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Get Ready for More Hulu Originals

By Adam Levy – Jun 22, 2019 at 8:00AM

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Hulu is in a similar spot as Netflix was just a few years ago.

Hulu has a growing slate of originals, but now that it's under full control of Disney (DIS -2.21%), subscribers and investors can expect the number of original productions to grow even faster.

"Investment in original programming will increase significantly," Hulu CEO Randy Freer said in an interview with CNBC. "We are going to be able to invest more and invest more upstream and find the best stories and the best creators to make shows for the company,"

Freer is trying to paint the picture that Hulu now has the luxury of investing in original content supported by Disney's great trove of intellectual property and deep bench of production assets. In fact, Hulu finds itself in a position similar to where Netflix (NFLX -0.27%) was about four or five years ago, when it started ramping up its own original productions.

Hulu's The Handmaid's Tale displayed on a television, tablet, and smartphone.

Image source: Hulu.

No more common interests

Hulu's ownership structure has quickly changed following Disney's acquisition of Fox. AT&T (T -2.22%) sold back its 9.5% stake in the streaming company it acquired with Time Warner, and Disney inked a deal to buy out Comcast's (CMCSA -2.77%) 30% share of the company in 2024.

Disney now has full operational control over the company, but its incentives no longer align with AT&T's or Comcast's. Both companies license a lot of content for both Hulu's on-demand and live TV products. As part of their deals to sell their stakes, both agreed to ongoing licensing agreements. AT&T's WarnerMedia agreement is undisclosed, but Comcast only has to license most of its content to Hulu for the next three years before it has the option to pull it off the service.

Importantly, both WarnerMedia and Comcast plan to launch their own streaming services, which will compete head-to-head to Hulu. It's very likely the companies will retain as much content as their contracts allow to attract users to their respective services.

As a result, owning a slate of original series that subscribers love will become extremely important for Hulu in the relatively near future.

Using Netflix as a model

Netflix currently finds itself in the same situation as Hulu will in about three years or so. It was once an important partner to media companies, providing a high-margin source of revenue in the form of licensing agreements. But as Disney, WarnerMedia, and Comcast prepare to launch their own streaming services, Netflix has seen the content available to license dwindle. What is available has become extremely expensive.

Netflix saw the writing on the wall relatively early that these big media companies with valuable brands and content could easily take the Netflix model and use it themselves. That's why it started investing in original content -- content for which it has exclusive and irrevocable streaming rights.

Over time, originals have become a bigger and bigger piece of Netflix's content budget. Today, about 85% of Netflix's incremental content spending goes toward originals.

While Netflix certainly produces some duds, or some content that only appeals to a small niche of viewers, it's by and large had a lot of success with its original series. Netflix originals are a key reason the company has been able to successfully increase its prices over the past few years and still grow its subscriber base. People will sign up or stay subscribed just for its originals.

Hulu now finds itself in a very good position to copy that exact strategy, as it will probably see a lot of valuable content leave the service in a few years. If it can leverage the creative resources of the combined Disney-Fox to create more original content subscribers love, it should be able to easily meet Disney's goal of 40 million to 60 million subscribers by 2024.

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. The Motley Fool has a disclosure policy.

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