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?

Comments

[HmmConvenient]

Hulu's a joke, always has been. The science behind the site is not the technology which is standard off the shelf streaming from CDNs, but the content.

What Netflix has solved that every analyst misses because they don't use the product is scheduling & content curation. Netflix has found a way to make the long tail appear as channels. When you log into your Xbox for example and use Netflix streaming, a set of virtualized channels appear based on your interests. They are making the VOD library accessible and have largely solved the problem of "what do we want to watch?" The recommendation engine itself is worth millions and the only ones close to replicating that technology are the smart folks at Amazon (another technology innovator).

Contrast that with Hulu, it's impossible to identify whats new, what I should be watching, etc. The site relies on the user still have broadcast and/or cable access to receive network promotions about shows. This is one inconvenience, then there are the quality and performance issues on the site with regards to the content.

If Hulu is allowed to purchase the archive library of shows from studios for Hulu Plus, I hope the same opportunity is given to the real innovators Netflix to do the same. I can't say I'm energized about Hulu at all anymore given the incredible advancements that Netflix has made both technologically and in shifting consumer behavior to consume millions of hours of content over the top. Hulu's contribution: better ad models for media buyers online.

[SethDMC]

Also, Hulu and Netflix have different motives. Hulu is owned mostly by broadcasters who want to protect their lucrative linear television franchises. Netflix is looking to innovate and is unconcerned with legacy business models. Simply put, Hulu has to worry about not growing the new business at the expense of the old business and Netflix is more nimble because it is only looking forward.

[Phoebe]

I agree with HmmConvenient that Netflix's recommendations system is an important advantage.

http://www.jinni.com

[Scott Shaffer]

I think Amazon is a more serious potential Netflix competitor than Hulu. What they don't have yet is a compelling business model for most consumers. Paying $2 for an episode of Glee? Hmmm...

[dude]

Some folks love their Glee. In these inflationized days, $2 isn't too much...

So how about NFLX? They have about $400m cash, $500 in liabilities, 50x+ P/E... That is an outrageous P/E.

Netflix made $116 in 2009 so it's not that ahead money wise.

[Shakir Razak]

Hi, Considering Hulu started by getting $100m in VC money, then going out to buy a Chinese start-up, readers shouldn't ignore the possibility of it buying a recommendation start-up to bolt-on, and accessing the various data depositories of partners.

Also, there's both Youtube/google (see its existing music history and Android marketplace) and Apple going from downloads to streaming with iTunes and sub-$200 A.tv (or see recent new MacMini with HDMI). I'd put that likelihood within 18 months, though like all their other products, they'll wait for perfection or techncal/ui revolution.

The doubts about device accessibility can be countered by the other players, such as Vudu and in time the likes of Boxee; However, more pertinent would be open standardised platforms such Google.TV and the UK's Canvas where manufacturers only have to implement one spec and the content aggregators paint on to that without everyone needing individual bilateral agreements.

Finally, on an unrelated note, and with respect: If you could care less about shares, why don't you? Why would you waste more time caring for something than you need to and point that out? Or, do you mean you couldn't care any less as your apathy/interest for a subject is at rock bottom?

i kidd, ;) :p