As Netflix Contends With More Rivals, Hulu Stands Out

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Everyone’s gunning for Netflix.

Amazon, AT&T, Apple and the Walt Disney Company have spent billions to create or bolster their own streaming networks to take on the giant in the field. Some, like Apple and Amazon, are meant to be aggregators — selling both original content and offering shows from channels like HBO — making them similar to traditional cable providers. Others, like AT&T and Disney, have positioned themselves as services that sell only their content — for now.

But Netflix remains the industry leader. The company has come a long way since its early days of mailing off DVDs in red envelopes. It added 7.8 million new customers through the end of March, according to the first-quarter report it issued on Tuesday, for a total of 148 million across the globe, with 60 million in the United States. Its subscriber growth has slowed, however, more in the United States than elsewhere, partly because of price increases and stiffening competition. The streaming service booked $344 million in profit on $4.5 billion in sales in the quarter ending in March.

For the moment, though, Netflix is soundly beating its streaming rivals — in subscribers, viewing time and library of content. But one is closer than the others: Hulu.

Hulu has long had trouble steering its own course, because it has had to deal with multiple corporate overlords since it was founded in 2007.

For much of its existence, it had several owners: Disney, 21st Century Fox, Comcast and more recently Time Warner. The ownership of this built-by-committee digital outfit has become less complicated in recent days.

When Disney formally completed its acquisition of most of Fox last month, it became Hulu’s majority owner. Hulu rid itself of another stakeholder on Monday, when AT&T — which acquired Time Warner last year — sold the stake that once belonged to Time Warner back to Hulu. Now Disney is the controlling owner, and Comcast has the smaller piece.

Hulu originally made a name for itself as a next-day streamer of shows from other networks. That started to change a few years ago, when it got into the business of creating its own programming. Most notably, it gave the green light to “The Handmaid’s Tale,” the first streaming-native show to win an Emmy for best drama series.

While it may not generate much hype, Hulu is Netflix’s closest competitor, despite some key differences between the two companies.

Almost stubbornly, Netflix sells one thing — a deep assortment of original and licensed shows and films meant to please almost every niche.

Hulu, on the other hand, has three products that may better reflect what the future of streaming will look like. It has a live-TV service that replicates a small cable bundle at $45 a month; a video-on-demand service that sells for $12 a month without ads (this one acts most like Netflix); and a streaming service with advertising that costs $6 a month.

The last one is Hulu’s most lucrative business and points to future profits. Even though it charges $6, the service generates more than $15 in revenue per subscriber each month, because of the high-cost advertising sold against those customers, according to two people familiar with the business.

That would explain why Hulu lowered the price of the ads-based service by $2 this year — and it might also explain NBCUniversal’s interest in starting its own ad-based streaming network by 2020.

Roku, the maker of streaming boxes, is also experiencing fast growth from its advertising-driven Roku channel, a free streaming app. And in January, Viacom spent $340 million for PlutoTV, another ad-based streaming provider.

Last year, Hulu took in more than $1.5 billion in advertising, a 45 percent jump from the previous year. Randy Freer, its chief executive, expects the ad market for online television to grow to $50 billion within three years.

“This uniquely positions Hulu to benefit from elite brands into the digital video ad market,” Mr. Freer said at Disney’s investor presentation last week. “Hulu does this with a viewer-first ad experience that has less commercial interruption, with ad breaks that are shorter and ads that are more relevant.”

Netflix and Hulu aren’t necessarily either-or propositions for consumers. Many people pay for both.

Mr. Hastings doesn’t anticipate that new competition will cut into Netflix’s business, because consumer appetite for streaming content still outpaces what’s currently available, or what will be available.

“Great competition makes you better,” he said of the newly announced competitors, Apple and Disney, in the company earnings call Tuesday. He added of all the others, “There’s a ton of competition out there, which is great for consumers, and it’s exciting for us.”

While Netflix remains well in the lead, a look at the numbers suggests that Hulu could prove a formidable rival. Let’s take a look:

• Valuation: Hulu is worth $15 billion, Netflix $157 billion. But it’s not just about size — it’s important to consider how fast each has grown relative to the other.

  When Time Warner bought a 10 percent stake in Hulu in August 2016, it paid $583 million, implying a valuation of $5.8 billion. Nearly two years later, Disney’s advisers pegged Hulu at a $9.3 billion valuation. This month, after AT&T sold its 9.5 percent stake for $1.43 billion, the valuation shot up to $15 billion. (Note: AT&T forfeited 0.5 percent of its stake when it didn’t make continued investments into Hulu. That small portion went back to Hulu.) That means Hulu’s valuation jumped by 2.6 times in two and a half years.

  Here’s the kicker: Netflix’s value grew by approximately 3.8 times in the same period. But keep in mind that, because Netflix is openly traded on the public market, it has many more potential buyers at any given point. Hulu is effectively a private operation, with few available buyers. You have to wonder if Hulu might be more valuable if it were spun out as a separate, publicly traded company with Disney retaining a significant, or even a controlling, stake.

• Subscribers: As of December, Hulu had 25 million subscribers — eight million more than it had the previous year, a 47 percent increase. Netflix had 58 million paying members in the United States at the end of last year — a 12 percent bump from the previous year. (Globally, Netflix had 139 million, a 26 percent increase.)

  Netflix’s growth has started to slow — and markedly so, when compared with Hulu’s.

• Business: Both Hulu and Netflix blow through a lot of cash. Hulu has been a money-losing operation from the start. It is expected to lose $1.5 billion this year and about the same next year. But Disney has said it expects Hulu to start turning a profit by 2023.

  Netflix records a profit on its books, but much of that comes from an accounting rule that allows it to account for some costs later on down the line. It made $1.2 billion in profit last year and is expected to make more than $2 billion this year and $3 billion next year.

  Netflix’s appetite for content means it has to keep spending big, however, resulting in what’s known as “negative free cash flow.” More money is going out the door than coming in — a difference that Netflix covers by borrowing even more. The company burned through $3 billion last year and $2 billion the year before that. But that won’t last forever. The company said it planned to rely on its own revenue to fund its content starting next year.

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