Why Hulu Says Its New Ad-Free Service Will Actually Help Its Ad Sales

With Ad-Avoiders Out of the Way, Will Viewers on the Ad Tier Be More Receptive to Marketers?

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Hulu CEO Mike Hopkins pitched advertisers at the company's NewFront event in April, but ads won't be welcome on its new $11.99-per-month tier.
Hulu CEO Mike Hopkins pitched advertisers at the company's NewFront event in April, but ads won't be welcome on its new $11.99-per-month tier.

Cord-cutters, rejoice. You can finally legally watch last night's TV online and without commercials.

Hulu is opening up an ad-free version of its service today that will offer "more than 99%" of its shows and movies for $11.99 a month, according to Hulu CEO Mike Hopkins.

Seven shows that Hulu carries, however, will appear on the "ad-free" tier with a 15-second pre-roll commercial and a 30-second post-roll spot, according to Mr. Hopkins, who cited rights issues but declined to elaborate. The shows are Fox's "New Girl," NBC's "Grimm" and ABC's "Scandal," "How to Get Away With Murder," "Grey's Anatomy," "Once Upon a Time" and "Marvel's Agents of S.H.I.E.L.D."

It's a big step for the company co-owned by 21st Century Fox, Comcast's NBC Universal and Disney. The move should boost Hulu's competitiveness among consumers picking streaming video services as it tries to expand its subscriber rolls beyond beyond the nearly 9 million people in the U.S. that currently pay for its $7.99-per-month, ad-supported service.

Neither Netflix, which seems to dominate the binge-watching market, nor Amazon's Prime Instant Video interrupt paying customers' viewing with ads. Now Hulu has caught up with both services and surpassed them in at least one respect: Some TV shows, such as Fox's "Empire" and FX's "Fargo," hit Hulu months, if not years, before they make it to any other streaming video service. And now they can be seen ad-free on Hulu while TV network apps and cable companies' video-on-demand platforms continue to bake in commercials.

Creating an ad-free service is a striking shift, however, for a company owned by commercial-TV programmers. It hands consumers yet another way to avoid advertising, joining a list of services and technologies from Netflix to AdBlock, which removes commercials from networks' online video players, among other kinds of ads it erases. YouTube is also expected to offer a paid, ad-free service in the near future.

"This is not a move to get out of advertising at Hulu," Mr. Hopkins insisted. "In fact we think it's going to have the opposite impact."

Hulu expects "a significant majority" of the nearly 9 million people who currently subscribe to Hulu will remain on the paid, ad-supported service, Mr. Hopkins said. How's that? Hulu conducted research to see how users would respond to a pricier ad-free service. "It was not age, income or gender that was the decider," said Hulu's Senior VP of Advertising Peter Naylor. "It was sentiment toward ads."

"People who avoid ads at all costs were never going to do business with Hulu to begin with, so now we have an entry point to them," Mr. Naylor said. And it can now sell advertisers on the notion that the people who access its ad-supported service will typically be more receptive to their ads -- because those less tolerant of ads have filtered themselves out.

"People who they might be marketing to today who might be reluctantly consuming the ads can go to the commercial-free plan," he said.

Hulu has been trying to improve its ad-supported service, and Mr. Naylor said that marketers briefed on Hulu's plans "get it and everyone is confident we'll be able to make good on their investments." Earlier this year Hulu began working with brands to create custom ads on Hulu, for example, that its audience may find more appealing than a made-for-TV spot. And late last month Hulu announced ways to make it easier for brands to buy ads that are more tailored to the intended audience.

While Hulu will also be continuing its completely free, ad-supported service, there's little reason to believe people will flock to it over the other options. For starters the free service doesn't carry any of the content Hulu has acquired since Mr. Hopkins took over as CEO in late 2013, such as Comedy Central's "South Park" or, streaming next year, AMC's "Fear the Walking Dead." Hulu's free service also isn't available on as many device types as the paid version. And it typically carries about twice as many ads per commercial break than the paid, ad-supported service. Mr. Naylor said he doesn't expect the $7.99 paid tier's ad load to change from the one to two ads it typically carries per commercial break.

Programmers were comfortable seeing their shows available on a commercial-free zone, Mr. Naylor said. "We've been really successful in negotiating our contracts and getting content rights," he said.

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