Mic Drop #35: Hulu is Outperforming Expectations... Or Is It?

With sports and less Discovery content, Hulu in June 2021 is very different from the Hulu of June 2020

If you have been reading the stories about Hulu over the past few months, odds are you’ve been left with mixed impressions:

  • “The secret weapon with Hulu is obviously the rapid growing, robust advertising business”, according to Bloomberg (March)

  • Disney reported in Fiscal Q2 2021 earnings that Hulu’s subscriber base is up 31% year-over-year from 32.1MM to 41.6MM, with subscription revenues marginally higher (from $12.06 to $12.08 ARPU) and higher advertising revenue from increased impressions (from $67.75 to $81.83) (May)

  • Hulu had the most average viewing minutes per day of any major service, with 130, according to Nielsen, and “the high tally for Hulu is likely tied to its longtime position as a place for catch-up viewing” (June 22)

  • Hulu’s “day-after-linear-TV catalogue is a huge competitive advantage” but it “well behind the pack” when it comes to originals, according to analysis from The Entertainment Strategy Guy (June 24);

  • Hulu is “totally uninteresting”, according to one Wall Street Analyst interviewed by Vulture’s Joe Adalian; but,

  • “With the Kardashians moving to Hulu, along with the D’Amelio family, they could be the ones to beat in the future”, according to a reality producer also Adalian spoke to. (June 24)

In short, Hulu is performing unusually well for Disney but few outside of Disney seem to think so.

I made two predictions for Hulu in PARQOR's "Learnings from OTT streaming in 2020, Predictions for 2021" presentation under the Fiduciary vs. Visionary Executives Framework back in January:

  1. A solid business for Disney DTCI in 2021, Hulu outperforms predictions given Disney+ bundle growth driving Hulu and ESPN+ growth.

  2. FX and 20th Century Studios-focused clarity of value proposition (Hulu = timely vs. Disney+ = timelessness) emerges for both audiences and advertisers.

I think the past few months have proven out Prediction #1 - all key business metrics tell a story of strong growth, despite the doubters. The “price-value relationship” of the Disney+ bundle has been a key part of that.

The more interesting question is why Hulu’s value proposition seems to be in transition, if not evolving.

A Clearer Purpose for Hulu in 2021

Hulu in June 2021 is different from the Hulu of June 2020. Part of the difference lies in Disney’s back-end integration of Hulu’s ad tech.

Last June, The Information reported “Tensions Over Hulu Expose Fissures Within Disney Streaming”:

Hulu’s engineers have resisted being absorbed into Disney's tech team, and the discussions have reignited longstanding tensions between the two tech teams.

This June, Disney CEO Bob Chapek could not be happier with Hulu’s integration into Disney XP, its self-serve ad platform, as he told the JP Morgan Global Technology, Media and Communications Conference in late May:

Well, we've enjoyed double-digit ad growth in addressable advertising. And I think it's a function of a couple of things: Number one, great content because you have to have great content for people who want to watch for advertisers to want to go there. So it obviously starts with that unparalleled content. But it also says something I think about our audience-focused data and technology, and our ability to make that advertising truly addressable, which we're excited about.

But then we go even further in terms of our direct customers, and we have really self-service programmatic advertising. So that people can get in and sort of buy media in a different way, a much more modern way of doing it. So there's a lot of behavioral shifts that are happening in the marketplace, whether it's got to do with the consumers themselves or the advertisers themselves. And we are pretty proud of where we're at. We think we're ahead of the market. We're ahead of the curve, and we're seeing tremendous gains in addressable advertising, as I think you know.

Within one year, Disney has both solved those internal tensions and has a clearer vision for Hulu’s success and value proposition in the Disney ecosystem.1

On the front end, Disney relies unusually heavily on Hulu for streaming ad impressions. The majority of its 41.6MM subscribers are on the ad-supported tier. In its 2020 Investor Day for Streaming, it reported 92MM monthly ad-supported viewers on Hulu. At Disney’s recent upfront, advertisers committed 40% of total upfront dollars to streaming and digital outlets.

So the more impressions Disney can drive on Hulu, the higher the ARPU it can drive on the platform.

But which content will drive more impressions?

The challenge for Hulu is catch-up viewing has been the most popular behavior on the service, to date, but Nielsen data suggests originals have not been popular.

In May, Hulu lost important show inventory that drives a good portion of catch-up viewing: Discovery’s reality-based, unscripted, and DIY content from HGTV, Food Network, and Animal Planet (it still has content from ID).

The Kardashian and D’Amelio deals mentioned above are intended to make up for that deficit in reality content, in part. But, there are no one-to-one replacements for Discovery content.

This makes its recent integration of ESPN+ notable. Hulu is currently streaming Euro 2020 matches and Wimbledon from ESPN+.

Sports may not be a one-to-one replacement for Discovery content, but “powerful interest in live sports” was a big part of advertiser demand in Disney’s upfronts. Hulu’s SVOD, alone, has 4x the reach of ESPN+: so cord-cutters consuming live sports on Hulu could make up for whatever percentage of catch-up viewing on Discovery are lost.2

But, Churn

That is, in theory.

Churn remains a reality for every service in streaming. Hulu has lower churn (5%) than every service but Netflix (2.5%) and Disney+ (4%), according to Antenna.

We won’t know until the Fiscal Q3 earnings call in August whether the loss of Discovery content led to an uptick in churn on Hulu (unless the team at Antenna tells us sooner). The risk is real.

Hulu will remain a “solid business” for Disney through December 2021. But its value proposition inevitably will be different from the Hulu we see in July 2021 because Disney continues to iterate and experiment with unusual speed for a legacy media company (which I wrote about in Wednesday’s Member Mailing).

The only question is whether Hulu will be marginally or more heavily relying on live sports to drive viewership.

1

I wrote more on this in “A quick essay on Hulu after Q1 FY21” back in February

2

I wrote more about how Disney is testing sports bundling in “Mic Drop #18: Some Rewards for Skeptics of Disney+