Stifel Nicolas Analyst Has It Wrong, Hulu Is Not A Threat To Netflix
This morning, Barron's published a post about Stifel Nicolas analyst George Askew who cut his rating on Netflix's stock to hold from buy, saying that Hulu could be a serious rival to Netflix. When it comes to stock prices, I'll be the first one to say I don't know anything about them. I could care less about stocks as I have never bough, sold or traded a single share in any public company ever.
But when it comes to the reason why the stock was cut, that's where the logic is bad. Of course anyone can say that someone "could" become a competitor to another company, but instead of speculating, lets look at the facts as to why Hulu won't be a competitor to Netflix anytime soon.
For over a year we've been hearing about a premium based subscription service for Hulu. Yet in that time, Hulu has yet to roll out a pay service for any device. While Hulu has said from day one that a subscription service was always part of their plan, there is still no offering in the market. At the same time, by the end of this year, Netflix says they will be on over 100 different devices in the market and quality wise, they have one of the best streaming offerings on the industry today.
Of course, none of that happened over night. It's taken Netflix three years and hundreds of millions of dollars to make this happen. Since Netflix does not rely on their streaming service to generate direct revenue, they can afford to spend the money and invest the resources to make their streaming offering as good as it is. Hulu on the other hand doesn't even encode their videos on the web for 720p and are still doing 480p with some really low quality bitrates. That's not to say Hulu could not increase the quality of their videos, but considering the company only just turned a profit for the last two quarters, simply moving from 480p to 720p streaming, or even to 1080p like Netflix has, would put Hulu back in the red overnight.
Hulu did just over $100M in revenue in 2009 and half of that money went back to the content owners. Compared to Netflix, Hulu has very little money to spend on R&D and can't dedicate the resources needed to work with dozens of consumer electronic manufactures to get their platform embedded into devices. Even Blockbuster, who is much larger than Hulu admitted they don't have the resources to work with all the hardware providers that they want to. Not to mention, Hulu would have to design apps for all these devices and none of that happens overnight. Just look at the amount of resources Netflix has put into this and it's still taken Netflix three years to get to the point they are at today. Hulu simply doesn't have the money or resources to replicate what Netflix has done anytime soon.
The other big differences between the companies is the rate at which they move. Even though Netflix is much larger than Hulu, Netflix is very nimble. Talk to any of their hardware partners and they will tell you how easy it is to work with Netflix, how fast they get things done and how well their service works. Compare that to Hulu who is smaller than Netflix, yet moves at a snails pace. Ask any syndication partner of Hulu's how easy it is to work with them and you'll see them roll their eyes or tell you in detail just how hard it is to get things done. One content owner even forwarded to me a document that outlines how Hulu works with content owners and it's was 25 pages in length. And that was just the overview document, nothing to do with any technical implementation. Could Hulu be a competitor to Netflix further down the road? Sure. But they won't be any real competitor over the next 18 months.
Another point mentioned in the note talked to the number of videos that the analyst estimates Hulu would have with a subscription based service. He writes, "we estimate that the Hulu service will feature a total of 24,472 streaming movies and television episodes – including 20,125 available only through Hulu Plus – compared with an estimated 18,522 titles in the Netflix streaming library." Where on earth does he come up with those numbers? By their own omission, not even Netflix knows exactly how many pieces of content they will have available for streaming in any given week. As Netflix has explained, the licenses to a portion of their inventory for streaming constantly changes with some titles dropping out, others getting added after licensing renewals as well as new content coming online. For anyone to suggest they can predict how many pieces of content Hulu may or may not have, for a service that is not even out in the market, is just ridiculous. Anyone can pull numbers out of the year.
If anyone is a possible threat to Netflix, it's not Hulu or Blockbuster
but rather Apple. If Apple came out with a subscription based service
for iTunes, then Netflix would have to be worried. Apple not only has
the eyeballs to iTunes, but it already has great relationships with the
studios and owns the hardware. Of course they would still need to go out
and get the iTunes platform embedded into a lot of non-Apple devices,
but Apple could make that happen. I don't believe Apple will come out
with such a service anytime soon, but it would be a natural progression
for iTunes and they have everything Hulu doesn't have including money, resources,
content relationships and hardware. While some have suggested that Redbox may
also compete with Netflix for streaming, Redbox has not yet finalized
their digital media strategy.
I'm all for other opinions being presented by analysts, but those opinions should be formulated based on the data and facts in the market. I don't personally know the analyst who wrote this note, but one thing I tend to find with analysts who cover Netflix in particular is that they know very little about the actual service. Many of them have never even used the streaming service, don't own a Xbox 360 or PS3, don't know how the the videos are encoded, what the settings are and haven't used other services by Apple, VUDU or others in the market to compare Netflix to. There are dozens of devices in the market that can stream Netflix content, how many of them have these analysts actually gotten hands on with?