all about the size of the audience
After it completes its takeover of 21st Century Fox, Disney (DIS -1.79%) will become the majority owner of Hulu. The entertainment giant recently reported that it lost $580 million in 2018 on its equity investments, largely due to new content creation for TV streaming -- and that's when Disney only owned one-third of Hulu.
Losses could therefore run a lot higher in 2019, when Disney gains control over Hulu, not to mention the content it is creating for its branded Disney+ service that's set to launch late in the year. So, what's Mickey Mouse's angle in cutting the cost for subscriptions?
Hulu CEO Randy Freer has said that the streaming service needs to be in at least 30 million homes to be able to scale profitably. The company reported crossing the 20 million mark in the spring of 2018, and Freer has implied Hulu is now in the 23 to 24 million subscriber ballpark entering the new year -- so, still some work to be done there. Slashing the ad-supported subscription doesn't really help the company's implied shortfalls, but it's not really the recurring subscription revenue that makes the service tick. It's the ad revenue itself that's important, and the more viewers there are on Hulu, the more money can be made off of those ads.
But will a $2 difference woo over cable-cutters and Netflix users? It might. According to a recent Streaming Observer survey, 27% of respondents said they might cancel their Netflix subscription due to the price hike, with many indicating they were interested in a cheaper ad-supported model. When Netflix has raised its cost in the past, only a small percentage of subscribers have actually followed through with the cancellation threat. Nevertheless, with over 58 million subscribers in the U.S. at the end of 2018, converting only a small percentage of disgruntled customers to Hulu could go a long way for the company and its new taskmaster, Disney.
Thus, Hulu's pricing changes look like an opportunistic move at Netflix's expense. It remains to be seen if the price trolling will work, but when Disney takes the reins later this year, investors can expect a little more data on the company's streaming operations.
Check out the latest Disney earnings call transcript.