Why Did Hulu Just Lower Their Price To $5.99/Month?

The obvious answer is to get more subscribers. That’s the name of the game when it comes to streaming video. This has been Netflix’s goal since it entered streaming video in the US, and then aggressively expanded worldwide. Looking at how Netflix went from 1.5 million subscribers in 2003 to nearly 100 times is, frankly, crazy impressive. And it explains why Netflix’s stock has gone from $15 a share at IPO to something like $4,700, if you adjust for stock splits.

Hulu is playing catch up. In January, as it announced the price cut, it also announced a whopping 47% growth in US subscribers (8 million new subscribers). It still has a long way to go—and Netflix has a global head start—but it’s trying to catch up:

The corollary to adding subscribers is that losing subs would be “suboptimal” (to use some industry jargon). As hinted above, Hulu previously offered the $6 price starting in October 2017 for three months, and again in September of 2018. (The TV Answer Man banged this drum loudly when many outlets called said Hulu was lowering its price.) Really, Hulu is continuing the previous promotional price more than they are lowering prices. They just announced it as a price increase for maximize the PR buzz following the Netflix price increase.

The example that probably keeps Hulu execs worrying is DirecTV Now. The AT&T execs running DirecTV also heard the siren call of promotional prices. In this case, AT&T lured customers with a $10 a month plan for their previously $40 and up service. Sure enough, when the deals expired, so too did the subscribers. As a result, after peaking at 1.8 million subscribers in early 2018, AT&T revealed in January it had lost 267,000 subscribers, bringing their total down to 1.6 million.

So the simplest explanation for this price movie is that Hulu is just keeping the lowest price it offered customers. (Oh, except for that time they offered a $0.99 a month plan for two days. That’s not coming back anytime soon.) By being cheaper than HBO and Netflix, it will look like a bargain and allow it to catch back up in the streaming wars.

Well, all the big corporate merger news. As 2017 started, Hulu was owned by four corporate parents: Disney, NBC-Universal, Fox (each owned 30%) and Warner Bros (10%). (CBS and Viacom never joined.)

Joint ventures are kind of terrible to be a part of and, in most cases, they fail. This applied to Hulu. Trying to please four corporate behemoths had some upsides (like lots of content), but some notable downsides (like five rolling episodes). For Hulu to thrive, outside observers thought—as I have—that Hulu would be better owned by one corporate overlord.

That overlord will be Disney. When Disney gobbled up 21st Century Fox in 2017 (for a whopping $71 billion), some observers noted that Hulu may have been the real target. With that deal having just closed, the smart money says that Disney will buy out AT&T from Hulu, since AT&T who needs the cash to pay for the Warner Bros. acquisition. That would give Disney 70% control, which may be enough to do whatever it wants with Hulu, including keeping the prices low as it tries to gobble up subscribers.

It needs to gobble up subscribers because the other traditional way to measure a business—making money—well, Hulu isn’t doing too great at that. (I mean, neither is Netflix, but Wall Street has been comfortable ignoring that so far.) From past reports, we know that Hulu has lost a lot of money:

Disney’s goal is to ignore the losses (a la Netflix) for as long as possible. But how long will that last?

This is what we care about as customers, right? The worst pricing “cable company” models offer 6-month introductory prices which then balloon with unexpected fees. The best pricing is stable pricing, like Netflix, who has increased prices for everyone about once every two years. Or HBO, which has cost $15 for what feels like forever. Hulu is somewhere in between.

So is Hulu a cable company in disguise or a future Netflix?

The “cable company in disguise case” is pretty simple: Given the very real cash losses, this could very well just be a one-time deal to get a lot of subscribers by the end of 2018. This is possible. But I don’t think that’s likely.

Subscriber losses will worry Disney more than the cash losses for the foreseeable future. They want to present the “streaming growth” case to the market. Clearly Disney has realized streaming consumers are fickle. Unlike cable or cell phones or health care, which are really hard to cancel, streaming video is pretty darn easy. Hulu wants to avoid upsetting those customers with unexpected price increases.

And I think Disney doesn’t even care about losses on its cheapest plan.

This brings me to my theory I haven’t seen covered as much. I’ve called Hulu’s $6 price a “promotional” one in that it was lowered to immediately boost subscribers. That’s true but only half the story. Unlike Netflix—whose $13 plan is the whole enchilada—Hulu wants to be so much more.

Once you’re streaming, Hulu wants customers to sign up for the bigger fish: the $45 live TV option. Hulu wants to become your “virtual” cable company As seen in the prices, this business is a lot of more valuable for Hulu than streaming. While they were lowering prices on streaming, they actually increased prices on the live TV option by $5. In other words, if Hulu can get you to sign up for Live TV for just three months, that can pay for the price cut for 14 other customers. That’s a good bet to make.

That’s not all. Even if you don’t get Live-TV, you can add on other premium streamers like HBO, Showtime or Starz. Hulu collects a cut from these additional add-ons. (Between 15 and 30%.) If Hulu can entice you in with the limited streaming bundle, and get you to add one other premium channel, then you’ve again paid for the price cut. Or if they get you to upgrade to “no advertising” tier.

Of course, by the end of the year there is the add-on that Disney cares the most about: Disney+, their future home of Marvel, Star Wars and beloved animated films. If Hulu sells that subscription as well—and I bet you it does—then again having the low-priced Hulu streaming options is a cheap price to pay to get new Disney Plus customers. This, along with other streamers (like CBS All Access), could help Hulu become your all-in-one access point to TV. That’s Disney/Hulu’s long game.

Then, Disney will take this entire show on the road. Meaning, launching internationally, too. Stability in the US subscriber base (or huge growth) will help make Hulu’s eventual international plans easier. And they can scale the Live TV and add-ons internationally after they’ve built out the infrastructure.

The Entertainment Strategy Guy writes under this pseudonym at his eponymous website. A former exec at a streaming company, he prefers writing to sending emails/attending meetings, so he launched his own website. You can follow him on Twitter or Linked-In for regular thoughts and analysis on the business, strategy and economics of the media and entertainment industry.