We've published an in-depth analysis
last year examining the competition between free online video services YouTube and Hulu. We believed that Hulu was in a better position than YouTube when it comes to profitability outlook, as Hulu's premium content could charge higher ad CPM and it's lower cost for carrying User Generated Content (UGC). But apparently a pure advertising model is not the best way to maximize profit, not even sufficient for the publishing industry, let alone the TV programming and filmed entertainment industry, which carries extravagant production cost.
So quite expectedly, Hulu is going to put up its pay wall as soon as May 24, according to a couple of news source. The new subscription service, Hulu Plus, would continue to provide for free the most recent episodes of shows. But viewers who want to see old episodes would have to pay $9.95 a month. $9.95? Yes, just one dollar more than the cheapest streaming plan from Netflix. We believe that it is not a coincidence for Hulu to set the price so close to Netflix. With the new subscription service, Hulu is now in head-to-head competition with Netflix.
Driven by its outstanding performance in the last quarter, Netflix's stock price has surged almost by 100% since January this year. Now Netflix is one of the leading US companies in the media sector that show robust growth, primarily due to its attractive streaming service. Given Hulu's entry in the market, is Netflix going to maintain its edge in the competition?
Early evidence shows that Netflix is in a strong position which might be hard for Hulu to catch up. As the subscription services from the two are mainly providing back-catalog of shows and movies, the services look almost identical, except that Netflix might sometimes have new movies for DVD rental. Although Hulu offers for free recent shows, they are also available for Netflix users. Netflix's advantages of being slightly cheaper and offering DVDs are not significant, but this could still make consumers somewhat favor Netflix over Hulu. Furthermore, Netflix has ample distribution portfolio including all major game consoles, iPad, set-top-boxes, computers and TV services such as Boxee. Netflix app on iphone is also believed to be released soon. In contrast, Hulu only distributes content through PCs despite some early attempt of multiple device access. But its owners do not want Hulu's content to be accessed on big screen TV sets at this moment, which would cannibalize their existing revenues. In addition, it is not costless for existing Netflix users to switch services, as Netflix's rating and recommendation system knows ours taste well, while switching to Hulu might require us to build up our profiles once again from scratch.
Looking at users numbers, Netflix has 14 million subscribers as of Q1 2010, while Hulu has about 40 million unique viewers in February 2010 according to comScore. Industry consensus for digital media freemium model is that about 5%-10% of total users could be converted to paying users, which leads to Hulu's potential high-end subscriber number to 4 million.Based on this assumption, Hulu's annual subscription revenue could reach 4 x 10 x 12=$480 million. But of course, Netflix's competition would put pressure on Hulu's acquisition of subscribers. So maybe $200-$300 million is more realistic, if not too optimistic, number for Hulu to generate. It almost doubles Hulu's current revenue size, but is still far from people's original expectation on the company. We are sure that Hulu will eventually improve its service, distribution outlet and increase the size of catalog, while with the pressure from Netflix and its investors, Hulu has a lot to work on right now.