Hulu just took a beating, due to a nice chess move by Netflix, Inc. (NASDAQ:NFLX).
Originally banded together by 20th Century Fox/ News Corp (NASDAQ:NWSA), The Walt Disney Company (NYSE:DIS), and Comcast Corporation (NASDAQ:CMCSK), the owner of NBC Universal Television Group, Hulu was designed to take on Netflix, Inc. (NASDAQ:NFLX) 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 Network Corp (NASDAQ:DISH), 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, Inc. (NASDAQ:NFLX) 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.com, Inc. (NASDAQ:AMZN) when its contract with Netflix expired. This 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, Inc. (NASDAQ:NFLX), 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, Inc. (NASDAQ:NFLX) 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, Inc. (NASDAQ:NFLX) 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.com, Inc. (NASDAQ:AMZN), Google Inc (NASDAQ:GOOG), 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, The Walt Disney Company (NYSE:DIS) 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, Inc. (NASDAQ:NFLX). 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 Inc (NASDAQ:GOOG), for eyeballs. Nevertheless, I do like the high level but very expensive corporate chess moves being made.
The article New Girl A Feather in Netflix’s Cap originally appeared on Fool.com and is written by Margie Nemcick-Cruz.
Margie Nemcick-Cruz is short Netflix. The Motley Fool recommends Netflix and Walt Disney (NYSE:DIS). The Motley Fool owns shares of Netflix and Walt Disney. Margie is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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