For months, the impending merger of Walt Disney (NYSE:DIS) and Twenty-First Century Fox (NASDAQ:FOXA) has cast a shadow on Netflix (NASDAQ:NFLX). While Netflix may currently be the dominant name of the streaming industry, existing and prospective investors in NFLX stock had good reason to worry about the rival streaming platform Disney has been planning once Fox was made part of the Magic Kingdom.
As it turns out, those Netflix investors looking a little too far down the road may have looked right past a nearer-term threat. On Tuesday, the usually elusive consortium behind Hulu — created by Disney, Fox and cable giant Comcast (NASDAQ:CMCSA) in 2007 as something of a streaming experiment — revealed its most recent subscriber headcount. With the 8 million new users it added in 2018, the streaming service now boasts 25 million subscribers.
True, that’s only a fraction of Netflix’s user base, more than 137 million at the end of 2018’s third quarter, but, there’s no denying it just graduated to being a true streaming contender.
Hulu CEO Randy Freer was quick to point out: “We added more subscribers in the U.S. than Netflix.”
Look Out Netflix, Hulu’s Gunning for #1
Given the pace of U.S. interest in something besides Netflix, the Hulu CEO’s suggestion that it’s “absolutely possible” to catch up to with Netflix doesn’t seem like a stretch. Bolstering the growth thesis is Hulu’s plan to roll out an international version of the service once the Disney/Fox deal is consummated. And that matters, as the international market is a much bigger opportunity that Netflix has already started to penetrate.
All told, after a solid 2018, Freer wasn’t afraid to set the bar high going forward, commenting: “Hulu is in the best position to be the #1 choice for TV — live and on-demand, with and without commercials, both in and out of the home.”
Still, access to a streaming service isn’t necessarily an either/or prospect for most consumers.
Apples and Oranges?
Some 63% of U.S. households that used at least one streaming service actually subscribed to two or more, according to a recent consumer survey. All told, more than 40% of all U.S. households have access to at least two on-demand video platforms, with a huge swath of those viewers still paying for traditional cable television service despite a cord-cutting movement that’s gaining traction.
It’s entirely possible Hulu could expand its reach without proving terribly disruptive to Netflix’s commanding lead. Underscoring that is the underappreciated reality that Hulu and Netflix aren’t quite the same.
Netflix is an ad-free service that has shown no interest in carrying content currently available via broadcast television. Hulu, conversely, offers a good deal of current seasons’ television shows as on-demand content, and also sells advertising space. Last year’s ad revenue of $1.5 billion was up 45% year-over-year.
The differences don’t end there, though the remaining distinctions largely paint Netflix into a corner.
Hulu enjoys much more competitive flexibility than Netflix. It can re-purpose Disney, Fox and Comcast content, sell ads, cross-sell access to different services, leverage Comcast to secure third-party content, and more to monetize its product. Its subscribers are also relatively accustomed to change.
Not so for Netflix. After training its customers well, its only realistic options for driving more profit-growth without adding new users are reducing the amount of content available, or increasing prices, or both. Neither have been terribly well-received in the past, and its recent test of ‘promotional videos’ set off a firestorm of complaints.
Netflix’s ace in the hole? Much of its original, exclusive content like the hit movie Bird Box or shows like House of Cards are enough to draw its own crowd.
Bottom Line for Netflix Stock
Not every consumer will inherently feel they have to choose one service or the other. Some, however, will make the either/or choice. There’s the rub for NFLX stock investors — Hulu will undoubtedly prove at least somewhat disruptive to Netflix. It just remains unclear to what degree.
However consumers end up comparing and purchasing the two platforms though, the sheer pace of progress Hulu is making clarifies that Netflix isn’t bulletproof. At least one competitor is making measurable inroads, which may be enough to inspire other players to ramp-up their streaming video efforts.
It’s a problem simply because Netflix stock has historically been priced as if its dominance of the streaming market was a forgone conclusion. We now know it isn’t.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.