New Girl A Feather in Netflix's Cap

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

Hulu just took a beating, due to a nice chess move by Netflix (NASDAQ: NFLX).

Originally banded together by 20th Century Fox/ News Corp (NASDAQ: NWSA), Disney (NYSE: DIS), and Comcast (NASDAQ: CMCSK), the owner of NBC Universal Television Group, Hulu was designed to take on Netflix in the streaming market. It was intended to use the greatest piece of leverage the studios had: ownership rights to the content.

Netflix's success and current challenges

Netflix had the foresight to license old content from the studios which rarely got any air time and built its library and membership base with it. Dish Networks, current owner of the defunct Blockbuster franchise, complained that it was unable to compete as Netflix had gotten a sweetheart of a deal that was largely based on it being the only bidder for the content at the time. Oh, the advantages of being first to market.

But guess what? Sweetheart deals for Netflix are a thing of the past. In an ominous sign of things to come and the lack of leverage that Netflix actually has, Viacom sold the rights to its content to a higher bidder in the form of Amazon when its contract with Netflix expiredThis caused me to cancel my Netflix account for reasons that we'll call "South Park Withdrawal."

Hulu's advantage

Hulu: The studio's content cartel. Want to watch the latest episode of Modern Family? To do so legally, you must subscribe to Hulu Plus, paying the same amount as Netflix, but you're also forced to watch commercials as well, generating additional profits for the cartel.

The only reason to subscribe to the inferior service, and I do mean inferior, was the content.

The owners of Hulu could have literally starved Netflix from all their hits, kept it for themselves, and slowly built their subscriber base.

In cartels, however, the participants are rarely team players. Like some countries in OPEC selling more than their allotted share of oil as prices rise, Fox gave Netflix the rights to New Girl. Though exact terms have not been disclosed, the Los Angeles Times is reporting the agreement will cost Netflix a price of high six-figures per episode.

Of course, Netflix might not come out and say it, but I am certain that this was not only about getting to the rights to the no. 1 rated comedy show for young women aged 18-34. It was also a chess move designed to weaken Hulu. If Amazon, Google, or even Apple (with Apple TV likely searching for content) suddenly wanted to pay an arm and a leg for a hit show like Modern Family, Disney will follow suit and similarly do what it's in own best short-term self interest rather than build the power of the collective cartel. It's understandable, of course, since not all content is created equal.

Worries about locking up content rights, are already undermining the bidding process for Hulu as it is. According to AllThingsD, Yahoo's bid came in far lower then the $1 billion desired by Hulu owners.

Playing Netflix?
While there's no doubt in my mind that Netflix paid for too much for the content rights to New Girl alone, I believe that CEO Reed Hastings might view this as a chess move to weaken the competition.

Nevertheless, I would short Netflix. It is my belief that the company pays impossibly high prices for content, its share price has run up substantially this year, and the company will be facing tremendous competitive pressures, not only from Amazon, but also a massive push forward by Google, for eyeballs. Nevertheless, I do like the high level but very expensive corporate chess moves being made.

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Margie Nemcick-Cruz is short Netflix. The Motley Fool recommends Netflix and Walt Disney. The Motley Fool owns shares of 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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