Is Hulu's Loss Netflix's Gain?

It looks like Hulu's strategic conflicts have bagged their first management victims.

Jason Kilar, Hulu's founder and chief executive, announced last week that he's leaving the company by March. The online video streamer's chief tech officer, Rich Tom, is also on his way out.

The shake-up gives us us some insight into Hulu's cloudy future. And it could mean clearer skies ahead for Netflix (NASDAQ: NFLX  ) .

The wild card
Hulu has had a split personality from the start. Its owners, Disney (NYSE: DIS  ) , Comcast (NASDAQ: CMCSA  ) , and News Corp  (NASDAQ: FOXA  ) , control a lot of quality content. And that cozy setup has given the streaming service a leg up in battles for digital distribution rights, especially over popular TV shows.

In fact, it's Hulu's next-day access to prime time programming like Fox's Family Guy that really differentiates the service from both Netflix streaming and Amazon.com's (NASDAQ: AMZN  ) Prime Video. Those online streamers have much bigger catalogs, but they focus on prior-season television content and not same-season hits.

But here's the rub: Hulu's owners also run their own broadcast networks: ABC, NBC, and Fox. And those channels generate plenty of advertising and affiliate fees for them. So as Hulu gained subscribers, it threatened to suck more viewers and more advertising dollars away from its owners' other properties.

That's an uncomfortable situation, to say the least. Impossible, you might call it. And it's a big reason why Netflix sees Hulu as "a wild-card in terms of future evolution as a global competitor." There's just been no telling how committed Hulu's owners are to growing the service at the risk of harming their traditional media business.

Who's coming with me?
But Kilar's departure could do a lot to clear that up for us. Back in August, Variety reported on an internal Hulu memo that outlined some major changes its owners were considering. None of the tweaks seemed aimed at helping strengthen the service. Instead, they seemed tailor-made to weaken it:

  • Loss of exclusivity: Current-season content can be licensed out to other parties, like Google's YouTube.
  • Less content: ABC and Fox can hold back more content from Hulu in a bid to build their own online audiences.
  • More commercials: Fox would get to boost its commercial output on Hulu.com.

The owners were also considering "scaling back the venture's international ambitions," according to the Variety report. Hulu is already available in Japan but has been considering expanding into other markets. Its owners appear to be balking at the high costs involved.

If that's the environment Kilar was looking at, then it's no wonder that he decided to move on.

Serious competition
And it's also not hard to see why Netflix might be cheering a development like that. Despite the prior-season vs. same-season focus, the company is locked in direct competition with Hulu Plus for streaming members.

Both charge $7.99 a month for subscriptions. They both bid for many of the same content rights, with four of Netflix's top 10 TV shows also available on Hulu. And just like Netflix, Hulu has been busy developing its own original content.

In fact, Netflix dubbed Hulu, not Amazon, its "closest U.S. competitor" in terms of viewing. The Hulu.com website attracts 30 million monthly visitors, and Hulu Plus clocks in at about 3 million paid members. That's not small change compared to Netflix's 24 million domestic subscribers.

And that hefty challenge over customers won't disappear anytime soon. In his parting email, Kilar said Hulu had just signed up 200,000 paid members over the previous seven days, a new high for the company. So Hulu's consumer draw is as strong as ever right now. But the competitive landscape does seem to be shifting in Netflix's favor.

The company announced a huge content deal with Disney last month, nabbing first-run rights to theatrical releases in the pay-TV window starting in 2016. Netflix's chief content officer called it "a bold leap forward for Internet television" at the time. It was the first handshake between a streaming service and one of the major content distributors.

Foolish bottom line
Hulu's wild story is far from over. Still, if management is bolting over disagreements about investments into the service, its a win for Netflix, which has no conflict about plowing money into content or international expansion opportunities.

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