Hulu Pricing Strategy in the US Market
Team 207: James Liu, Isaac Castro, Olivia Millspaugh, Gonzalo Munoz, Anjali Menon
Hulu is one of the largest online streaming services in the US by market share, with core product offerings in two categories—Hulu Streaming, which falls under Subscription Video On-Demand (SVOD) and offers users on-demand access to Hulu’s catalog of movie and TV series content through a smart device, and Hulu + TV subscriptions, which offers users streaming capabilities of live television channels via the Hulu application. In 2019, Disney acquired a controlling stake in Hulu, adding it to their expanding media portfolio which also includes ESPN, ABC, Marvel, Pixar, and more, each of which targets a different audience and consumer segment affecting Hulu’s pricing strategy. While Hulu also offers its streaming service in Japan as of 2021, we will focus on its pricing strategy in the US market which contains multiple levels of price descrimination, including bundling and add-ons.
Streaming Video On-Demand (SVOD) is a highly competitive market with multiple established companies, and frequent new entrants vying for market share. In the SVOD market, Hulu is the third largest player in the US by estimated usage share. According to Statista, in 2020 Hulu’s largest competitors were Netflix and Amazon Prime Video, which represent 20% and 16% percent of estimated subscriber share respectively, compared to Hulu’s 13%. The remaining streaming companies in the market occupy 51% of total estimated subscriber share; this includes HBO Max, Disney+, Peacock, etc. The presence of competing players that are targeting a similar user base leads to high demand elasticity in this market. These companies are differentiating themselves through creating exclusive content to lock in long-term viewership and increase user loyalty. Based on content metrics, Hulu is lagging behind Netflix, Amazon Prime Video and Disney+ on the percentage of exclusive content on their streaming platform. Overall, Hulu has only 4.26% exclusive content for movies, and 21.74% for TV series, compared to 48.6% and 72.3% in the case of Netflix. Given the similarity in user experience, the lack of exclusive content on Hulu’s platform further increases the elasticity of demand for customers, compared to competing platforms like Netflix.
Live TV streaming, Hulu’s secondary product, also occupies a highly competitive market with top players that include Youtube TV, Sling TV, FuboTV and DirectTV Stream. The elasticity of demand for products in this market is high, since all platforms provide nearly identical channel catalogs, which are also offered through conventional cable TV subscriptions. This makes large conventional cable TV providers, like Comcast Xfinity and Charter Spectrum, competitors to Hulu’s Live TV streaming services.
In terms of cost structure, Hulu has a low marginal cost and a relatively high fixed cost. However, these costs do not tend to play a large role in their pricing decision, partly because Hulu is meant to be a distribution channel that allows for higher revenues for its parent company, hence off-setting its own losses.
Hulu’s fixed costs are primarily the initial investment in setting up the platform, the licensing fees in streaming content from partners like Disney, ESPN etc, and production fees on producing Hulu’s original content. To start out, Hulu had to invest in the development of a website, mobile app, and smart TV app, which are all technological assets that have to be maintained over time. The cost of maintenance will depend on whether it is outsourced or handled in-house. Hulu also needs to pay for the viewership rights of the content that is available on their platform. This content comes from licensing partnerships with production companies and is usually a fixed monthly/ annual fee which contributes to a large part of their costs. Licensing fees usually fall within a range of subscriber content, but within that range, it is fixed. In the cases where Hulu chooses to produce original content, the costs associated with film production like the cast, set, production facility, employees and more come into play. However, if these costs are not recovered through projected revenue, they are considered sunk.
Hulu’s marginal costs are relatively low since they mostly consist of the additional hardware needed to support the streaming needs of users. Hulu runs its services on a hybrid cloud structure combining private data centers and the offerings of Amazon Web Services. Hence, Hulu’s decisions on its tech infrastructure could alter the marginal cost. For example, Hulu could convert more of its traffic to the private cloud and invest in more hardware upfront, this would in turn increase fixed cost but lower the marginal cost to onboard more customers. The granular (elastic) pricing options of modern-day cloud computing enables Hulu to scale up and down based on demand without incurring additional fixed costs, such as adding new servers or data center space.
