"No advertising coming onto Netflix. Period."
-- Reed Hastings, Netflix (NASDAQ:NFLX) CEO, June 2015
Since its inception, Netflix's streaming video service has been ad-free. That stands in sharp contrast to Hulu, whose subscribers are shown ads. Other factors have certainly contributed, but Netflix's insistence on remaining ad-free may have fueled its rapid growth, and today Netflix has many more subscribers than Hulu.
Hulu's latest move, however, brings it into more direct competition with Netflix. Earlier this month, Hulu announced a "No Commercials" plan. For an additional fee, Hulu subscribers can remove almost all of the service's advertisements. Should Netflix investors fret?
Falling to third place
Netflix's streaming service has always been larger than Hulu's. In 2011, Netflix had over 20 million streaming subscribers; Hulu had less than 1 million. But at that time, Hulu was commonly viewed as Netflix's biggest competition. That's no longer the case.
Amazon launchedPrime Instant Video in February 2011, about three years after Hulu's debut. Despite starting later, Prime Instant Video has emerged as a far more menacing rival to Netflix. Unfortunately, the company doesn't disclose the total number of Prime subscribers it has, but analysts peg the figure at around 40 million-50 million, up from about 5 million in 2011. Hulu, on the other hand, had just 9 million subscribers at the end of April.
Admittedly, Amazon has been more aggressive than Hulu in pursuing original content, and has snagged exclusive syndication deals with Viacom and HBO, but, like Netflix, it built its streaming video business without advertisements.
Ads seem to be anathema to the streaming, on-demand video experience. Earlier this year, The Exstreamist surveyed its readers about the possibility of advertisements coming to Netflix. Seventy-nine percent said they would be willing to pay more if it meant no advertisements and 56% said they would outright cancel their memberships if Netflix was no longer ad-free.
$3 more per month
Hulu's new No Commercials plan, then, could win over a lot of customers who have been unwilling to use the service -- perhaps even stealing some Netflix subscribers.
Netflix does have some advantages over Hulu. Hulu's No Commercials plan costs $4 more per month than its standard membership. That makes it $3 per month more expensive than Netflix's standard HD plan ($11.99 vs $8.99). Hulu also continues to limit its subscribers to a single stream, while Netflix subscribers can watch two different shows on two different televisions simultaneously. In addition, Hulu's No Commercials plan is not entirely ad-free -- a select handful of its shows (including New Girl, Scandal, and Grey's Anatomy) require the viewer to watch a single commercial at the beginning and end of each episode.
Still, it's a risk factor Netflix subscribers should not discount. Hulu's No Commercials plan is not a one-off event, but rather the latest in a string of increasingly aggressive moves designed to attract more subscribers. Over the last year, Hulu has signed several high-profile deals giving it the exclusive streaming rights to a number of hit TV shows, including South Park, Empire, Fear the Walking Dead, and Seinfeld. Earlier this month, it signed a deal with Epix to stream its Hollywood movies, taking them from Netflix.
Netflix continues to distinguish itself from Hulu with an ever-growing catalog of original, exclusive shows (House of Cards, Orange is the New Black, Daredevil). And with cord-cutting on the rise, many could ultimately choose to subscribe to both.
Regardless, it's clear that competition is intensifying. Hulu was hardly a threat to Netflix in the past, but that's no longer the case.
Sam Mattera has no position in any stocks mentioned. The Motley Fool owns and recommends AMZN and NFLX. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.