Comcast's (CMCSA -1.94%) NBCUniversal is planning to release its own streaming service early next year. With the company's agreement this week to cede control of Hulu to Disney (DIS -2.60%) in exchange for the option to sell its stake in the streaming company in 2024, its plans for its own streaming service have become a bit more clear.
NBCUniversal will continue to license content to Hulu for at least the next three years. After one year, the media company will have the right to also stream the same content on its first-party platform in exchange for lower licensing revenue from Hulu. NBCUniversal currently takes in more than $500 million in licensing fees from Hulu.
Investors should expect NBCUniversal to exercise its right to stream its own content -- that's also available on Hulu -- starting next year when it launches its own service. Here are some additional details about Comcast's streaming plans, and what investors need to know.
Two tiers of service
NBCUniversal will have two tiers to its streaming service: a free tier and a paid tier. But don't get it twisted, the free tier is the more premium tier. It'll require a pay-TV subscription to authenticate. It'll include ads as well.
Additionally, the "free" tier will include NBCUniversal episodes from current seasons and access to live streams of NBCUniversal's networks. The paid tier only includes prior-season episodes on demand. Paid subscribers won't have to sit through ads, though, and they might not be paying as much as originally anticipated. The company was originally considering charging as much as $12 per month. But, in light of Disney's aggressive pricing for Disney+, it'll lower the price to around $10 per month, according to CNBC.
NBCUniversal's parent company obviously wants to give consumers as much incentive as possible to subscribe to pay TV. Comcast is the second-largest pay-TV operator in the United States, and NBCUniversal owns a lot of cable networks. But intentionally curbing its paid tier for cord-cutters and those that don't want to sit through advertisements is indicative of some short-sightedness at the company.
Disney also has a big interest in supporting the pay-TV industry. Its media networks segment is its biggest source of operating income. Still, it's not leaving anything on the table with its direct-to-consumer services.
A slate of originals and a big back catalog
At this month's upfront event, where networks preview new shows for advertisers, NBCUniversal ad chief Linda Yaccarino said the services "will have a slate of originals and a gigantic library of all [the] favorites." It's unclear if originals will be exclusive to the free tier or not.
Original content is a key part of Disney's plans to attract subscribers to Disney+ and Hulu. It's also been integral to other streaming services like CBS's (PARA -3.35%) CBS All Access. CBS All Access offers a similar set of content as what NBCUniversal will offer in its "free" tier -- on-demand episodes from current seasons, a big back catalog of content, original series, and live streams of local networks.
Since launching in 2014, CBS All Access has grown to about 4 million subscribers. Management believes CBS All Access and Showtime could combine to reach 25 million subscribers by 2022. Growth has been largely fueled by the launch of new originals or big live events like the Super Bowl or Grammy awards. By keeping the live streams gated to the free tier, NBC will miss out on at least one growth opportunity for its service.
It's also worth noting originals can be quite expensive. And operating the streaming service costs money, too. Disney, for example, doesn't expect to turn a profit on any of its streaming services until 2023 at the earliest as it invests in content, technology, and marketing.
Despite offering the service free to the 88 million pay-TV subscribers in the United States, NBCUniversal may have a tough time building an audience big enough to offset its lost licensing revenue from Hulu and other streaming services, as well as its investments in original content. Investors also need to be mindful of how the streaming service will impact NBCUniversal's ability to grow its affiliate revenue from pay-TV distributors, which has recently grown thanks to full-stack video-on-demand rights. The streaming service renders those rights redundant.
It's a big challenge for NBCUniversal to overcome, and its plans to focus on a shrinking base of cable subscribers should give investors some long-term concerns.