Netflix (NASDAQ: NFLX) could face the strongest threat yet to its video-streaming dominance if Disney (NYSE: DIS) gains full control of Hulu, which may just happen. That helps explain why Netflix has been ramping up its investment in original programming, but because that's a risky strategy in itself, it might not be enough to offset the challenge.
Hulu began as a collaboration among media titans Disney, Comcast (NASDAQ: CMCSA), Fox, and AT&T (NYSE: T), which acquired its stake through the acquisition of Time Warner. Now Disney is preparing to acquire Fox, which would give it a 60% stake in the streaming service, and if both Comcast and AT&T sell their respective positions to Disney, giving it 100% control over Hulu, it could become a premiere movie-streaming powerhouse that challenges Netflix's preeminence.
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AT&T is said to be giving serious thought to selling its 10% stake. Having acquired Time Warner in June for $85 billion, the telecom is weighed down by $180 billion in debt and at a recent investor day conference told analysts it was considering shedding the property, particularly because it was gearing up to launch its own service next year. It's estimated a sale could net AT&T about $1 billion.
Previously, Comcast was also said to be willing to sell its 30% stake in the service after Disney agreed to sell it Fox's Sky broadcasting network, though some analysts think that by doing so, Comcast would be giving its rival too much of a competitive advantage. Comcast also appointed three executives to serve on Hulu's board in September.
But even without Comcast or AT&T selling their stakes, Disney will still be getting majority ownership when the Fox deal closes. Disney CEO Bob Iger has laid the groundwork for making a full-frontal assault on Netflix by telling analysts last year he wanted to turn Hulu into "a more adult-oriented offering" by using the assets from the movie and TV studios of Twentieth Century Fox, along with Fox's FX cable channel. Moreover, it will be pulling much of its content from the Netflix platform, a move that might hamper Netflix's ability to respond to Disney's attack.
Blunting the impact
Although Netflix CEO Reed Hastings has refused to say just what percentage of the company's content is Disney-related, he did say it was a declining portion and that Netflix had anticipated its content partners would eventually pull their programming as they launched their own services. He believes international growth will more than offset any domestic subscriber losses that came about because of the loss of Disney content.
Moreover, the two services co-produce programming like Nurse Ratched and a series of Marvel-character-based programs, which Netflix, not Disney, has the right to cancel. And Netflix just canceled a whole bunch of them, likely because of the impending launch of Disney+, a new, online streaming service.
Still, when Disney's partnership with Netflix concludes in 2019, its library of live action and animated movies from Disney and Pixar, as well as Star Wars and Marvel films, along with content from the Disney Channel, Disney Junior, and Disney XD, will no longer be featured on Netflix, and will instead be seen on the new service -- and likely a lot of them will be on Hulu, too.
Customer and competitor
Business Insider has said losing Disney kids programming may be the toughest blow, as the shows are a big reason behind why parents subscribe to Netflix in the first place. Some 60% of respondents to a survey said it would definitely affect their decision to subscribe to Netflix, or might impact their decision depending on whether Netflix added new programming to replace it.
That's why Netflix has been amping its content budget, though being a content producer is a different game. The streaming service made waves recently when it gave movie theaters exclusive showings of new movies it produced before making them available on Netflix. While the strategy was to make a bid to gain better talent for future content in part by giving them a chance to win an Academy Award, it continues to push Netflix into a position of being a competitor with its content providers.
It also means Netflix will need to consistently grow its content creation budget, something that will take ever larger slices of the available funding pie. Netflix might not turn into a streaming service with only original programming, but the broad category of content that was once available to it is going to be severely diminished.
Disney's control of Hulu, whether completely or as a majority owner, could end up making the service the new premiere streaming platform to watch.
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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.