Netflix Competitor Prospect for Acquisition

Executive Summary

Netflix has been regarded as the industry leader for so long because of its capabilities and market power. Hulu is another player with a significant market share in North America. The brand is known for its good user experience. It is unique because of the free video streaming in exchange for interruptive advertisements. Notably, Hulu complements Netflix in various ways, hence a significant acquisition prospect. Netflix could rely on Hulu to gain more competitive power in the North American market and increase the subscription base. Hulu could rely on Netflix capabilities to avail more free content and improve customer experience. In return, the customer would have access to a variety of quality content. Additionally, it could become beneficial to stakeholders and profit movie producers with better pay. Ultimately, the acquisition of Hulu could generate massive benefits for Netflix, consumers, and the entire industry.

Table of Contents

1      Introduction. 3

2      Key Strengths and Complementarity of Netflix and Hulu. 3

2.1      Netflix Strengths. 3

2.1.1     First-Mover Advantage. 3

2.1.2     Economies of Scale and Market Power. 4

2.2      Hulu Strengths. 5

2.2.1     Exceptional User Experience. 5

2.2.2     Favored by Industry Trends. 5

2.3      How Hulu and Netflix Complement each Other. 5

3      The Value of Netflix’s Acquisition of Hulu to the Customers. 6

3.1      More Content Variety. 6

3.2      Improved Services and Better Video Quality. 6

4      The Value of Netflix’s Acquisition of Hulu to the Industry. 7

4.1      Greater Demand and Revenue for Producers. 7

4.2      More Earnings to Stakeholders. 7

5      Conclusion. 7

Netflix Competitor Prospect for Acquisition

1           Introduction

As the new millennium unfolds, evidence suggests that most mergers and acquisitions intend to achieve economies (of scale and scope) and market power to increase competitiveness in the global market. Large companies want to be regarded as fast-growth and dominate their respective industries. An active merger or acquisition facilitates such growth objectives. Arguably, the highest merger and acquisition activities are in the media sector. Such activity has influenced how top companies compete in the developing market to increase their brand visibility. For instance, Netflix has used a similar strategy to acquire and merge with companies, such as the Roald Dahl Story Co Ltd, to increase their awareness globally and facilitate quality and original content. This report recommends the acquisition of Hulu by Netflix because the two complement each other, and it could benefit the consumers and the entire industry.

2           Key Strengths and Complementarity of Netflix and Hulu

2.1         Netflix Strengths

2.1.1        First-Mover Advantage

Netflix’s advantage as a first-mover is perhaps the most vital in its current glory. Netflix is a first-mover in the online DVD rental market (Varadarajan et al., 2007). Using this advantage, the company has developed a sticky interface by offering personalized movie recommendations that use movie renting patterns and preferences. For this reason, second-movers and other brands have found it almost unmanageable to overthrow this giant from its market leadership position. To indicate the extent of this advantage, in a previous survey; “53% of North American users said they considered Netflix an ‘essential service’, making Netflix the most indispensable video service, ahead of YouTube and cable, among others” (Guadiana, 2020, p. 10). This advantage has enabled the company to develop unique products and become so popular to enjoy substantial economies of scale relative to the rivals.

2.1.2        Economies of Scale and Market Power

Netflix’s economies of scale and market power have reduced operational costs and increased the profit margin significantly over the rivals. Online flexible infrastructure and interface allow Netflix to preserve low operating expenses while increasing the subscription base. Its position will potentially rise further as movie downloads become the consumer choice in the modern world. Subsequently, the number of subscribers on the platform will increase soon (Sadq, 2013). The company will continue to incur a minimal marginal cost of production, leading to higher profits and relatively greater market power. Markedly, the brand has significant control over the industry and has become a household brand. These strengths, together with electronic-commerce experience, value in its consumer services and library content, and large DVD catalog will continue to propel the firm beyond the ability of its rivals.

