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Hulu’s Endgame: Eliminate The Middle Man And Become Cable TV

Hulu is co-owned by Comcast, Disney, and Fox.In 2013, Netflix Chief Content Officer Ted Sarandos told GQ writer Nancy Hass exactly what the plan was for the DVD-mailing company-turned-streaming giant:

“The goal is to become HBO faster than HBO can become us.”

Three years after that statement, Netflix has nearly 47 million subscribers in the U.S. and an original content budget of $5 billion for this year alone. By comparison, HBO NOW had only 800,000 subscribers in the U.S. as of February — a figure that surely increased during the Game of Thrones Season 6 premiere, despite all manner of access woes for the service that night — and while HBO claims to be “approaching 50 million domestic subscribers” overall, those are combined numbers for HBO and Cinemax. So Netflix certainly appears to be achieving its goals.

That brings us to this question: if Netflix wants to become HBO, what exactly does Hulu want to become?

We’re starting to get the answer to that. The streaming service co-owned by Disney, Fox, and NBCUniversal is approaching 12 million subscribers, and instead of becoming another Netflix, Hulu appears to have its sights set on becoming more like Sling TV and PlayStation Vue. Hulu announced plans to launch a live streaming TV service sometime in 2017, and it reportedly has its co-owners and Time Warner on board to supply channels. According to one Bloomberg reporter, this service will cost $30/month.

It’s unclear if this “skinny bundle” will be an add-on to Hulu’s current service, which is $8/month with commercials and $12/month without them, or if the current service will be included in that $30/month package. The latter seems more likely — Hulu currently offers Showtime as a “premium add-on”, while Amazon offers Showtime, Starz, and a growing list of channels as premium add-ons to its Prime Video service. Clearly, Hulu wants to follow Amazon’s lead with add-ons, but it wants to do so with live TV.

The big draw to this bundle? Sports. With the networks it has on board, Hulu can offer ESPN, Fox Sports, NBC Sports, and Turner Sports programming to its catalog. For most sports fans, that’s enough of a compelling option to bring them into the fold — especially if they already subscribe to Hulu.

This is where Hulu’s endgame comes into focus — Hulu is positioning itself to become cable TV.  As the market slowly shifts away from expensive cable and satellite TV packages, Hulu is setting itself up to be both a Netflix-style service for binge-watchers and a destination site for live events. What’s more, a Hulu skinny bundle can take advantage of a number of trends in the current TV market:

1.) Internet Service Providers are dropping TV.

Two years ago, smaller ISPs started dropping television service, citing rising carriage fees as the main reason they couldn’t afford to offer it anymore. Other pay-TV providers cut out some companies’ channels when their asking price got too high. (One cable CEO went so far as to call the current pay-TV market a “tragedy of the commons” that’s “guaranteed to end badly for all in the long run”.)

As streaming services continue to grow in size and number, those ISPs appear forward-thinking now — stick to offering internet service, leave video to online providers. Sling TV and PlayStation Vue have already jumped into this space. DirecTV is about to do the same.

Hulu, however, effectively cuts out the middleman, allowing the networks to sell its owners’ channels directly to video consumers. Theoretically, this should mean lower prices, but these are big media companies, so it probably won’t. With the right package of channels, however, $30/month could be a compelling offer for a lot of customers.

It’s not just small ISP customers, however, that Hulu could reach.

2.) Charter cannot institute internet usage caps for seven years.

Charter’s merger with Time Warner Cable was completed on Wednesday, making it the second largest cable company in America. In order to get the FCC to approve the merger, however, Charter had to agree to a seven-year ban on imposing broadband usage caps on its customers.

This allows Hulu to compete directly with whatever TV service Charter offers. Charter customers who want TV but also want to minimize how many channels they get and how much they give Charter could decide to bypass Charter for TV service entirely and go with Hulu. They might be able to save a few bucks in the process, but the more important thing is that they’ll be paying for a lot fewer channels and (presumably) watching more of them.

Of course, Charter’s lack of usage caps benefits every other streaming service equally, which means Hulu would have to compete in a fairly open market with Sling TV, PS Vue, Netflix, HBO Now, Amazon Prime, and everyone else. That’s where one of Hulu’s owners could help bring it a captive audience…

3.) Comcast could zero-rate Hulu.

Comcast  — which owns NBCUniversal, which owns a piece of Hulu — has been one of the most notorious instigators of home broadband usage caps, which are little more than a short-term profit grab. Customer outrage even forced the universally hated ISP to increase its cap from a paltry 300 gigabytes a month to one terabyte, though Comcast still charges $10 for every 50 GB over that cap.

As if that weren’t enough, Comcast also instituted another controversial policy — zero-rating. This is the practice of designating apps that don’t count against usage caps. T-Mobile brought zero-rating into the modern lexicon with its Binge-On service, which allowed any streaming service to sign up and be zero-rated on its mobile network.

Comcast, on the other hand, attracted a high-profile net neutrality complaint after it zero-rated its Stream TV service — and nothing else. Despite the complaint, the FCC has been hesitant to come down on either Comcast or T-Mobile for the practice.

Now imagine if Comcast decided to zero-rate Hulu.

It’s a bit of a long shot, as Comcast clearly wants to continue offering traditional cable TV. It might even be tempted to copy AT&T’s new policy of forcing customers to subscribe to a TV service to avoid usage caps. On the other hand, since Comcast owns a third of Hulu, they could simply decide to promote Hulu to customers who wouldn’t fall for its other heavy-handed tactics — sign up for Hulu’s streaming TV service, and it won’t count against your data cap.

Why could Comcast promote Hulu over Stream or another of its own video platforms? Because it might actually come out ahead as a result.

Over the last 8 years, [Comcast] has dramatically reduced its reliance on video revenue. In 2008, it delivered 59% of the total revenue for the company. In 2015, it accounted for just 29%. Over the same period content revenue has gone from zero to 37%. Given that mainstream content is likely to continue to do well, regardless of the delivery mechanism, this seems like a good move for company.

In other words, NBC channels would get paid. Partners Disney and Fox wouldn’t complain, because their channels would get paid, too. What’s more, zero-rating would give Hulu a huge advantage over Netflix, Sling TV, PS Vue, and any other streaming service. All that would be left is for Hulu to offer HBO as a premium add-on, and it would be a complete replacement for cable TV — and one that still helps Comcast profit.

Let’s not forget that Hulu could still attack Netflix in the long run. Right now, ABC, NBC, Fox, and the CW Network all have multiple seasons of multiple series on Netflix. What would happen if those shows left Netflix and made their way to Hulu? Netflix had better ensure its $5 billion of original content is good enough keep customers around.

Either way, Hulu seems determined to become more than just Netflix’s green cousin. Its live-streaming plans suggest that it’s aiming to replace pay TV services as we know them and become the new pay TV — one that comes direct from the networks themselves. How well they execute on that goal remains to be seen. Big media companies don’t have the best record of building platforms themselves.

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