This morning, a news report indicated that a consortium of cable companies were in discussions to purchase Hulu, a web television provider. The companies mentioned were all leading cable companies, including Comcast (NASDAQ:CMCSA), Time Warner Cable (NYSE:TWC), and News Corporation (NASDAQ:NWS). Comcast is already a partial owner of Hulu, owning about a 1/3rd stake of the company. However, as a condition of the acquisition of NBCUniversal, Comcast is barred from owning Hulu outright or even exerting control over the company. This condition itself should show that others in the industry believed that a cable company controlling Hulu would be a large competitive threat. Comcast certainly did not ask the regulators to include the stipulation preventing control of Hulu, as part of the conditions placed on them to receive approval to purchase NBCUniversal. You can be sure that others lobbied for this condition heavily, knowing full well the potential competitive threat an established web television outlet would be in the hands of a cable company. The key here is understanding who the ultimate loser would be if the major cable companies controlled Hulu. The answer is Netflix (NASDAQ:NFLX).
The Content And Cable Market Today
As it exists today, Hulu does not really offer a significant competitive threat to Netflix. You can argue that it is alternative service, and thus it should at least be considered a minimal threat. The reality is that the content offerings from Hulu pale in comparison to those found on Netflix today. Part of that is the business model in place at each company. Hulu is not trying to be Netflix today.
That will all change if the cable companies are able to control Hulu. As I have discussed previously, the greatest threat to a cable company is that internet based television or other similar products cause consumers to cut the cord and give up cable. Likewise, this threat filters down to the content providers who would lose the monthly annuity stream they receive from the cable providers related to each subscriber. For this reason, the cable and content companies together, have every reason to ensure that their offerings remain a must have for consumers. This is also a significant reason why you see the traditional cable company morphing into a content company, such as Comcast with its purchase of NBCUniversal.
Hulu Would Advance "TV Everywhere" Concept
TV Everywhere is pretty much what its name implies. It is the concept being pushed heavily by cable providers, which would allow paying cable subscribers to have access to significant cable content on devices other than just a television. The key for the cable providers is being able to authenticate users, verifying they are paying subscribers, prior to those users accessing content on a device other than a television. While it is possible for someone to "steal" a traditional cable signal today by tapping into a cable line, it is clearly not something the industry is overly concerned with. When your content goes from a cable line to being broadcast over the internet, the risk of that signal being stolen rises significantly.
The cable companies would prefer that the source of viewing content in the TV Everywhere world is limited in scope. Hulu would provide a singular platform for subscribers of Comcast, as an example, as the point for accessing content on multiple internet connected devices. This provides the cable companies with a secure point of connection, allowing them to focus resources both on delivering content and ensuring that it is secure.
The Threat To Netflix
Hulu being acquired by the leading cable companies would impact Netflix in a multitude of ways. First and foremost, Hulu would immediately see an expansion of its available content that would dwarf what is offered on Netflix. Cable providers already make a majority of the content they broadcast available on-demand. Today, the majority of that content can only be accessed through a DVR box and a television. Acquiring Hulu would allow the cable providers to make the content available, on-demand, on any internet connected device a consumer chooses to use for viewing. This immediately knocks off a strategic advantage Netflix has today, in its ability to allow consumers a significant choice in how and when they view Netflix content.
More importantly, Hulu would be a free alternative to Netflix. The cable providers, now having the ability to provide this content, may decide they have no need to license any type of valuable programming to Netflix. Sure Netflix may continue to have season 1 of Friends, but the only winner in that deal is the content provider who continues to monetize a 10+ year old program. Consumers are not flocking to Netflix to see 10+ year old shows. Netflix knows this, which is why they are making the aggressive push into Original Programming.
In summary, the market continues to overlook substantial threats to Netflix. Reed Hastings, the CEO of Netflix, also continues to overlook that he is completely at the mercy of the content providers. He has gone so far as to say the traditional television viewing model is toast. The circular loop is that the content providers, are far better off financially with the existing relationships they have with the cable providers. Reed Hastings is correct in that the viewing model will evolve substantially for television. His lack of foresight is in believing that Netflix can compete with the deep pocketed cable and content companies in this evolving market. Hulu in the hands of the cable companies will cause Reed Hastings to start singing a different tune. I am short Netflix on the long term outlook that the cable companies and content providers will eventually wall off Netflix from any content that consumers desire to view. Without this content, Netflix will be dependent on becoming HBO and having a steady stable of original shows. I simply do not believe Netflix has the financial capacity to play in an arena with the big boys, when the big boys decide it is time for Netflix to go. As soon as the market begins to catch on to this point, Netflix is set up for a significant fall, after rising from around $60 a share to $240 a share over the last year.