nScreenMedia OTT multiscreen media analysis

Will consumers take the Hulu ad-free option? Is it too cheap?

Hulu

Hulu struck a completely new tone last week with the announcements it would allow people to buy-out of watching the ads. Is the company charging enough for the option, and will consumers actually go for it?

Hulu announced last week an ad-free option for viewing the shows. Consumers can pay $4 more a month ($11.99 overall) and enjoy the shows it provides without ads. This is not quite true in all cases. Some shows, like ABC’s Scandal and Fox’ New Girl, will still be seen with pre and post-roll ads, due to licensing constraints. However, consumers will be able to enjoy the majority of shows completely without ads.

How did Hulu arrive at $4 as the increment in monthly subscription? In May of this year, I estimated the value of a Hulu subscriber based on some new data from CEO Mike Hopkins.

He said that the company is closing in on 9M subscribers, a 50% increase in one year and 80% increase since December 2013. Hulu’s subscription rate has remained unchanged at $7.99 since the company added the subscription option over 3 years ago. It is now generating $72M a month, $860M a year, in license revenue.

Mr. Hopkins did not reveal how advertising sales were going, but in 2014 nScreenMedia estimated Hulu was generating around 59% of its revenue from ad sales. If the company is still tracking to the same ratio, ad revenue could be close to $2B a year and total revenue not far from $3B.

By comparison, Netflix needed 6 times as many subscribers to generated $5.5B during 2014, illustrating the strength of Hulu’s dual revenue model.

This analysis led me to speculate that a Hulu subscriber was twice as valuable as a Netflix subscriber. I happened to mention this to Tim Connolly, SVP of Distribution at Hulu. He smiled and said perhaps not that much. With all of that data, paying 50% more to watch ad free sounds a pretty reasonable place to try the feature out.

Will consumers actually choose to pay 50% to view the content ad free? Deloitte Data from earlier this year suggests this option may be less popular than you might think.

According to Deloitte, 71% of SVOD users said they valued the fact that their service allowed them to watch ad-free. That certainly suggests Hulu is on the right track with its new offer, but wait! Deloitte says that 62% would be willing to watch ads to cut the cost of the service! Given that most are paying $10 or less a month for their SVOD service, it’s surprising that so many would give up something they obviously value so much to save so little!

Even more surprising is that it looks like bingers, those watching 3 or more TV show episodes back-to-back, are more likely to be willing to cut costs by watching ads than non-bingers. 66% of GenXers said they liked the idea of saving money by watching ads, but within that age group 69% of bingers said this versus 57% of non-bingers. Bingeing indicates a viewer has a much higher level of engagement with a show than other viewers. It seems odd they would be willing to accept interruptions to the experience from ads.

The good news for Hulu is that the company is winner whether consumers bite on the ad-free option or not.

 Why it matters

Hulu’s option to let people pay more to watch ad-free is a dramatic departure from its dual-revenue model.

The $4 increment in subscription cost seems like a reasonable premium to pay from the company’s revenue standpoint.

However, data suggests few will take the company up on the option.

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