Two digital darlings are teaming up. Spotify (NYSE:SPOT) is joining forces with Hulu to offer a discounted bundle of the two platforms. Streaming buffs can now pay $12.99 a month for a package that includes Spotify's premium service and Hulu's entry-level platform with limited commercials for just $12.99 a month. The new offering provides monthly savings of $4.99 off the two plans priced separately with Spotify at $9.99 a month and Hulu at $7.99 a month.
This is a pretty big deal because both of these services are already ubiquitous and growing quickly. Spotify has 71 million premium subscribers worldwide, 46% more than it had on its rolls a year earlier. Hulu has 17 million U.S. paying users, up 40% since early 2016.
Naturally this is going to leave some wondering if Netflix (NASDAQ:NFLX) is vulnerable. Hulu was already a thorn in Netflix's side, swiping Emmy awards. Will Hulu also swipe market share now that it's being offered in a discounted bundle with the world's leading premium on-demand music service? Let's go over the reasons why this won't end badly for Netflix.
1. Limited commercials are still commercials
Hulu comes in two flavors. Folks can pay $7.99 a month for access to the growing Hulu content library with limited commercial interruptions, or they can pay $11.99 a month for a true ad-free experience. The Spotify bundle only works with the ad-backed plan, for now.
Since Hulu is owned by many of the leading media networks, it makes sense that they would want folks to keep consuming some degree of ads. They don't want to kill the cash cow of television commercials. However, it's also not a surprise that consumers are flocking to Netflix and to a lesser extent Prime Video because they are ad-free services.
The Spotify and Hulu partnership can naturally evolve to cover all of the available plans. Spotify has family plans that aren't covered here, and Hulu also offers premium add-ons that aren't part of this deal. However, as things stand right now, paying $12.99 a month for Spotify and Hulu sounds like a great deal but even limited ad breaks are still time killers if not deal breakers to a Netflix-spoiled audience.
2. Prime Video hasn't slowed Netflix down
This promotion may seem pretty scary to some Netflix investors. If someone's already paying Spotify $9.99 a month -- as 71 million people across the planet are right now, and Spotify is generating 39% of its revenue from the U.S. market -- why not pay an extra $3 a month to get a Netflix product valued at $7.99 a month? Replacing Netflix (with plans starting at $7.99 a month) with a bundled Hulu would put an extra latte in your hands every month.
Thankfully for Netflix, consumers don't think that way. There are tens of millions of people with essentially free access to Amazon.com's Prime Video. It's included with all Prime memberships. Prime Video's success hasn't slowed down Netflix.
Netflix attracted a record 8.3 million more subscribers than it lost during the last three months of 2017, and that was with Prime usage booming and Hulu gaining credibility on the original content from with The Handmaid's Tale earlier that year.
3. Netflix is an absolute value
Cord-cutters aren't replacing cable and satellite television services with a single streaming platform. They're saving a lot of dough by going digital, and they're spreading the wealth around across several different services. Why do you think Hulu, Netflix, and Prime Video are all growing so quickly?
Spotify effectively lowering the price on Hulu may have whiffs of a problematic price war, but entertainment consumers are more concerned about the absolute and not relative value. There is likely a lot of overlap with Netflix and Hulu subscribers, and if anything, saving $5 a month may actually help Netflix by allocating more saved dollars to the other platforms.
If pricing was an issue, Netflix wouldn't have seen its audience grow by 143% since it started increasing its prices four years ago. Hulu's deal with Spotify is smart for both of those companies. It will help both platforms grow their audiences, but it doesn't mean that it has to come at the expense of the service that's spending more on content than all of its closest rivals combined.