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Why Hulu Doesn’t Have an Ad-Free Service Like Netflix — Yet

Acting CEO Andy Forssell says company will spend $750 million infusion from Disney, Fox and NBC on content and marketing

Hulu at some point expects to introduce a subscription video plan without any advertising — and compete more aggressively with Netflix.

But today, the Internet TV service doesn’t want to leave money on the table. Hulu generates $7.99 monthly per subscriber for the pay service and brings in about that much — in the “mid to high” $7 range — in advertising per Hulu Plus user, according to Andy Forssell, Hulu’s acting CEO and senior VP of content.

Hulu Plus carries fewer ads than the content on Hulu.com (usually two 30-second spots per half-hour, versus three on the free site), but the ad revenue it gets from paying customers “allows us to buy more content,” said Forssell, speaking at the Goldman Sachs Communacopia conference in New York.

That said, “Allowing people to pay more and not have advertising at all, I think that’s the right path long term,” he added. “I’m a big believer in choice… I believe over time we should introduce an ad-free service.”

Hulu’s owners — Disney, 21st Century Fox and NBCUniversal — explored selling the Internet TV service earlier this year, attracting bids from parties including DirecTV, AT&T, Chernin Group and Yahoo. But in July, the media congloms announced they would retain their stakes in Hulu and invest $750 million in the company.

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“What the $750 million lets us do is press down the accelerator and grow (the subscription business) faster, both through content and marketing,” Forssell said. “We want to get it to scale.”

In April, Hulu said the Hulu Plus service had hit 4 million subscribers. Currently, Hulu Plus is “midstream” in its path to profitability, Forssell said, while Hulu.com became profitable about 2½ years into its life.

Meanwhile, Hulu Plus should gain traction as TV broadcasters delay their newest episodes from becoming available on Hulu.com for several days after they air.

Since last fall Fox has delayed free online access to new eps for eight days after broadcast, making them available on Hulu Plus and through pay-TV partners next day after air. So far, NBC and ABC have continued to release shows on the Internet free day-after-air, but Forssell expects them eventually to follow Fox’s lead.

“I have no inside information. But I expect all the broadcast networks to institute a delay as they reach retrans deals (with pay TV operators),” he said. “The economics make that inevitable, but I couldn’t guess at the timing.”

As for original and exclusive content, Hulu looks for properties “where we can make the difference” to help showrunners find an audience, Forssell said. He cited the company’s recent deal with Lionsgate for comedy “Deadbeat,” to be produced by Dakota Pictures and Brad Pitt’s Plan B Entertainment.

“I can’t think of a situation where we’ve bid against someone” for an original series, Forssell said, noting that Netflix has vied with large cablers in some of its deals.

The Hulu Plus subscriber base skews younger than broadcast TV, with a median age of about 35 or 36, and they’re more affluent, according to Forssell. There’s an even 50-50 split between men and women, and females 18 to 35 are Hulu’s the fastest growing segment. Hulu users watch an average of about 20 hours video per month.

There’s no way Hulu could have gotten off the ground without being a joint venture, Forssell said — but he acknowledged that JVs are “by nature somewhat treacherous… different investors sometimes have different agendas.”

But, he said, both Disney and 21st Century Fox are “committed” to Hulu’s success. The third owner, NBCU, is forbidden from exercising operational decisions about Hulu under Comcast’s agreement with the U.S. government to acquire NBC.

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