Why Hulu is poised to become an advertising juggernaut
It’s certainly not a new story development that consumers are cutting the cable cord in hordes and that connected TV streaming apps have benefited from this trend. It’s been over a decade since Netflix first rolled out its streaming services, and since then a bevy of services, from Amazon Prime Video to HBO Now, have entered the market. In the next year, major media and tech companies that include Disney, Apple, and WarnerMedia plan to launch their own streaming apps, and if you add up the annual revenue generated by just the three top players — Netflix, Amazon, and Hulu — you have a market that already generates north of $26 billion per year.
But the vast majority of that revenue comes from paying subscribers. Even though there are hundreds of millions of streaming consumers, most of the $70 billion dedicated to TV commercials stays on linear TV. Earlier this year, one firm estimated that OTT streaming only accounts for 3 percent of TV advertising budgets even though 29 percent of TV viewing occurs on streaming apps.
The tides seem bound to shift, however. Multiple reports from this year’s TV Upfronts found that advertising executives were increasingly interested in buying streaming app inventory. Of course the main reason behind this interest is that they want to reach the growing cohort of cord cutters and cord nevers, many of whom fit within the coveted 18–49 demo. But these companies are also attracted to the better targeting capabilities and the efficiencies offered by streaming apps.
And indeed, a number of new streaming products have entered the market to address this growing need. Earlier this year, Viacom spent $340 million buying Pluto TV, a free streaming service with over 100 channels. It plans to populate the app with Viacom content and use it to help stem the bleeding from its declining cable viewership. Roku has gone all-in on advertising, debuting the Roku Channel with its 10,000 shows and movies. It also takes a cut of advertising from apps that stream on its platform. A number of streaming apps offer two paid tiers — one for ad-free viewing and a cheaper version that shows ads. CBS All Access, for instance, has a $9.99 per month “commercial free” option and a $5.99 “limited commercials” version.
But while there are literally hundreds of advertising-supported apps available on OTT streaming devices, very few can stack up to the reach and content catalog of Hulu. Launched in 2007 as a joint effort between several major cable and media companies, Hulu is now majority-owned by Disney and is in a unique position to absorb the billions of dollars migrating from linear TV to streaming.
Hulu is not only among the most-subscribed-to streaming apps, but its two biggest competitors — Netflix and Amazon Prime Video — eschew advertising (with some exceptions, I’ll get into those at a moment). Hulu is one of those streaming apps that offers two subscription tiers — $5.99 for a version that contains advertising and $11.99 to go ad-free — and currently has about 28 million subscriptions.
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For most of its history, however, we didn’t know the breakdown of how many subscribers were paying for each version, nor did we know the average number of users for each subscription. But in late May, Hulu revealed that it had 82 million total users, and that about 70 percent of them — or 58 million — were on the advertising-supported plan.
Not many streaming apps can claim that kind of scale. Pluto TV reportedly attracts 15 million unique viewers per month. As of 2018, CBS All Access only had about 2 million total subscribers, and though it’s seen strong growth over the past year, it still sits somewhere south of 8 million (that’s the total number of CBS All Access and Showtime streaming subscribers combined). I couldn’t find any reference to The Roku Channel’s total viewership, but the entire Roku platform has 27 million users, and assuming that most views of The Roku Channel are occuring on its own platform, its audience size is somewhere south of that number.
Hulu generated $1.5 billion from advertising in 2018, which is more than half of the $2.7 billion made from OTT advertising that year. Unlike its linear TV brethren, Hulu keeps it ad breaks at less than 90 seconds, which somewhat limits its supply, but it’s also rolled out a number of innovative ad products that extend its inventory. For instance, after noticing that its users pause its video over a million times a month, it developed a static ad unit that displays when a show or movie is paused. It also capitalizes on binge-watching by offering up longer, 90-second ad units that, if played, allow users to continue watching without being interrupted by ads as often.
Of course there’s one elephant in the room I haven’t mentioned yet: YouTube. The video behemoth counts over 2 billion monthly users, but it’s unclear how many of those stream its video on TV; the company merely touts the stat that its users watch 250 million hours of its content a day on TV screens. One recent survey suggested that more time is spent on YouTube’s TV app than Hulu. It’s certainly placing resources in expanding its TV offerings; it’s optimized its recommendation algorithms to reward longer, episodic content, and it’s aggressively courted TV advertisers, rolling out a number of ad products that allow them to specifically target TV viewers.
But there are two advantages Hulu has over YouTube. The first is that, with its library of 85,000 TV shows and movies, Hulu has one of the largest catalogs of premium content, the kind that’s the most comparable to what brands advertise against on linear TV. YouTube has a huge library of video, but the vast majority is user generated content, which is less coveted by advertisers than expensive shows and movies.
Second, many Fortune 500 companies still consider YouTube to be a brand safety risk. Rarely a day goes by without one of its prominent users attracting controversy. According to one advertising executive, every time this happens, they “get requests from C-level teams on the client side for an immediate response and recommendations.” Hulu, on the other hand, is considered brand safe by advertisers, and its smaller universe of available inventory allows them to more easily monitor where their ads appear.
Even though the competition is fierce, Hulu is likely to continue its ad dominance for the foreseeable future. Amazon keeps on hinting that it’ll offer a free version of Prime video, but thus far it’s only carried ads on some sports programming. It also launched an ad-supported, free app called Freedive, but it doesn’t have near the amount of video inventory as Prime. Netflix, on the other hand, has vowed to keep its services ad free.
So as more and more money flows toward streaming apps, Hulu is poised to benefit the most from this shift in ad spending. And given that it generates revenue from both ads and paid subscriptions, Hulu is probably one of the best-positioned streaming apps on the market. It may not have Netflix’s international presence or 148 million users, but its longterm value to Disney is immense. While all eyes are currently on the forthcoming Disney+, I think Hulu is the real key to Disney’s future growth in the streaming space.
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Simon Owens is a tech and media journalist living in Washington, DC. Follow him on Twitter, Facebook, or LinkedIn. Email him at simonowens@gmail.com. For a full bio, go here.
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