In Wednesday’s mailing, I quoted a long Twitter thread from IAC Executive Chairman Randall Rothenberg - “Television Enters the Fifth Dimension” - about the choices consumers face in the post-linear, post-Electronic Programming Guide (EPG) content consumption world:
I can’t help but think that this phenomenon - many, many multiple services, each one looking very much like your old cable universe, but each one actually a walled content garden, blocking out or strictly limiting access to competitors’ content will have as dramatic an effect on television’s economics as the digital platforms have had. Television will no longer be a single coopetitive platform, where 3-10 media giants inhabit the same ecosystem, competing for fractions of share-points against similar rivals which sit next to them, cheek by jowl, in the same EPG, all of it visible to an audience of 100 million households. Rather, there will be many multiple “televisions,” each one striving to keep its own audience - an audience smaller than historical norms - locked in and blissfully unaware of those other televisions inhabiting other dimensions in different space-time continuums.
In short, there is a fundamental, if not inherent, limitation to the ability of individual streaming services to scale because they do not communicate with each other. Nor is there an EPG to capture their programming simultaneously (because streaming apps don't all offer live programming).
Hulu's integration of ESPN+ is a marginal step towards the linear EPG. It gets very little discussion, but may be the future of streaming bundles, especially any that would include Netflix.
Bundles of Walled Gardens Are Bundled Dead-Ends
When a linear customer pays a monthly cable subscription fee, they are ultimately paying for both the user experience and the economics of the EPG: the simplicity of finding something to watch on a linear channel in real-time (or to choose from VOD options), and the simplicity of paying a single fee to a distributor for access to hundreds of channels.
Rothenberg’s point is that all streaming services are each “a walled content garden, blocking out or strictly limiting access to competitors’ content”. This is a point about user experience (UX) and user interface (UI), but it’s also a point that the lack of an EPG in streaming prevents the co-opetition economics of the linear bundle from emerging: for example, a consumer who wants a bundle of the Starz app and Netflix may end up with a deal that gives them the highest-priced app in the market at a lower price, and more value across two different services.
As Rothenberg points out, Netflix will have no window into the consumer’s behavior on Starz, and Starz will have no window into the consumer’s behavior on Netflix. And therefore, the entire experience for the consumer in this more cost-effective bundle will be dead-ends in two separate apps. A lower price will not improve the consumer's experience.
Keep an Eye on Hulu & ESPN+
The bundle of Hulu and ESPN+ - which I highlighted in The Tiger Woods Comeback Story vs. Streaming Bundles - solves this problem.
They are bundled together in the Disney+ bundle, and on Hulu there is a row of ESPN+ content, personalized to the user, that features in the upper third of Hulu’s home page. Notably, Hulu pulls in ESPN+ content, but:
ESPN+ does not pull in Hulu or Disney+ content
Disney+ does not pull in Hulu or ESPN+ content, and
Neither Hulu nor ESPN+ pulls in Disney+ content
Hulu’s personalized recommendation algorithm and scale (45.3MM) are both second only to Netflix. At 21.3MM subscribers, ESPN+ is only 8% larger than Starz (19.7MM). It ends up being a reasonable comparison.
It is worth noting the argument that but for Hulu and the Disney+ bundle, ESPN+ would not have scaled to 21.3MM. The Entertainment Strategy Guy recently estimated that as many as 15.3MM subscribers are duplicated across all three. That leaves 6MM subscribers for ESPN+, which is up from the 3.5MM subscribers it had before the launch of the Disney+ bundle in November 2019. The remaining 2.5MM currently are signed up for ESPN+, alone, implying that without the bundle ESPN+ would be a highly niche service and would have failed to grow by 100% three years on.
In other words, without the bundle there exists little to no demand for ESPN+’s walled garden while its linear sister channels are still in 76MM households (as of November 2021), competing “cheek to jowl” in the EPG against other linear networks.
The Significance of Hulu
With its integration of ESPN+, Hulu is now one exception to the rule of multiple, non-interoperable TV walled gardens created by streaming. It is not the exception: It only solves a narrow problem related to ESPN+ and the Disney+ bundle.
Hulu is worth a closer look given all the questions now being asked about the future of Netflix and potential alternate models (which I last wrote about in Was Netflix's Gaming Strategy Revealed In Its Boss Fight Entertainment Press Release?). This bundle certainly solves pain points around sports viewership, as I argued in The Tiger Woods Comeback Story vs. Streaming Bundles. But, in terms of the hypothetical Netflix and Starz bundle, above, it also exposes ESPN+ content to a larger audience.
Meaning, 45MM subscribers now are offered a choice to watch sports content in an app that, before the Disney+ bundle, only offered scripted and unscripted TV and movies. ESPN+ may be a dead-end for ESPN+ subscribers, but Hulu is a not.
Hulu & The Economics of Bundling
In light of Randall Rothenberg’s thread, I think Hulu’s approach to solving for walled gardens is significant in this market moment.
The economics alone are compelling. The Disney+ bundle costs $13.99 - Hulu alone costs $6.99 (ad-supported tier), Disney+ alone costs $7.99, and ESPN+ alone costs $6.99. Alternatively, Hulu subscribers can add ESPN+ for that same price. Both bundles cost less than Netflix’s standard tier.
Also, Hulu’s user experience brings the Hulu and/or Disney+ consumer marginally closer to the linear EPG experience than any other pricing-sensitive bundle currently offered on the market. This is true now and for the foreseeable future.
Hulu’s personalized recommendation algorithm is also a key factor here, if not a bigger one: it implicitly tells Disney+ bundle subscribers that Hulu is:
Not a walled garden, and
Knows what they want to watch better across genres than the ESPN+ and Disney+ apps, and every other streaming app in the U.S. market.
No other service can claim that advantage across walled gardens.
Netflix Co-CEO Ted Sarandos told investors on the Q1 2022 earnings call that it’s not pursuing sports: “we're not quite so sure that you can add the big profit stream by adding sports”. But perhaps the question for Netflix isn’t whether it is pursuing sports, but rather whether it is willing to open its walled garden to third-party sports broadcasts (something MobileDevMemo’s Eric Seufert describes as a “Content Fortress”)?
Hulu has embraced that model and solved both ESPN+’s pain points with scale and consumer pain points around the costs and user experience in walled garden bundles. Why couldn’t Netflix with a personalization algorithm built upon the data of 68MM U.S. subscribers (and those with whom they share their passwords)?