Netflix CEO: Hulu Plus Still 'Too Small to Matter'

Netflix Inc. (Nasdaq: NFLX) chairman and CEO Reed Hastings says his company is keeping close tabs on Hulu LLC 's budding $9.99 per month subscription service and views it as a direct competitor, but the company isn't exactly quaking in its boots just yet.

"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

Jeff Baumgartner 12/5/2012 | 4:29:11 PM
re: Netflix CEO: Hulu Plus Still 'Too Small to Matter'

I forgot to mention that Netflix mentioned that it's working on a disc-less version of its Watch Instantly service for the PS3. Big-whoop, right? Maybe, but it does take one manual step out of the process. I've got my PS3 hooked up to Netflix and, quite honestly, I don't use it that much because of it. Yeah, that's just a matter of being lazy, I know,  but I do use Watch Instantly much more frequently on a Sony Blu-ray hooked to a different TV and via the iPad. Is the disc the culprit? Yeah, I guess it's enough of one to curtail use on the PS3, so the disc-free version may help bump up the use of Netflix on the console once the new UI is released.   JB

Cooper10 12/5/2012 | 4:28:58 PM
re: Netflix CEO: Hulu Plus Still 'Too Small to Matter'

Netflix results are absolutely amazing - but there are a couple of potential flies in the ointment.  First, with 15M growing to 18M by EOY, content providers can no longer consider Netflix licensing revenue "ancillary", and Netflix will increasingly compete with traditional pay TV service, where content providers are getting a much larger revenue stream for licensing their content.  Both factors will increase licensing costs to Netflix, which will put pressure on both their price points and margins.

Second, as streaming usage increases, the likelihood of a) an unsatisfactory experience due to network congestion, and b) likelihood of metered usage getting broader adoption, will both serve as limits to the utiliity of the Netflix subscription.

That said, they are an amazing growth story...

Jeff Baumgartner 12/5/2012 | 4:28:57 PM
re: Netflix CEO: Hulu Plus Still 'Too Small to Matter'

That's true... best effort access on broadband means Netflix doesn't have complete control of the experience as streaming becomes more central to their strategy, so they are vulnerable there. 

But that also makes me wonder if they might be able to chase down some express lane type deals with the operators down the line and make them less OTT in the sense that they might establish some sort of biz relationship with the pipe providers... if both Netflix and the operators would even be open to such a deal if the terms were right.   JB




Jeff Baumgartner 12/5/2012 | 4:28:56 PM
re: Netflix CEO: Hulu Plus Still 'Too Small to Matter'

Or msos could go in the opposite direction and put more constraints on broadband consumption caps, as appears to be the case with Rogers in Canada, which will soon get access to Netflix streaming.  But that approach does open them up to a backlash. JB

msilbey 12/5/2012 | 4:28:49 PM
re: Netflix CEO: Hulu Plus Still 'Too Small to Matter'

MSOs could also adopt the Netflix/Hulu Plus model for on-demand content- getting subscribers to pay a flat $10/month for access to an expanded VOD library.

Jeff Baumgartner 12/5/2012 | 4:28:47 PM
re: Netflix CEO: Hulu Plus Still 'Too Small to Matter'

That would put a new twist on subscription-VoD and open some more incremental revs.  Anyone out yonder go for that?  might be interesting if if they tie it in with the cross-platform piece and offer more value for the same price as the stand-alone Hulu Plus offer.  'Course those that are paying the freight on Hulu Plus without the added traditional VoD component might scream bloody murder, or ask for a smaller monthly nut. JB

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