Netflix CEO: Hulu Plus Still 'Too Small to Matter'
"They're just at [an] early stage, too small to matter," Hastings said Wednesday during his company's second-quarter earnings call. "But, generally, we ask ourselves every quarter, should we cut price, should we raise price, should we add more content, shrink the content?"
Hastings's comments were in response to questions about the implications of Hulu Plus, a new service, still in the invite-only phase, that looks to compete with Netflix via a hybrid subscription and advertising-based business model that will support myriad broadband-connected devices such as the new Apple Inc. (Nasdaq: AAPL) iPad. (See Hulu Opens Toll Road .)
Hastings shrugged off the near-term threat posed by Hulu Plus, but is keenly aware of what new competition the studio-backed firm could bring as it looks to expand the subscription offering.
"Once Hulu Plus has a few hundred thousand subs, we'll be able to learn from consumers what they like about Hulu Plus. The Hulu team is sharp, and we're not going to underestimate them," Hastings said in prepared remarks. "It's a potential significant competitor, and it is the direct competitor," he added in response to question from analysts.
Speaking of those that shouldn't underestimate threats, count the cable sector in that group. If MSOs don't fear Netflix by now, they certainly should.
Netflix, which is transforming from a by-mail DVD company to a subscription streaming video specialist, noted that it will continue to invest aggressively in streaming because it makes its subscription packages more attractive and offsets slower growth on disc shipments.
Streaming is also enabling Netflix to go after two growth opportunities: making more TV shows available for streaming; and striking more exclusive content deals. "We see TV shows as equally important to our franchise as movies," Hastings said.
Netflix has already made some progress with exclusive content via a streaming deal with Relativity Media, a move that puts pressure on cable operators and premium channels such as HBO and Showtime. (See Netflix Takes on Movie Channels.)
And Netflix is looking to add more partners. It already has a deal with Starz Entertainment LLC , but is "definitely interested in licensing from HBO, from FX, from Showtime," Hastings said. However, Netflix isn't looking to source all their latest content and compete with those companies' subscription-based premium services. (See Netflix Bypasses Studios With Starz Deal.)
"We focus on the prior season and [on] generating incremental viewing... and you will see us continue to expand on that in the company years," the Netflix chief said, noting later that the "profit opportunity" shrinks with the hottest, new content because Netflix would end up paying a lofty premium to the content owner to get the rights.
But he also acknowledged that access to exclusive, and more, TV content will boost streaming content expenses. Netflix, though, hopes to recoup that investment through incremental subscriber growth.
On the financial front, Netflix ended the second quarter with 15 million subscribers, up 42 percent year-on-year, and 7 percent ahead of the previous quarter. Revenues were $519.8 million, up 27 percent, with GAAP net income of $43.5 million (80 cents per diluted share), versus $32.4 million (54 cents per share).
The quarter also saw a rise in streaming use. Netflix said the percentage of subscribers that tuned into its Watch Instantly service for more than 15 minutes of a TV episode or a movie in the quarter was 61 percent, compared to 37 percent a year ago, and 55 percent in the first quarter of 2010.
— Jeff Baumgartner, Site Editor, Light Reading Cable