Hulu Plus Not an Immediate Threat to Netflix

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Hulu, owned by News Corp (NASDAQ:NWS), Disney (NYSE:DIS) and General Electric’s NBC Universal division, is an online video service that streams hit TV shows and movies. Hulu currently makes money through advertisements and commercials inserted in streaming videos. The company recently announced a new subscription-based service, Hulu Plus, priced at $9.99 a month.

Hulu’s entry into subscription-based video services provides more evidence that consumers are increasingly embracing online video. But it also means competition for Netflix (NASDAQ:NFLX), which uses a subscription model to sell DVD rentals and online video streaming services.

Hulu primarily distributes TV shows, whereas Netflix focusses more on movies. Also, Hulu is a newcomer to the subscription business model. As a result we don’t see Hulu Plus as an immediate competitive threat to Netflix. Our rationale follows below.

Hulu Focuses on TV Shows, Netflix on Movies

For $9.99 a month, Hulu Plus subscribers have access to all seasons of hit TV shows from popular networks like NBC, ABC and FOX. Hulu’s free version offers only a handful of episodes from each show. Hence, the subscription service would greatly increase content availability, which should be very attractive to consumers.

Hulu Plus offers a limited number of movies.  Netflix is expanding its TV content, but it primarily relies on an extensive movie catalog. Moreover, Netflix’s online TV content is mostly older than Hulu’s.  This lack of direct competition limits the threat that Netflix faces from Hulu Plus.

Netflix is an established brand, Hulu a newbie

Netflix has become tremendously popular among U.S. consumers.  The company has struck numerous content deals with media companies, established an efficient supply chain for DVD delivery, enriched its online content, and maintained excellent customer service.

In comparison, Hulu is still new to the subscription-based video streaming model. Hulu’s traffic has risen significantly over the past few years, reaching 813 million unique streams in May 2010. But unlike Netflix, Hulu has not penetrated the video rental market. In order to lure customers away from Netflix, Hulu will need to enlarge its content pool, determine  the right type of content for its audience, and deliver content to gaming devices (PS3, Xbox 360, Wii).

All that said, Hulu is owned by three media giants who can be expected to invest heavily to expand the subscription service if it performs well in early going. Hulu could spend the money to acquire more content and expand distribution services to more devices and platforms. This is a longer-term trend that will probably not impact Netflix’s stock during the Trefis forecast period.

You can see the complete $82.26 Trefis price estimate for Netflix’s stock here.

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