A battle for streaming was always coming. There is no universe where media companies were simply going to allow Netflix (NFLX) to be the only player. In perhaps the first shot fired, Hulu has announced they are cutting prices for their streaming service. The base service, which does include some commercials, will be available for $7.99/month starting in February. Their commercial free service will remain at $11.99. The move is almost certainly a strategic reaction to Netflix increasing their subscription fee for their most chosen plan to $13/month.
The differentiation here might not seem like a lot, but the ramifications of the move could be quite meaningful. To me this represents the start of a price war that Netflix has yet to truly have to face. With very few players in the online streaming game, Netflix has largely operated unchallenged. Econ 101, when you're the only producer, your control over pricing leverage is vast.
I've written about Netflix often. While I love the quality of the service provided, there are a lot of "ifs" when it comes to the company's stock price and ability to derive large financial value. The economics of streaming are not yet written, but one has to imagine there is a ceiling for how many providers will be able to successfully build a user base. That ceiling will be directly related to pricing. I don't believe consumers will pony up more per month than they do for traditional cable. The entire appeal of these streaming services is the access to quality content without the big traditional cable pricing. The irony here is that traditional cable is the far more lucrative endeavor. Netflix shows profits on its income statements, but the company has yet to really balance its spending, relying on poor cash flow and debt to finance its content spree. While that content has certainly upped the ante for traditional series, the translation into gainful economics for the company is not clear yet. In similar fashion, Hulu is creating losses.
The price increase announced by Netflix was justified as a means to create more revenues to finance its content creation. Were Netflix the only provider, I'd be inclined to think the pricing move would be relatively ineffective in terms of scaring off consumers. Now, with the advent of a different provider at a lower price, I think it has meaning. Hulu, a streaming service partly owned by multiple media companies (soon to be controlled by Disney (DIS) ), has been making waves for its user growth rates. While still much smaller than the Netflix behemoth, Hulu's 25 million subscribers are nothing to scoff at.
The company is creating strong original content on its own with shows like "The Handmaid's Tale" garnering critical acclaim. Since the service is tied to names like Disney, Comcast (CMCSA) , and AT&T (T) , I think it has an advantage in terms of alliances. The service can draw from the content portfolio of Disney's vast empire, as well as Comcast's NBC Universal lineup. Furthermore, you can access currently airing shows on Hulu, something that can't be done with Netflix. If you miss an episode of Modern Family on Wednesday night, you can view it the very next day on Hulu. The draw of this convenience should not be overlooked. Let's not forget Hulu also offers a live TV package now, along with bundles with providers like HBO and Showtime.
With Disney launching its own streaming service (one that I'm sure will work in complementary fashion with Hulu), and Comcast launching an NBCUniversal streaming service, I think the pricing power of any one entity could diminish. At that point, it will become a question of which provider can create the strongest content at the cheapest price. Sounds a lot like traditional cable, doesn't it?
Comcast's service will be free to anyone that is already an existing TV subscriber, a convenient detail. Anyone else will be charged a monthly fee. Disney's service is less clear at this time but I suspect the company will no doubt make it competitively priced against rivals. What we heard back in August was that Disney's service would be cheaper than Netflix.
Investors need to be aware of the dynamics currently at play before getting too vested in any one name. As Comcast's earnings this morning pointed out, traditional cable certainly does seem to be losing to digital streaming. Ironically, it's the same names that are suffering from cable cutting that are most likely the same ones that will profit from online services. My prediction is an absolute bloodbath.
I think we're going to see each provider make attempts to block others from accessing their content portfolio, all while competing for user growth through value pricing. Netflix is down today off the news of Hulu's price cut, and I think the action is justified. Creating a financially viable streaming business may become a lot more difficult than everyone thinks. The early bird (Netflix) might catch the worm, but the flock might not let him keep it. In the end, this will all come down to pricing and value. It always does. The pricing competition is starting earlier than I anticipated. Hulu is taking its swing with this price reduction. It will be very interesting to see what effect the widened gap between it and Netflix does to user growth. Will people keep paying for commercial free Netflix when they can get Hulu for more than half the price? I think this is the start of a big picture increase in competition.
For now, it makes it very difficult to invest in streaming when the dynamics of the market are still developing.