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Hulu: Change of Business Strategy

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Sep. 12 2015, Updated 1:06 a.m. ET

Hulu going ad-free?

Hulu is an ad-supported, online video streaming service that is jointly owned by 21st Century Fox (FOXA), The Walt Disney Company (DIS), and NBCUniversal (CMCSA). In the previous part of this series, we discussed Hulu’s recent move to offer programmatic ad buying to its advertisers. In this part of the series, we will look at some other strategic changes made by Hulu in the past year.

On July 16, 2015, The Wall Street Journal reported that Hulu is planning to launch an ad-free service priced at $12–$14 per month later this year. Currently, Hulu’s free service is ad-supported, while its $7.99-per-month service provides content with fewer ads.

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Hulu has made some strategic changes in the past year to respond to stiff competition from other OTT (over-the-top) players in the market such as Netflix (NFLX) and Amazon Prime Instant Video (AMZN). For example, Hulu is acquiring original content and exclusive SVOD (subscription video on demand) rights. In April, it acquired exclusive SVOD rights to a variety of programming from Turner Broadcasting (TWX).

In June this year, Hulu also announced a partnership with CBS’s (CBS) Showtime network. Showtime will offer ad-free Showtime TV shows, documentaries, movies, and sports for $8.99 per month, on top of the $7.99 per month for a Hulu Plus subscription.

As the chart above indicates, Hulu provides a basic ad-supported subscription plan for $7.99 per month. It remains to be seen how well an ad-free premium plan priced at $12–$14 per month would be received. That is because Netflix’s ad-free subscription plans cost an average of $10 per month. On the other hand, Time Warner HBO Now’s and Dish Network’s (DISH) over-the-top offerings are slightly more expensive at $15 and $20, respectively.

What does this change of strategy mean for Hulu?

It appears that Hulu is adopting a two-pronged strategy to differentiate its offerings from those of competitors. In addition to looking at programmatic ad buying to better monetize its content, Hulu is considering the option of launching an ad-free premium plan for users who are tired of ads and may move to competitors. Further, Hulu is trying to bring in new users by strengthening its offerings through original content. However, in the midst of this churn, the company still could rake in revenue through better monetization of its content through ads.

You can get diversified exposure to 21st Century Fox by investing in the iShares S&P 500 Index ETF (IVV), which invests 0.28% of its holdings in the stock.

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