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

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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.

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