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Hulu: Its Strategic Significance for Disney

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Hulu

On January 9, 2016, The Wall Street Journal reported that Hulu entered into a multiyear agreement with Sony Pictures, a unit of Sony Entertainment (SNE), to stream older TV shows and movies from Sony’s content library.

In a bid to compete with Netflix (NFLX) and Amazon Prime Instant Video (AMZN), Hulu is either producing original content or acquiring content. Last year, Hulu acquired exclusive SVOD (subscription video on demand) rights to a variety of programming from Turner Broadcasting (TWX).

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Disney’s broadcasting segment suffered an equity loss from Disney’s investment in Hulu in fiscal 2015. Disney is an equal stakeholder in Hulu along with NBCUniversal (CMCSA) and 21st Century Fox (FOXA). Disney’s equity loss from Hulu was mainly due to an increase in content and marketing costs. Hulu is expected to soon exceed 10 million subscribers in the United States.

Disney expects the equity loss from its investment in Hulu to accelerate. This is because Hulu is increasing its investment in acquiring original content from media companies and is also producing original programming. Disney believes this investment will benefit Hulu in the long term.

As the graph above shows, Hulu offers a basic ad-supported subscription plan for $7.99 per month. It remains to be seen how well Hulu’s ad-free premium plan, priced at $11.99 per month, is received since Netflix’s ad-free subscription plans average $10 per month. Last year, Hulu started offering an ad-free option plan for its users at $11.99 per month in addition to the existing $7.99 per month service.

On the other hand, Time Warner’s (TWX) HBO Now and Dish Network’s (DISH) OTT (over-the-top) offerings are slightly more expensive at $15 and $20, respectively.

Hulu’s investment in content

In October 2015, Hulu renewed its agreement with Viacom (VIAB). Under the terms of this agreement, Hulu would be an exclusive SVOD platform to carry Viacom’s popular TV shows.

Hulu also offers CBS’s (CBS) Showtime for $8.99 per month on top of the $7.99 per month for a Hulu subscription.

The PowerShares QQQ Trust Series 1 ETF (QQQ) holds 0.67% in 21st Century Fox. If you’re interested in exposure to the television sector, QQQ has 4.6% exposure to that space.

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