The owners of Hulu have decided to keep the online streaming service. In fact, they won't just keep it as is -- they're planning to invest some $750 million into the service.
Although Netflix, Inc. (NASDAQ:NFLX) is somewhat of a competitor when it comes to online streaming, the company actually benefits from Hulu's independence.
Cutting the cord
There’s growing evidence that cord cutting is finally starting to emerge as a potent trend. In the US there’s a group of households -- Nielsen calls them Zero TV households -- that don't subscribe to cable, or even watch the free, over-the-air networks. Instead, they stick to Internet alternatives for their entertainment needs.
This group of people is still small (some 5 million households) but growing (up from 3 million in 2007). This trend is most prevalent among young adults.
And it isn't limited to the US: In Canada, 16% of households now stream all their TV-related content online.
The rise of Internet networks
What’s fueling this trend? A weak economy probably isn't helping -- cable packages often cost $100 per month or more, and with unemployment remaining high (particularly among young adults) that’s another utility bill many households can no longer afford.
But the rise of Internet alternatives cannot be ignored. For $8 per month, Netflix provides thousands of hours of content. Sure, it might not be as high quality as a robust cable bundle, but $8 is far more affordable than $100.
And it isn't just Netflix, Inc. (NASDAQ:NFLX). There’s the aforementioned Hulu, Amazon.com, Inc. (NASDAQ:AMZN)’s Prime Instant Video, RedBox Instant, and other alternatives.
Netflix needs a strong online content system
In the past, these other services were seen as a threat to Netflix. If you have Amazon.com, Inc. (NASDAQ:AMZN) Prime, for example, do you really need Netflix, Inc. (NASDAQ:NFLX)? But Netflix has been able to rebuke this challenge -- in fact, it has arguably turned its rivals into allies.
As I've written previously, Netflix, Inc. (NASDAQ:NFLX) has been slowly changing its business model in recent months -- from a cornucopia of broadcasters' recycled content, to exclusive deals and original shows.
Netflix has signed deals with The Walt Disney Company (NYSE:DIS) and Fox, while paying to develop original shows like House of Cards and Orange is the New Black. Amazon.com, Inc. (NASDAQ:AMZN) has done the same. The online retailer is working to create five new, original series and has acquired exclusive rights to Viacom programming.
And while Netflix and Amazon may be investing in original content to compete with each other, in reality, they're beginning to create a more powerful alternative to paid-TV providers.
Even if one pays for both Amazon Prime and Netflix, Inc. (NASDAQ:NFLX), that’s only $175 for a full year -- a year’s worth of cable could run over five times that amount.
As for how Amazon Prime Instant Video benefits Amazon? Clearly, unlike Netflix, Amazon’s business is far more complex than just offering online video. Still, if Amazon can scoop up some cord cutters, it could gain some retail customers in the process.
Along with video programming, Amazon Prime includes free two-day shipping. Customers who buy Prime for the video might be more likely to buy some physical goods from Amazon as well.
An independent Hulu could bolster that ecosystem
In an interview with CNBC, Netflix CEO Reed Hastings said he feared an independent Hulu, more-so than an acquired company. Hastings claimed an independent company would be hungrier, and a stronger competitor.
Perhaps. Or perhaps Hastings realizes that keeping Hulu as-is benefits his company as a paid-TV alternative. As it stands right now, Netflix and Hulu have a limited overlap (Netflix, Inc. (NASDAQ:NFLX) has a deep film catalog, Hulu is all TV shows).