In terms of pricing strategy, Hulu appeals to its customers through differentiation and customization, and is more complex than its competitors. It acknowledges different preferences for a wide range of consumer markets, through their content preferences and varying willingness-to-pay. After its latest pricing strategy change in 2019, Hulu utilizes a tiered pricing system with additional bundling options to appeal to the diverse spectrum of users in this market that have different willingness-to-pay. Hulu splits customers into four monthly payment tiers based on two viewing preferences: advertisements versus ad-free and the option of Live TV. This is aimed at extracting maximum value from customers in each segment. Hulu with Ads is priced at $5.99 per month (with the option to pay $59.99 per year), Hulu with Ads + TV priced at $64.99, Hulu Ad-free priced at $11.99, and Hulu Ad-free + TV priced at $70.99 per month. Its basic version Hulu with Ads, priced $3 below Netflix’s basic plan, is aimed at maximizing viewership at a time where Netflix is still seeing strong growth albeit intense competition in the industry. The basic version also offers an annual subscription at a discounted rate to lock in customers at this spectrum of willingness-to-pay. On the other hand, Hulu + TV targets high-end customers and traditional cable TV customers who have a higher willingness-to-pay. Lastly, Hulu acknowledges a market where a lower willingness to pay is prevalent and distinguishable via its student selection at $4.99 per month bundled with SHOWTIME and Spotify. The only other player to do this is Amazon with its 50% student discount bundling Prime Video with its other Prime services. Similar to other streaming services, Hulu also partnered with a telecommunications company Verizon, combining synergies and offering the Disney bundle for free with a Verizon plan.
Hulu's competitors have a more streamlined three or four-tiered pricing model, with the only difference between offerings being the number of concurrent sessions allowed and the quality of videos delivered. In contrast, Hulu tweaks its offerings by appealing to a specific type of customer, the moviegoer, the sports enthusiast, or the family, to name a few, with its Cinemax, Sports add-ons, and unlimited screens options, respectively. Hulu’s add-ons by channel preference include HBO Max at $14.99, Cinemax at $9.99, Showtime at $10.99, and Starz at $8.99, all monthly. Additional add-on options include Espanol for $4.99, Entertainment for $7.99, and Sports for $9.99 monthly. Hulu also bundles itself with its parent company at $13.99 monthly and is included in the "Disney Bundle" alongside Disney + and ESPN +.
Hulu is the only top player in the market that has an ad-based product offering. This strategy provides another source of income through advertisement, which has brought in a significant amount of revenue for the company. In 2020, Hulu received $1.5 Billion in ad revenue, which is 34% of their approximated revenue of $4.4 Billion. Ad revenue has consistently increased each year and the company expects to receive to $2.7 Billion in 2021.
Finally, the pricing strategy for Hulu is also impacted by the strategy of parent company Disney, as they work to position their multiple streaming service offerings as complementary goods in the Disney Bundle, rather than substitutable options for customers: ESPN+ for sports content, Disney+ for children and family friendly content, and Hulu for live television and additional content. Since the acquisition of Hulu by Disney, there has been speculation that Hulu could eventually be merged with Disney’s core streaming service (Disney+), as further networks have continued to consolidate their catalogs within their own proprietary streaming platforms (e.g. Comcast with Peacock). It stands to reason that moving forward, Hulu will need to rely on original content or on being the primary platform for Disney owned content that is not reflective of Disney’s stringent protection to their “family-friendly” brand. As Disney continues to develop and catalog more mature content (e.g. Deadpool franchise, The Simpsons, and 20th Century Studios films etc.), Hulu could become the exclusive platform for these titles, which could reflect a more opportune elasticity of demand for those customers drawn to accessing those exclusive titles. Given its stance with Hulu and Disney +, Disney is expected to position itself mainly as an online streaming service and compete more directly and aggressively with Netflix.
Recommendations on Pricing Strategy
Analyzing Hulu’s pricing strategy based on its demand, cost structure and market, we propose two changes from its current pricing strategy. The first proposal is to experiment with customer’s willingness-to-pay for ad-free content. Hulu’s most lucrative offering, in terms of revenue per subscriber per month, is their basic (with ads) plan, where they bring in an estimated $15 per subscriber each month. Given that Hulu charges $5.99 per month for this plan, the additional $9 per month in revenue is extracted from targeted advertising. Today, Hulu charges $11.99 per month for their ad-free SVOD offering, leaving $3 on the table for potential revenue from advertising. Therefore, our recommendation is to experiment with increasing the price of their ad-free service in order to gauge the willingness-to-pay from customers for ad-free content. We would expect that certain customers may be enticed to downgrade to the ads-included version, while others would be willing to pay the additional amount for the current ad-free service. If users downgrade, it opens up an opportunity for Hulu to negotiate higher ad revenue with the companies based on increased viewership for the ads.
Second, we recommend Hulu explore the possibility of consolidating the number of add-ons for its Hulu + TV customers. Hulu currently has eight add-ons and the numerous add-ons could create confusion for the customers. Looking at Hulu’s financial report, the average revenue per Hulu + TV customer is $81 per month, $10 above the $70.99 price Hulu charges for its Hulu + TV package. With this data, we see a potential to bundle more popular features to the Hulu + TV package that is currently priced at $64.99 and $70.99 (Ad-free). With this surplus, there is a potential to identify common features asked by Hulu + TV customers and reduce the number of Add-Ons to simplify user’s experience and reduce confusion.