Netflix Unbound: Will Its Rise Hasten Hulu’s Demise?

Netflix is starting to get into Hulu’s business, and under its skin.

According to sources, last month Hulu execs were fuming over NBCU’s decision to offer episodes of Saturday Night Live via the Netflix Web service the day after they air.

While nearly all of the major networks work with Netflix, typically viewers aren’t able to rent or stream episodes from the current season. Catching up on last night’s episode is Hulu’s territory and this had been a major point of differentiation until now. NBCU’s SNL deal may encourage the other networks to follow suit, and Hulu worries that this will further erode its exclusivity.

In addition, Netflix’s recent $1 billion pact with Epix, the pay TV service owned by Viacom (Paramount), Lionsgate and MGM, has indirectly put pressure on Hulu by raising the stakes for content procurement. “Netflix is writing bigger checks than anyone else in the market,” said Justin Patterson, senior analyst, Morgan Keegan & Co.

“Major content providers are aggressively fighting for the value of their content,” added Howard Bass, senior partner, Ernst & Young. “Distributors need to have the capital to compete.”

Hulu does have income — it announced last week that its 2010 revenue should reach $240 million — but it shares somewhere between 60 and 70 percent of its revenue with partners ABC, NBC and Fox. This puts its net revenue somewhere around $80 million. According to several media insiders, it’s that reality that is motivating Hulu and its partners to plan for an IPO in the near future — to basically fund future programming payouts.

And many in the industry are convinced that Hulu will eventually break up. “I think both will happen,” said Andrea Kerr Redniss, vp, group director at Moxie Interactive. “I think they’ll have the IPO and I think it will collapse.”

Still, what’s striking is that for all the doubts digital buyers have about Hulu, they shower love on the site as an ad vehicle. “If you take the networks’ issues out of the equation for a second, there are very few comparable ad environments,” said Donnie Williams, vp, director of digital strategy, Horizon Media. Williams said that brands are drawn to Hulu’s highly engaged audience, uncluttered ad experience and ability to provide custom campaign research.

Yet Hulu is still tainted by “very real competition between its network partners and Hulu’s sales staff,” said Williams. “You still end up spending a great deal of time in sales meetings discussing that and not strategy.”

Which points to the inherent tension and fragility of the joint venture, something many have speculated will lead to its undoing. Some are certain that Comcast, once it takes hold of NBCU, will pull the network out of Hulu — IPO or not — since the free nature of Hulu is in opposition to cable’s efforts to prevent cord cutting. “You don’t want to win the battle and lose the war,” said one insider.  Hulu may simply have outlived its usefulness to the networks, which are increasingly able to monetize video on their own sites while pulling in complementary revenue from companies like Netflix. “Hulu may have become a nice experiment that was too successful for its own good,” said Patterson.

Clearly, Netflix has a huge opportunity to exploit the uncertainty. The company has broader distribution (it’s available on PlayStation, Xbox, Apple TV, Google TV and through various Blu-ray DVD players), better relationships with Hulu holdouts like CBS and Viacom, and none of Hulu’s affiliate/MSO baggage. Thus, many in the industry are starting to wonder when Netflix will go after the booming online video ad market by introducing a cheaper (or free) ad-supported model.

No chance, according to spokesperson Steve Swasey. “Netflix is a subscription service and we would not be interested in any plans that involve advertising to Netflix members,” he said.

But even with Netflix’s current momentum, it’s possible that its subscription-based service may be just as threatened as Hulu’s in the long run, argued Eric Bader, chief strategy officer at Initiative. “Hulu and Netflix…are both going to end up in a collision with broadcast, cable and satellite because the long-awaited content ‘on-demand’ scenario is really happening,” said Bader. “When the model really changes [is when] people don’t go to YouTube or other sites…they just pull that content from apps or their cable box.”



VIDEO RIVALS:


NETFLIX

 • Movies-through-the-mail rental service launched in 1997; co-founder and CEO Reed Hastings.

 • Ended 3Q 2010 with approximately 17 million total subscribers, up 52 percent year over year.

 • Revenue for 3Q 2010 was $553.2 million, up 31 percent over 3Q 2009.

 • Partners include all major film studios, as well as NBC, CBS, Fox, ABC, Showtime, Starz, HBO and others.

 • Distribution partners include Roku, Samsung’s Blu-ray disc player, Sony TVs, Apple’s iPhone, Sony’s PlayStation 3, Nintendo’s Wii, Microsoft’s Xbox.


HULU

 • Joint venture among NBC Universal, News Corp. and Disney, with funding from Providence Equity Partners.

 • CEO Jason Kilar.

 • Projected to pull in $240 million in revenue in 2010.

 • 235 content partners, 352 advertisers.

 • 30 million unique users in October 2010, according to internal figures.

• Users watched 260 million content streams and 800 million ad streams in October.

 • Broadcast partners typically post 4 or 5 most recent episodes of shows within a day of their TV airing.