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3 Reasons Hulu Will Survive the Streaming Wars

By Adam Levy - Oct 1, 2019 at 10:00AM

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Hulu is facing some big changes, but investors shouldn't fret the new competition.

Hulu is currently one of the three most popular video streaming services in the United States, alongside Netflix (NFLX 1.67%) and Amazon Prime Video. But Hulu will see a lot of changes over the next few months as new competitors enter the market and its ability to hold onto valuable licensed content diminishes. 

A big draw for Hulu is its next-day access to popular television series, but that could go away for a lot of shows. AT&T's (T 0.05%) WarnerMedia sold its stake back to the company and is launching HBO Max, so it no longer has as much interest in licensing content to Hulu. Meanwhile, Comcast's NBCUniversal will be able to stream the content it currently licenses to Hulu on its own streaming service, and it has the option to pull its content from Hulu entirely in early 2022.

The influx of new competitors vying for consumer's wallets and a change in the content catalog at Hulu could spur some subscribers to leave the service for a new competitor. But Disney (DIS -0.11%) investors shouldn't worry too much that Hulu's value will decline as its position in the market changes. There are three big reasons Hulu should be able to handle the incoming competition just fine.

Succulent plants arranged in the Hulu logo

Image source: Hulu.

1. Pricing

Hulu uses a hybrid subscription and advertising model, which can make it much more affordable than the competition. The company flexed that muscle earlier this year: Just after Netflix raised its pricing, Hulu lowered the price for its ad-supported option by $2 per month. In fact, Hulu still generates more revenue per ad-supported user versus its $12 per month ad-free offer even after the price cut.

Now that Hulu is fully under Disney's control, it's likely the company will be able to grow its ad sales even more. Disney will integrate its unique consumer data and ad technology with Hulu, and it'll include Hulu's ad inventory under a unified sales team. Combined with the secular growth in premium digital video ads, those factors should enable further growth in ad revenue per user at Hulu.

As a result, Disney has greater flexibility with Hulu's pricing if it needs to attract more subscribers to the service.

Additionally, Hulu ought to benefit from the streaming bundle Disney will offer. Consumers will be able to subscribe to Disney+, Hulu, and ESPN+ for just $13 per month. That bundle will increase subscriber retention, and it should have a positive impact on ad sales as well.

2. New original content

Hulu has already had some hits with original series, most notably The Handmaid's Tale. This year, it gained notice for its limited series The Act, which won Patricia Arquette an Emmy for her performance, as well as its comedy series PEN15.

Hulu's investments in original series and films will get a boost under Disney's control. With the acquisition of 21st Century Fox, Disney adds another film studio to its portfolio, and it now has unparalleled capacity to produce content. Disney will also lean heavily on its portfolio of intellectual property to produce content for Hulu that will reliably attract an audience.

As licensed content from Comcast, WarnerMedia, and others leaves the platform, Hulu plans to replace that content spending with its own originals. Netflix is leading the way with that strategy -- and proving it can increase subscribers and engagement without spending as much on licensed content.

3. Live TV

The ace up Hulu's sleeve is its live TV service, Hulu + Live TV. It's currently one of the least expensive options on the market for streaming live TV, and it offers considerably more value than competitors like AT&T TV Now (formerly DirecTV Now). What's more, Hulu is in a unique position to sustain its pricing thanks to its integration with its on-demand service and advertising business.

As a result of its better pricing and integration with its on-demand platform, Hulu has taken the lead among virtual MVPDs. It now has an estimated 2.4 million subscribers, and that number's growing quickly.

Hulu's live TV service is simply another form of bundling. It ought to improve subscriber retention, and it gives consumers a reason to pick Hulu over the competition, just like the Disney+ bundle. With the ability to exert additional control over pricing thanks to its strong ad business and integration with the rest of Disney's ad sales team and the improved value from new originals leaning on time-tested intellectual properties, Hulu should do just fine in the face of new competition.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney and short October 2019 $125 calls on Walt Disney. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.

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