Late last week Disney told its Hulu + Live TV subscribers that Disney+ and ESPN+ would be bundled starting Dec. 21st, and that their rate would be increasing by $5 per month. Coming off an anemic fiscal Q4 ’21 in which Disney+ added just 2.1 million subscribers, the lowest by far since launching in late 2019, the intra-company move meant the automatic addition of 4 million Hulu + Live TV subscribers to Disney+’s total in one magical wave of CEO Bob Chapek’s wand.

I received a number of emails from VideoNuze readers to the effect of “that kind of corporate trickery doesn’t feel like a positive sign for Disney+.” I don’t dispute that there’s merit to that line of thinking, but I’d discount it. The step up in Disney+ subscribers in fiscal Q1 ’22 will be so delineated that it means Wall Street won’t give Disney+ any credit for it because investors are tunnel-visioned on Disney+’s organic growth heading in 2022 (that’s kind of what happens when an SVOD service goes from a standing start to 118 million subscribers in less than two years…expectations become quite high).

I’d assert that the tunnel vision on Disney+’s growth is causing under appreciation of what may be a far more important driver of Disney’s decision to bundle Disney+: Hulu’s burgeoning opportunity in connected TV advertising.

To understand this logic, the first thing to know is that as of Oct. 2, 2021, Hulu’s combined businesses (“Hulu,” which is the on-demand only service and “Hulu + Live TV,” which is on-demand plus the virtual pay-TV service) are much bigger than Disney+ from a revenue perspective. Hulu had 39.7 million subscribers generating an average of $12.75 per month as of Oct. 2nd, which totals over $506 million per month. Hulu + Live TV had 4 million subscribers generating an average of $84.89 per month, which totals around $340 million per month. Combined that’s almost $850 million per month.

Meanwhile, Disney+ had 118.1 million subscribers, but an ARPU of just $4.12 per month, yielding around $486 million per month. So Hulu’s combined revenue is 1.75x Disney+’s. (ESPN+ chips in another $81 million per month from its 17.1 million subscribers paying $4.74 per month).

CTV advertising is critical to Hulu’s business. Over two years ago, at a VideoNuze conference, then head of ad sales Peter Naylor said that 70% of Hulu’s on-demand subscribers choose the ad-supported plan, which is now $6.99 per month (earlier in 2019 Hulu took the unprecedented step of LOWERING its on-demand rate from $7.99 per month to $5.99 per month, a serious sign of company optimism about the ad model. The price has since moved up by a dollar per month).

How much advertising per subscriber per month Hulu generates is tough to calculate because some of it is no doubt tied to linear TV deals. When NBCUniversal had its Peacock investor day back in January, 2020, it asserted Hulu gets about $10 per month in ad revenue per subscriber. NBCUniversal should know since its parent Comcast still owns a big chunk of Hulu. On the other hand, the Hulu number was shared as a way of illustrating how modest Peacock’s initial financial goals were, so NBCU could have been erring on the high side.

Doing a little back-of-the-envelope math with Disney’s financials does seem to suggest Hulu’s advertising could be at least $7-8 per month per subscriber. If 28 million on-demand subscribers (70% of Hulu’s total) drive $8 per month each in advertising (nearly all of it on CTVs), that equals over $220 million per month. That’s also not counting ad revenue that’s generated by Hulu + Live TV’s 4 million subscribers. $220 million per month from Hulu ads (which is also primarily DOMESTIC) is almost half the $486 million per month Disney+ generates GLOBALLY from subscriptions.

On top of all of this, keep in mind that Hulu is one of a handful of scaled, ad-supported streaming services. That’s a really valuable position because it gives Hulu both a huge first-party data set to provide advertisers seeking ever greater targeting and also real efficiency in reaching a large audience, especially important in the highly fragmented CTV market. The results that Tubi, Pluto and Roku have reported for their scaled ad-supported businesses are evidence of this (then there’s YouTube, whose ad business exists in its own stratosphere). Longer term, CTV advertising will morph into more of a full funnel medium, which is immensely valuable to advertisers of all sizes. If this occurs, it's not crazy to think about Hulu, and others, generating $20 or more, of ad revenue per month per viewer.

Hulu’s ad business is almost certainly growing strongly. Hulu has openly said it is amenable to subscribers to the Live service periodically dropping down to the on-demand service during seasonal changes in sports. With advertising such a powerful growth driver, Disney should be focused on keeping users paying for some tier of Hulu, generating watch time, collecting data on viewers and optimizing monetization of its inventory.

Given all the attention that’s been lavished on Disney+, it’s admittedly a little hard to reconcile that Disney+ could actually become something of a supporting player to Hulu in its pursuit of ad dollars.  But when considering Hulu’s financials and the dynamics around CTV, it becomes clear that bundling Disney+ into Hulu + Live TV strengthens Hulu at all tiers, helping drive the CTV ad business.

An interesting side question is how Disney may or may not modify its messaging to focus more on Hulu in the future. In the fiscal Q4 ’21 earnings call the focus was squarely on how the Disney+ content slate is going to reignite subscriber growth in the second half of fiscal ’22. But that’s a long way out, and far from certain. A related problem that swirls around Disney+ is that in Disney’s eagerness to make a splashy launch, and its desire to integrate Disney+ in India with Hotstar, Disney+’s massive content library is priced to consumers way too low. ARPU must increase, but that’s going to take time.

Meanwhile, Disney’s stock price has slumped around 14% since the Q4 earnings release. Complicating things further, NBCU is reportedly considering pulling some of its content from Hulu, and Comcast and Disney are arbitrating Hulu’s valuation. In short, while there’s a cottage industry solely focused on promoting the value of CTVs (as my inbox of CTV-related press releases shows), it’s not an ideal time for Disney to be touting Hulu’s upside in advertising, even if it’s likely a core driver behind the decision to bundle Disney+ with Hulu + Live TV.