Hulu’s cash burn has accelerated — its losses in the second quarter of 2018 more than doubled — as the video-streaming venture continues to step up its investment in content and technology to acquire new customers.
At this point, questions remain about what will happen next for Hulu once Disney gains majority control of the company, and how Hulu will find a path to profitability after an intense period of investing in growth.
In Q2, Hulu sustained a loss of about $357 million, double from the prior-year quarter of about $173 million. That’s based on Comcast’s 10-Q filing for the period, which said the streamer’s losses were “primarily due to higher programming and marketing costs.” Disney’s quarterly filing also cited increased content spending along with “labor costs, partially offset by higher subscription and advertising revenue.”
The Hulu parent companies don’t disclose revenue for the JV, but that’s clearly on the rise. Hulu had 20 million paying subscribers as of May, up 18% from the end of 2017. Of those, about 800,000 had Hulu’s live TV service, priced at $40 monthly.
With its costs going up, Hulu’s parents — Disney, Comcast/NBCUniversal, 21st Century Fox and Time Warner (now WarnerMedia under AT&T’s ownership) — have been pumping more money into the venture, with regulatory disclosures indicating they’re collectively putting in $1.5 billion this year. That would be up from $1 billion in 2017.
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Comcast said it made cash capital contributions to Hulu totaling $227 million for the six months ended June 30, up substantially from $99 million in the first half of 2017. That’s consistent with Disney’s disclosure that it has invested $227 million into Hulu over the first six months of the calendar-year 2018, and has committed to make a total capital contribution of $450 million to Hulu in 2018.
On Disney’s Aug. 7 earnings call with analysts, CEO Bob Iger noted that as part of the deal with 21st Century Fox to acquire big pieces of the Fox entertainment assets, Disney will pick up Fox’s 30% share in Hulu to give the Mouse House a 60% stake in Hulu.
Hulu “will fit in very significantly to our app strategy,” said Iger. He’s previously said that in the mix of the rest of Disney’s direct-to-consumer streaming lineup, Hulu will be the “adult-oriented” brand, and the obvious destination for programming from the newly acquired FX and Fox television studio. Hulu already skews toward a grown-up audience with dark originals like “The Handmaid’s Tale” and “Castle Rock,” although it also has a robust slate of kids’ programming as well.
At some point, Hulu also might become part of a bundle that includes the Disney-branded streaming service, which is set to launch toward the end of 2019, and the premium ESPN+ sports package.
“If a consumer wants all three, ultimately, we see an opportunity to package them from a pricing perspective,” Iger told analysts this week. “But it could be that a consumer just wants sports or just wants family or just wants the Hulu offering, and we want to be able to offer that kind of flexibility to consumers because that’s how we feel the consumer behavior, what consumer behavior demands in today’s environment.”
But how big will Disney’s appetite be to keep plowing money into Hulu? Remember, Hulu is competing against Netflix — which itself continues to operate at a negative free cash-flow rate — as well as Amazon, which is investing in Prime Video as a way to yield more e-commerce purchases from Prime members. Hulu also is vying for subscribers in the “virtual” pay-TV arena against Google’s YouTube TV, AT&T’s DirecTV Now, Dish’s Sling TV and others.
Disney keeps demonstrating that it believes internet video is the way of the future (witness the $2.6 billion it spent to acquire majority control of BAMTech). Presumably Iger and Kevin Mayer, who is chairman of Disney’s recently formed Direct-to-Consumer and International business segment, are looking at Hulu as a long-term play with the sustained investment now paying off in the years ahead.
At some point, it’s possible that Disney will try to buy out the two remaining shareholders, Comcast (a 30% shareholder) and WarnerMedia (which owns 10%).
Worth noting: Comcast chief Brian Roberts was just beat out in a bidding was on the Fox deal by Iger; it’s not clear Roberts wants to give Disney a nearly total hold on Hulu. On the other hand, Comcast doesn’t have a strong direct-to-consumer video play itself right now (aside from NBC Sports and its Playmaker Media division), so it might want to exit a Disney-controlled Hulu to focus on its own OTT strategy.