Strategy

Disney Q3 Earnings: The Hulu Puzzle Piece

12 August, 2021
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Disney+ subscriptions are up, beating what Wall Street analysts were expecting and coming in at 116 million, but with all focus on the Disney Streaming Services bundle, the bigger question is how vital Hulu is to keeping new subscribers satisfied. 

Out of all the major SVOD offerings in the United States (on the path to being wholly global or starting to branch out internationally), Hulu has the highest catalogue demand. Hulu beats out Netflix, HBO Max, Paramount+, and Peacock — an impressive feat considering the last two boast deep libraries from mega entertainment players including ViacomCBS and NBCUniversal respectively. 

Hulu makes up 21.4% of demand share across its entire catalog. Netflix is in second with 18%, and then it drops dramatically to 10% for Amazon Prime Video. Disney+ has the lowest demand share across the major platforms clocking in at just 4.6% total demand — but that’s not at all entirely surprising. 

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Disney+ is the home for heavily branded, family oriented, franchise specific series. In the United States specifically, it exists as its own entity that embodies the Disney brand. Families and fans know what they’re getting for $8 a month when they sign up. There are some outliers (Hamilton) and Disney is clearly open to experimenting within those restrictions (The Simpsons, Black is King, and National Geographic’s catalog spring to mind), but it exists as a home for what Disney is and what it will continue to become. 

Hulu isn’t Disney+. Hulu is a collection of everything for someone and something for everyone. On its own, that’s a problem. Demand share for Hulu originals sits at 7.2% despite being the longest running SVOD service. It currently registers in fourth place behind Netflix (46%), Amazon Prime Video (9.3%), and Disney+ (8.1%). 

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This is mostly good for the Disney bundle. Hulu is everything that Disney+ isn’t, and Hulu is the reason to keep the bundle going for anyone who wants to watch anything beyond classic Disney shows, new Marvel and Star Wars projects, or Disney movies. A collection of sitcoms, dramas, reality shows, and prestige programming from FX (under the Disney umbrella post-acquisition of 21st Century Fox) generates enthusiasm and demand, which translates into subscription revenue, for a much wider audience base. 

The cable bundle worked because it added enough of everything for a relative price to make sure that someone in the family had something to watch at any given time. Nickelodeon for kids, ESPN and TNT for sports fans, and HBO or Showtime for fans of prestige dramas — plus many, many more. 

In lieu of the cable bundle is the streaming services bundle, which offers a substantially less valuable proposition content wise — there’s no direct 1:1 live sports offering and its much more fragmented than a classic cable package — but for a much cheaper price. Key to that experience, flipping though channels waiting for something to pop up and entice a viewer into spending more time in front of their TV, is general entertainment that isn’t necessarily sought out. It’s constantly in-demand, but it serves a different purpose than appointment viewing.

Much of this is Hulu. Hulu collects everything and puts it in one place for people. The streaming service boasts the highest demand for non-exclusive licensed content. Shows like Law and Order: SVU, for example, stream on both Hulu and Peacock. Same with Modern Family. Schitt’s Creek, Rick and Morty, and Community all stream on Hulu and elsewhere, including Netflix and HBO Max. 

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Non-exclusive licensed series on Hulu is the category with the largest total audience demand across all SVOD platforms in the United States, according to our data, the highest of any major SVOD competitor. The second highest was Netflix and then Amazon Prime Video. Non-exclusive licensed content, much of which is rotated out, is key to keeping subscribers happy and potentially convincing lapsed customers to reactive their account. For example, Friday Night Lights returned to Netflix on August 1st, and the show saw a bump in demand within the United States. 

Even though it’s non-exclusive content, it’s the type of series that may convince someone to stay within Disney’s walled garden than go somewhere else. Add in that Hulu also has the highest indexed total demand for exclusive licensed series (think of the FX collection), and Hulu’s value proposition is clear. Add it into a bundle Disney+, which may be the dominant streaming platform choice for consumers based on demand for original digital series, and the value proposition only continues to grow. As such, subscriber additions increase across all of the Disney streaming services. 

From a bundle perspective, Hulu is a crucial puzzle piece, offering an array of general entertainment for subscribers who don’t want to watch Marvel, Pixar, or other Disney titles every single day. The bigger value proposition question, however, is whether the bundle makes more sense as two distinct streaming services that consumers can jump between depending on viewing mood or part of Hulu is bundled into Disney+ like the Star extension on Disney+ in international territories. 

The first chart below showcases average demand for Disney+ and Hulu original series in the United States last quarter (April 1st through June 30th). Disney+ originals — including The Mandalorian, WandaVision, and The Falcon and the Winter Soldier, all outpace Hulu's originals. When that's flipped to look at total catalogue demand during the same period, Hulu outpaces Disney+, as seen in the second chart.

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Hulu is the option for subscribers once they've gotten their fill of Marvel or Star Wars.

There are a couple of big roadblocks to integrating Hulu into Disney+. Unlike Star, which carries content from across Disney’s entire catalog of brands (ABC, FX, FXX, Searchlight, 20th Century Studios, and Freeform), Hulu carries content from a number of different partners. Under the contracts signed, Disney might not be able to move those titles off one platform and onto another without renegotiation and higher costs. Plus, Hulu does generate revenue for the company.

Hulu + Live TV is another factor. What happens to the live TV offering that includes Hulu if the majority of content on Hulu moves over to Disney+? Not to mention that Comcast still has a 10% stake in Hulu that is currently valued at around $9 billion. Disney moving the bulk of content onto Disney+ as an additional tab for Disney+ subscribers, therefore solely benefitting Disney, that’s a legal battle no one wants. 

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All data points to Hulu being a valuable part of the bundle for Disney, especially in the coming years when Disney+’s subscriber base will hit saturation and the House of Mouse wants to use any possible strategy to keep churn rates low. Hulu, for now, is a complementary service — one that Disney might invest more in post-buying out Comcast’s stake. 

As far as the colloquial streaming wars go, Disney is in a good spot. Its various streaming services are seeing growth, there’s a good breadth of content across various genre on both Hulu and Disney+, and it doesn’t seem like demand for Marvel or Star Wars is slowing down anytime soon. Still, with a merging WarnerMedia and Discovery on the horizon, and tech giants like Netflix, Apple, and Amazon ready to invest tens of billions on content, Disney has competition — and it’s in this space that Hulu will need to help Disney’s streaming ambitions thrive.

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