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Wednesday, June 17, 2015

Hulu Steps Up Its Fight Against Netflix


Much smaller Web-video service secures shows with marketing promises as well as money

Discovery’s ‘Deadliest Catch’ is one of the shows that has moved to Hulu from Netflix. ENLARGE 
Discovery’s ‘Deadliest Catch’ is one of the shows that has moved to Hulu from Netflix. Photo: DISCOVERY CHANNEL
When 21st Century Fox started shopping the online video rights to its TV drama “Empire” earlier this year it ran into trouble with Netflix Inc.
Netflix believed Fox had devalued the show by already making the entire first season available through cable video-on-demand services, instead of just a handful of episodes. Netflix wanted a discount if the TV network continued that practice, which is known as “stacking” episodes.
Rival streaming service Hulu LLC stepped in and not only agreed to pay more than Netflix but indicated it was fine with episode-stacking, which Fox says helped build the show’s audience by allowing viewers to catch up.
The “Empire” deal is just one example of how Hulu is catering to the wishes of traditional television giants—and securing deals with some high-profile content producers. AMC Networks Inc., Time Warner Inc. ’s Turner Broadcasting, 21st Century Fox’s FX Networks and Discovery Communications Inc. are among the companies that have struck big content-licensing deals with Hulu in recent months. Those deals include Turner moving its show “Aqua Teen Hunger Force” to Hulu from Netflix, and Discovery’s “Deadliest Catch” doing the same.
Of course, Hulu’s friendliness with the TV industry isn’t surprising. It is a joint venture of 21st Century Fox, Comcast ’s NBCUniversal, and Walt Disney Co. It was launched more than seven years ago as a free, advertising-supported home for broadcast television shows that could fight back against the threat of online piracy. (21st Century Fox and Wall Street Journal owner News Corp were part of the same company until mid-2013.)
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Hulu’s relationship with its parents has run hot and cold, and the service has twice been on the auction block. But in the past couple of years, with the help of a $750 million cash infusion from its owners intended to help it take on the Netflix juggernaut, the service has significantly shifted strategy toward building out its $7.99-a-month subscription service.
Armed with this cash—which came after the most recent sale attempt was called off in 2013—Hulu has become newly aggressive in the content marketplace, with deals for original shows and big franchises like its acquisition of streaming rights to “Seinfeld” for $700,000 an episode, as the Journal reported in April. In the process, it has become an important piece on the complex chess board between Netflix and media companies, who are increasingly nervous about the impact that Netflix, with its 40 million domestic subscribers, is having on their business as ratings fall.
Beyond its openness to stacking episodes, Hulu also has agreed to promote the current season of shows so more viewers will tune in, and to highlight a TV network’s branding on its reruns—saying something is an original series of FX or AMC, for example.
“We look at network brands as a benefit to us,” said Hulu Chief Executive Mike Hopkins, a former Fox distribution executive, in a recent interview.
“It’s a very synergistic relationship,” said Gary Newman, co-chairman of Fox Television Group, of Hulu’s openness to stacking. “They have accepted the notion that the bigger we can build the show, the better it is likely to do on Hulu, not the opposite.”
Netflix has a different view. Chief Content Officer Ted Sarandos, speaking at a recent MoffettNathanson conference, said the shift of programmers like AMC from Netflix to Hulu was simply a result of Netflix’s strategy of cherry-picking the best performers and focusing more on its original programming, as well as its refusal to pay top dollar for shows that have been stacked.
His comments made clear how different Netflix’s view of channel brands is from Hulu’s. “I think in the pay-television world…the channel brand equity means a lot, and in our world, it really doesn’t.”
The effort to land more popular shows has helped Hulu’s base of paying subscribers grow briskly to around 9 million, from 6 million last year, although it remains tiny compared with Netflix.
A scene from Fox’s ‘Empire.’ Hulu topped a Netflix bid for the show. ENLARGE
A scene from Fox’s ‘Empire.’ Hulu topped a Netflix bid for the show. Photo: Chuck Hodes/Fox/Everett Collection
Hulu is expected to double its spending on content this year to $1.5 billion, putting it roughly on par with Amazon.com Inc. ’s Prime Instant video, though still well behind Netflix, which is expected to boost content spending nearly 18% to $3.3 billion, according to RBC Capital Markets analyst David Bank.
People familiar with the Hulu’s financials say it has yet to reach sustained profitability. That means that if spending on content rises further, the owners will likely have to kick in more money. Hulu is on track to bring in about $1.5 billion to $1.7 billion in revenue this year, the people said, up from revenue of $1 billion in 2013, when it last disclosed its financials. Netflix revenue in 2014 totaled $5.5 billion.
Hulu’s owners have at times been reluctant to constantly put money into the site. This time around, however, the entire TV ecosystem has new reasons to want to keep Hulu strong. Its media company owners see their investments in the site as part of a virtuous circle. One person close to Hulu’s owners said they are still coming out ahead on their investments in the money-losing site, since a sizable chunk of Hulu’s content spending goes to them as part of their licensing deals with the service.
Traffic to Hulu’s site on computers and laptops is dropping as Hulu has played down its free, ad-supported service, which has only been available through desktops and Android mobile devices. But Hulu says overall consumption and video ad impressions are increasing when viewing on living room and mobile devices is counted. “Hulu is growing in both advertising and subscriber revenue and we are on a robust growth trajectory,” the company said.
Media company executives also said they like it that Hulu—unlike Netflix—has advertising, and therefore doesn’t train viewers to expect to be able to watch TV without commercials.
In addition, Hulu is available only in the U.S., so it is only looking for domestic rights, while Netflix is increasingly pushing for global rights.
“When you look at the domestic prices, we were getting more from Hulu,” Mr. Newman said. “When you looked at the potential of world-wide revenue, we would do far better going into those markets and selling individually.”
Write to Keach Hagey at keach.hagey@wsj.com and Shalini Ramachandran at shalini.ramachandran@wsj.com

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