Hulu Shrewdly Undercuts Netflix with Strategic Price Reduction

Base tier now priced $3 less than comparable Netflix tier at a time when consumers are beginning to question all those  OTT charges hitting their monthly credit card statements
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With studies suggesting that Netflix could lose a sizable portion of its subscriber base with a price increase announced a week earlier, Hulu announced that it’s going to significantly reduce the monthly price of its base tier.

The media company, a joint venture between three publicly traded media conglomerates, said that starting in February, it will lower the cost of its base subscription video-on-demand service from $7.99 to $5.99.

“This may be the shrewdest move I’ve seen, and I’ve been covering this space for 15 years,” said Michael Greeson, who runs The Diffusion Group, a research firm focused on the OTT market.

Hulu’s base service gives users full access to its full VOD streaming library, but does require customers to watch commercials. Importantly, it now costs $3 a month less than Netflix’s base tier, which delivers a one standard definition stream per household and was recently bumped up to $8.99 a month.

“That’s a prima facia value play, positioning ad-based Hulu on the lowest end of the pricing spectrum,” Greeson said. “Since the company continues to significantly trail Netflix and Amazon Prime Video in subscribers, Hulu really had nothing to lose here and much to gain. If Netflix is a no-brainer at the new $9/month, Hulu makes even more sense at $6/month."

Related: Netflix Loses 8% of Consumers with $1 Price Increase: Study

Hulu didn’t offer official comment with its announcement. But behind the scenes, its decision-makers concede that previous $5.99 promotional offers for their base tier have goosed sign-ups. An even bigger driver, company officials say, is the higher engagement and retention rates wrought by these $5.99 promos. 

Perhaps confusing and diluting Hulu’s media strategy, the joint venture also said that it’s raising packages that bundle its SVOD library with virtual pay TV live-streamed services. The version of Hulu+ Live TV that requires users to watch ads during SVOD streams went up $5 to $44.99 a month; the iteration with no SVOD adds also went up $5 a month to $50.99.

But given the state of the ultra-competitive, low-margin subscription-based vMVPD business, where every operator is losing money on every customer they sign up, and rising program licensing costs have made $5 bumps almost routine, “+ Live TV” subscriptions may not be a category Hulu is interested in growing right now.

For his part, Greeson—who pegs Hulu+ Live TV’s subscriber base at around 1.6 million—doesn’t believe the price increase will hurt the business all that much.

“No doubt consumers see solid value in the offering, and we saw ample pricing headroom at $40/month,” he told MCN. “Given recent reporting of Hulu’s continuing losses, it makes all the more sense to take advantage of this headroom and increase prices at this point in time."

But ad-supported streaming (AVOD) is hot, hot, hot right now, evidenced at least to some degree by Viacom’s $340 million purchase of AVOD platform Pluto TV.

There’s a general consensus that has settled into the OTT market that consumers are becoming price-sensitive about video subscriptions. Notably, The Diffusion Group surveyed broadband users in December—a month before Netflix raised prices—and asked them what they would do if the No. 1 SVOD service became more expensive.

For a then-hypothetical $1-a-month price increase, 8% said they’d bolt Netflix.

For Hulu, which touts 25 million subscribers compared to 139 million globally for Netflix, advanced advertising may be a better way to compete. The joint venture said earlier this month that it took in nearly $1.5 billion in ad revenue in 2018 — which was probably welcomed news to majority shareholder Disney, which said its $580 million in equity investments last year were primarily earmarked to Hulu.

For its part, Hulu is championing a notion that there’s an emerging Generation Z audience running back to advertising, seeking relief from paywalls, a decade after their millennial forebears shunned commercials in video services.

Speaking at CES earlier this month, Hulu CMO Kelly Campbell said Hulu is seeing a less rejection of adverting from younger viewers, who are willing to sit through commercials to avoid subscriber fees they can’t yet pay for.

“Gen-Zers think differently about TV,” Campbell said. “They’re more receptive to advertising. They’ve grown up in this IP-powered universe, and they’re used to targeted advertising.”

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