A corporate exercise led Hulu to create its recently launched virtual pay-TV service.

Ten years after the 2006 launch of its subscription video-on-demand (SVOD) service, which at first merely served as just a catchup platform for three of the four major broadcast networks, Hulu’s executives were asked to imagine the next decade of their online video platform.

“For us, it’s very simple," Hulu consumer experience chief Ben Smith told FierceOnlineVideo. “TV and movies really matter to people. Simultaneously, people don’t love how they get TV, broadly speaking.”

This led Hulu to combine the forces of its popular all-you-can watch SVOD platform with its new livestreamed vMVPD bundle, Hulu Live TV.

“I don’t think there’s a single person who likes switching devices in their living room,” Smith added. “We wanted to create a platform where you get it all in one place and make that place personalized and built around you.”

Packaging Hulu's extensive on-demand library with a basic cadre of livestreamed broadcast and cable networks for $40 a month, Hulu Live TV just launched in April. It's early—the company hasn't released any subscriber data yet. But make no mistake, Hulu—which has over 12 million subscribers to its SVOD service alone—has created a juggernaut, not only for rival operators of virtual pay-TV services such as Dish Network, AT&T and Sony Corp., but also its chief SVOD rivals, Netflix and Amazon

RELATED: Hulu a consensus pick to survive vMVPD’s ultracompetitive race: FOV poll

Of course, traditional pay-TV operators and broadcasters face a threat, too, especially given that Hulu seems to have a huge advantage, since it’s owned by the programmers themselves.

“I think that Hulu is in a very interesting position,” said Brett Sappington, director of research for Parks Associates. “For many years, TV network owners were reluctant to launch their own OTT video services due to fears of angering their cash cow, the traditional pay-TV providers. However, because Hulu is owned by several of the leading U.S. TV networks, pay-TV providers cannot easily threaten to drop their networks without hurting their base of subscribers. In fact, doing so would drive those subscribers right into the hands of Hulu and other vMVPDs. So, while the new Hulu Live TV service provides the TV networks with a hedge in case consumers decide to cut the cord en masse, it also provides them with greater leverage in their carriage deals.”

All in the families

While Hulu doesn’t represent the only content distribution model backed by programmers—CBS All Access and HBO Now are others—its size and sheer number of backers render it unique. Hulu is jointly owned by 21st Century Fox, Walt Disney Co./ABC, Comcast/NBCUniversal and Time Warner Inc., tying it directly to three of the four major broadcast networks and their studio arms. Time Warner bought in last year and now owns 10% of the joint venture, further anchoring it to assets like HBO and Turner Networks. If AT&T succeeds in its quest to buy Time Warner, that will position Hulu with yet another powerful ally.

RELATED: Hulu’s Ben Smith: Being owned by content owners ‘helps us start conversations faster’

This coziness has long caused distributors in other realms of the TV business—pay-TV operators, rival TV studios, broadcast network affiliates, rival SVOD services—to wonder if they’re at a disadvantage.

Now that Hulu is adding to its SVOD smorgasbord the ability to stream more than 50 top cable and broadcast networks on two screens at once, and record up to 50 hours of programming on a cloud DVR, all for $39.99 a month with no contract, those fears are being exacerbated. This especially true in the pay-TV industry, in which even well-leveraged operators have trouble pricing a programming bundle at below $100.

That sure is a lot for 40 bucks

How does Hulu offer so much for $40 a month? Since programmers don't release the rights fees paid to them by Hulu—or any other pay-TV operator, for that matter—it remains a mystery. Notably, a year ago, when word of Hulu's upcoming live service first leaked, MoffettNathanson analyst Craig Moffett modeled the service's potential channel offering and associated per-network licensing costs. He found a basic array of live channels alone would cost over $34 a month for Hulu to license (see chart). He just included the networks available from the owners of the JV. It's a not a precise model of what actually ended up in Hulu's various programming tiers, but it's close enough to illustrate just now razor-thin the margins would be if the JV's parents are paying the going rate for channels.

Attribution/Copyrights MoffettNathanson

“I think we are able to start some conversations faster,” conceded Smith, “if only because the heads of ABC and Fox are on our board of directors. It’s a short walk to start a conversation.” (Editor's note: While Smith spoke in broad strokes regarding Hulu's relationship with its joint venture partners, his job involves crafting the Hulu Live product and not negotiating program rights deals.)

Hulu’s parents, Smith added, “are publicly traded companies who have to answer to shareholders. Their mission isn’t just to make Hulu great.”

Not so fast...

Challenging that assertion is Fox's decision to become the first broadcast network to undermine the retransmission efforts of its affiliate stations. Fox is providing a national network feed to Hulu to use in markets in which the streaming service hasn’t yet carved out a retrans deal with the local network affiliate.

This is an unprecedented move. It's unimaginable that Fox would undermine the retrans negotiations of its affiliate stations if the distribution outlet was a traditional pay-TV operator.

"It’s a sign that Fox really wants to get [Hulu's live TV service] launched ahead of the fall season and they’re really frustrated that they can’t market nationally a product they believe in that they put a lot of their energy behind," said MoffettNathanson analyst Michael Nathanson.

Fox reportedly offered to compensate its affiliates 50 cents for every Hulu subscriber in their territory, which is far less than they'd command in a traditional broadcast retrans renewal deal.

RELATED: Fox offering 24/7 live feed on Hulu without local affiliates’ content

Speaking to FierceOnlineVideo, Cox spokesman Todd Smith was reluctant to describe Hulu as a threat, emphasizing that the MSO views its licensed version of Comcast’s X1 video platform, Contour, as a credible competitive response to not just Hulu, but the overall over-the-top insurgency.

But the the Fox deal hasn’t gone unnoticed by Smith and other pay-TV operators.

“Bottom line, we want flexibility in pricing and packaging,” the Cox exec said. “If they are getting creative with online platforms, we expect they will be open to greater flexibility on our platform. That is what customers want and where we need to move together.”

What's at stake

The addition of a live service offers gives Hulu a key advantage over larger SVOD rival Netflix, which has no livestreaming product to match up with it. It's a competitive threat to traditional MVPDs, which can't come close to bundling as much live and on-demand programming for $40 or under.

And certainly, just in the increasingly competitive realm of virtual MVPDs, Hulu seems to have a leg up.

“I think over the period of next 36-48 months, you’ll see a highly volatile period of entry and exits,” Smith added, agreeing that among Sling TV, DirecTV Now, PlayStation Vue, YouTube TV and Hulu Live, not all are going to make it.

Hulu, he said, not only has a chance to be the survivor of the heated vMVPD race, but also “redefine the category.”

“I think the world of TV will look very different in 2020 than it does today,” Smith said.