Can Hulu Compete With Internet TV Players?

Ishfaque is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Traditional cable-based businesses like Disney (NYSE: DIS) and Twenty-First Century Fox (NASDAQ: FOX) are heavily reliant on cable and distributional channels for a large part of their total revenues. But consumers are increasingly shifting their video viewing habits online. These media giants have decided to retain their very valuable over-the-top asset, Hulu, in their own hands, and to make a big cash injection to make the video platform more competitive in the long-term.

Competition on the rise

Increasingly viewers are using their mobile devices and video streaming players like Roku and Apple TV to watch TV Shows and movies. And as a result, traditional media firms and other technology companies are making big bets on the secular trend and catching up with the leader of Internet video, Netflix (NASDAQ: NFLX). The owners of Hulu have decided to keep the asset independent and not sell it to competitors like Dish, Time Warner etc.

Hulu is already owned by three of the largest content companies in the world, and as a result has a big content library; it will step up competition with Netflix and with Amazon (NASDAQ: AMZN). Hulu is already making original shows in a bid to make its service more unique, just like Netflix. And the powerful Amazon is already in the process of building five new original shows to get more subscribers for its Amazon Prime Service. The rapidly growing Internet video business is increasingly becoming more competitive. 

Investing in Hulu; Maximizing potential 

The trio of Hulu's owners, which includes Disney, Comcast and Fox, has decided to make a sizable investment of more than $750 million to make Hulu a viable and long-term player in the online streaming business. Hulu already gets a lot of next-day content from the studios of its owners under more preferential terms due to its ownership structure. And this new investment in Hulu will likely pave the way for a wider content library and for the production of more original content. 

The owners of Hulu put the company up for sale, after the companies owners couldn't come to an agreement about the company's business model. Disney and Fox couldn't agree on the revenue model of Hulu, which is currently monetized through paid subscriptions, just like Netflix, for $7.99 a month, and also earns revenue through video advertisements on its platform. Comcast's NBC is a silent partner, and Disney and Fox have aligned their interests for the future of Hulu, thus deciding to keep the company under their operating umbrella. 

Disney's CEO Bob Iger stated that Hulu's strategic value is immense, and its long-term investment value is much higher. The future of Hulu is bright, and the owners decided to hold onto it based on that premise. And the $750 million cash investment into Hulu will lead to improving its user interface and adding more content. 

Hulu's paid version, Hulu Plus already has more than 4 million subscribers, and the company's platform now gets more than 30 million monthly unique visitors. The company is a leading aggregator of TV content online by sourcing content from more than 400 partners as well. 

Investments in adding content

Hulu's over-the-top competitors, Netflix and Amazon are spending heavily in content. Netflix added more than $2.5 billion worth of content in 2012 to its streaming library. Amazon doesn't breakdown its investment in media and entertainment but it’s almost certainly close to $1 billion in content spending annually. 

In order for Hulu to compete with Netflix and Amazon, the company will have to spend even more money on content, especially exclusive content deals and the production of quality original shows to attract newer subscribers of its paid version, and also for the free ad-supported version. 

If Hulu can invest with its new cash injection on building up a solid library of original shows, the company can grow its subscriber base substantially from current levels. Hulu is already quite a popular and consumer friendly platform and is available on numerous Internet connected devices. And the investment by its owners can lead the company to jump-start its growth engines. 

Going Forward

The alignment of Fox and Disney in developing a strong vision is a great positive for Hulu. Hulu has gained a lot of momentum in adding subscribers and developing itself as a viable and competitive platform for Internet video streaming.

With the existing players on cable and premium TV holding onto Hulu, the competition for Amazon and Netflix increases a lot, especially in the long-term. Amazon and Netflix are making huge bets in defining a new age for Internet TV by adding exclusive and original content, but their plans will be partially impacted by the decision of the content companies to invest in Hulu for the long-haul and maintain the current ownership structure. 

The television landscape is changing quickly, with new entrants like Netflix and Amazon.com disrupting traditional networks. The Motley Fool's new free report "Who Will Own the Future of Television?" details the risks and opportunities in TV. Click here to read the full report!


Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Netflix, and Walt Disney. The Motley Fool owns shares of Amazon.com, Netflix, and Walt Disney. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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