Image Source: Hulu.
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Hulu is up against some big competition. Netflix (NASDAQ: NFLX) is the leader in streaming video on demand, and Amazonisn't far behind anymore. Both have nearly 50 million subscribers in the United States -- one of the two markets in which Hulu operates. Hulu, by comparison, has just 12 million subscribers between the U.S. and Japan.
As Hulu spends to keep up with its bigger competitors, it continues to lose money for its owners. In fact, it's losing more this year than the year before. Comcast (NASDAQ: CMCSA) reported an increase in losses associated with its ownership of Hulu during the first half of the year, from $24 million in 2015 to $65 million in 2016.
The loss had accelerated sharply in the second quarter, up more than threefold, to $40 million. Those losses show up in the results of Hulu owners Comcast, Disney (NYSE: DIS), Twenty-First Century Fox (NASDAQ: FOX), and newest investor Time Warner (NYSE: TWX).
Here's what Hulu might be spending so much money on.
The Epix catalog
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During the second half of last year, Netflix decided it wouldn't renew its contract with Epix, which holds the rights to films fromLionsgate, MGM, and Paramount Pictures. Hulu picked up the contract starting Oct. 1. While financial details weren't released, considering the high-profile titles in Epix's catalog, it likely cost quite a bit.
The relative value of the Epix catalog for Hulu, however, is arguably significantly larger than it was for Netflix. Netflix decided to focus on producing original films instead of renewing its contract with Epix. It also has several exclusive-rights contracts directly with studios, including its deal with Disney that went live in September.
Epix's catalog gives Hulu a more robust and enticing movie catalog, which can help reduce churn when television season dies down. The big draw for Hulu is next-day streaming of popular broadcast and cable television series. But Epix's catalog can keep customers from leaving.
Hulu's spending on original series has skyrocketed over the past couple of years as it continues to add more and more of its own shows to its catalog to help differentiate its service, and attract viewers to subscribe to its premium service.It's debuted eight new series since August of last year (if you include the continuation of The Mindy Project), and its newer series have higher production values than some of its earlier efforts. It also has 16 more series in the works.
Several of Hulu's newer originals have acquired critical acclaim, including comedies Difficult People and Casual, and dramas The Path and 11.22.63. While its productions haven't gotten the notoriety of Netflix's originals, the continuing stream of original releases every month or two will also keep subscribers from leaving.
A full-fledged television service
Hulu is reportedly planning to launch a live TV service in the first half of next year. Forging contracts with media companies with upfront minimums, and investing in additional streaming technology, could be running up Hulu's expenses without bringing the benefit of additional revenue yet.
The streaming television market is quickly expanding with new entrants. Hulu will be getting in near the ground floor, however, and there's a lot of potential in the market as cable TV consumers look to lower costs.
Hulu is expected to price its service around $35 at the low end for a single-stream service -- one device at a time -- or $50 for a multistream option. That's on the high end compared to existing competition, but if it includes access to Hulu's on-demand service, it could compete.
Until Hulu launches its live TV service next year, it may continue to rack up expenses. Even after the launch, it may take some time for Hulu to scale its offering for it to start producing any profit.
Hulu's joint owners can afford to take losses from Hulu as it invests in the future. The approximate $120 million loss it took in the second quarter is nothing compared to Comcast, Disney, Fox, and Time Warner's combined $6.3 billion in net income. While investors expect Hulu to generate a profit eventually, it's not under a lot of pressure to do so soon.
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Adam Levy owns shares of Amazon.com. The Motley Fool owns shares of and recommends Amazon.com, Lions Gate Entertainment, Netflix, and Walt Disney. The Motley Fool recommends Time Warner. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.