Netflix Faces Increased Threat from Hulu, Says Jefferies

Jefferies said although Netflix, Inc. NFLX has dominated the SVOD (subscription video on demand) landscape to date, the platform will face increased competition from Hulu over the next 2-3 years. SVOD refers to a service that gives users unlimited access to a wide range of programs for a monthly flat rate. Hulu is seen as a potential threat to Netflix apart from Amazon Prime in this hot market, which is expected to show an annual growth rate (CAGR 2016-2020) of 8.81 percent, according to Statista. While Hulu has traditionally been characterized by network TV content, the platform is pursuing more content deals across television and stepping up investment in originals. "In our view, Hulu will likely pursue international expansion in the next 1-3 years, representing a threat to Netflix's own global aspirations. Overall, assuming $1.5B in revenue (2015 est.) and a target multiple of 2.5-3.5x revenue, we believe that Hulu is worth between $3.8B and $5.3B – this compares to Netflix, which is currently trading at 5.7x 2015 revenue," analyst John Janedis wrote in a note to clients. As of now, Netflix is the Preferred Platform for Consumers. According to a UBS survey, Netflix was "essential" for >60 percent of participants. Millennials (18-24 years old) are especially loyal with nearly 80 percent saying Netflix is essential. Going forward, negotiations will reflect a revised strategy from both network owners and SVOD platforms. As a result, Netflix is expected to license even less content from networks going forward, instead focusing investment on developing original content. Netflix expects programming expenses to reach $5 billion in 2016 as the platform launches 30+ original series (from 16 in 2015). "To fill this void, we feel that networks will aim to monetize a higher portion of content on Hulu, particularly those with an ownership stake in the platform (NBC, ABC, FOX), or look to earn incremental payments from MVPDs for expanded rights to content.," Janedis noted. This shift could have a short term negative impact on network owners, especially as key deals with Netflix expire. "Specifically, we expect a potential revenue impact of $100-200M for TWX, $50M+ for VIAB, and $150-200M for FOX. The names most exposed to SVOD in the entertainment group include DIS, FOXA, CBS, and TWX," the analyst added