What would a life without commercials be worth to you?
That may be a tough question to answer, but Hulu is tempting its consumers with a commercial-free model that costs $4 per month on top of its $7.99 existing subscription plan. That's a 50% increase for customers, which seems like a lot, but for heavy users it may be worth it and could prove how much subscribers really value streaming TV.
Where's the value in today's programming?
One big drawback for cable subscriptions is that they're more one-size-fits-all than most consumers would like. If you want to watch a few baseball games per week and nothing else, you have to subscribe to a basic cable package with a sports package add-on. This may cost $50 or more, which may not be worthwhile for a few hours of baseball.
On the other end of the spectrum, if you sit in front of the TV all day surfing channels you may get a lot more use out of the breadth of options a cable subscription supplies.
The value of cable to each consumer is very different, but the price is often the same. This isn't a great way for either side to do business.
What are commercials worth to you?
The same concept can be used to look at the value of commercials. A 30-second commercial takes 30 seconds out of your viewing time no matter how much the advertiser paid for that time.
A 30-second add during the Super Bowl may cost $4.5 million, and for the entire game it was estimated that NBC brought in $350 million this year, or about $3 per person watching. Would you have paid $4 to watch the game without commercials?
What would you pay to watch the next episode of Modern Family without commercials? $2, $0.50, or maybe nothing? The point is, we don't usually have that option no matter what we're watching.
Streaming companies like Netflix (NASDAQ:NFLX), Hulu, and Time Warner's (NYSE: TWX) HBO Now have far more options than cable ever had when it comes to commercials, how many streams you can run at a time, and even resolution. This gives them more choices in how to monetize programming if the companies choose to use these options.
Charging for where the value lies
For now, Netflix and HBO Now have chosen to go (almost entirely) without commercials. This means users know what they're getting when they open a show or movie, but it also locks them into a model of a single revenue stream.
Hulu, on the other hand, has always had commercials and charged for a streaming subscription. This may have put the company behind Netflix in the past, but when it comes to bidding for content in the future it may give it an advantage (something we've seen with the Epix deal it stole from Netflix). After all, there was widespread panic when word spread that Netflix was even testing commercials in its streams.
Hulu gets $7.99 per month per subscriber, can charge for commercials, and has even given the user an option to pay $4 more to go ad-free. For a user like me, whose family uses Hulu on an almost daily basis, it was easy to justify the $12 cost. And it's a win-win for both sides. I get a better service and Hulu makes more money, which will likely turn into even more content in the future.
What I think Hulu is really doing is exploring the relationship it has with subscribers. How much do they value not seeing commercials? How much do they value hit movies? Can they add Showtime and charge $8.99 per month for it and will people sign up?
Pricing power matters
What you can charge consumers for your product is key to making money long-term in streaming. Netflix had a revolt when it raised prices a few years ago and is just now inching toward raising prices $1 per month. HBO Now is also going with a one-size-fits-all model, although at a higher price point of $14.99.
Hulu is going the route of add-ons, like commercial free and Showtime's package. With NBCUniversal, Fox, and Disney as parents to the streaming app there are sure to be more packages to come. This could add more value to Hulu subscribers as well as Hulu itself.
The streaming model has to change
If we're going to move to all streaming all the time the pricing model has to change. Netflix blazed the trail but its low price is constantly butting up against rising content costs and content owners launching their own streaming subscriptions.
Companies are going to have to figure out a way to adapt and change, adding more value to consumers, while charging for it appropriately. Hulu seems to be blazing a path that Netflix isn't ready to blaze yet.
Maybe that's why Hulu's content has gotten significantly better over the past few years and Netflix's content has been resigned to old movies and documentaries. Or am I the only one who's noticed that?
Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool recommends Time Warner. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.