Netflix can no longer rely on these strengths for the coming years without preparing effectively to address impending pressures from close competitors. For instance, the company faces a challenge from rivals because of the minimal barriers to entry into the market. Similarly, its first-mover advantage is weakening as the industry faces significant trends. The changes in technology in terms of internet rates require companies to continually modernize their business model to sustain their existing market share. Netflix, therefore, must continue to find ways to differentiate itself from competitors to remain on top of the industry.

2.2         Hulu Strengths

2.2.1        Exceptional User Experience

After its launch, many people believed that Hulu was destined to fail because it was ridiculous to imagine how a free online video site could offer a good user experience or even be successful in the first place. However, Hulu has been a success from the beginning, proving this assumption false. This success could be attributed to the fact that it offers an easy and intuitive user interface with videos that do not require a separate application. At the same time, it has a huge catalog of free content from different providers, including shows and trailers. The company has been profitable because it sells ads spaces, allowing users to stream content for free at the expense of these interruptive moments.

2.2.2        Favored by Industry Trends

As a legal streaming content site, it arguably beats the likes of Netflix in two aspects. First, consumers do not need to subscribe to enjoy certain television shows. Second, consumers are progressively gaining more control over their own time as the act of tuning in for a program’s specific airtime becomes more and more extraneous. Seemingly, Hulu has not fared well in technology and other aspects that other brands, such as Netflix, have leveraged to gain their competitive power. By joining hands with brands that possess significant resources and technology power, this content streaming website could unquestionably become one the most prominent in the industry globally.

2.3         How Hulu and Netflix Complement each Other

Hulu lacks experience and skills in the industry relative to brands such as Netflix. The firm is therefore unable to build a sustainable competitive advantage. This situation is made worse by the lack of resources and capabilities, such as finances, physical resources, adequate human capital, and technology. Although Hulu has integrated technology in the backend processes, it still lags in harnessing its frontend power. Based on the same aspect, there is no stronger brand in terms of resources than Netflix. With what Hulu has achieved without massive resources, it could become a stronger brand if it used Netflix’s resources. At the same time, Netflix could gain more millions of potential subscribers currently using Hulu and use this to increase its competitive advantage.

Hulu enjoys a massive customer base in North America, a region that has remained the target of other rivals such as HBO and Amazon Prime Videos. Currently, Hulu ranks among the most popular video streaming sites in the U.S. For this reason, Netflix could easily control a larger market share.

3           The Value of Netflix’s Acquisition of Hulu to the Customers

3.1         More Content Variety

Netflix has a wide range of originals and licensed content on its streaming service. Similarly, Hulu is primarily known for TV shows and is unique because it releases episodes quickly. It also features programs from networks such as NBC, ABC, USA Network, and others. As of 2020, Netflix had over 1,569 TV shows and 4,010 movies (Palumbo, 2020). These numbers show that Hulu users could potentially enjoy much more variety of original and licensed content with Netflix’s acquisition.

3.2         Improved Services and Better Video Quality

Hulu’s video quality is inferior to that of Netflix. For instance, the highest video quality in Hulu is 720p HD, whereas Netflix offers up to 1080p HD. Because Netflix has better technology and resources, the video quality could improve for Hulu users. Accordingly, Netflix’s capabilities could support better services and better content management, ultimately a better customer experience.

4           The Value of Netflix’s Acquisition of Hulu to the Industry

4.1         Greater Demand and Revenue for Producers

By increasing the customer base and expanding Hulu’s business model, Netflix could increase the demand for original content in the market, which is essential for producers. As demand increases, the market price would rise to benefit movie producers and studios. Ordinarily, whenever demand is high, the bargaining power of movie producers goes up. It advantages the entire industry because higher pay for Netflix’s producers and movie suppliers would cause the competitors to raise their wages and payments.

4.2         More Earnings to Stakeholders

Hulu’s acquisition by Netflix would benefit several stakeholders. For example, the firm’s brand value would go up, becoming valuable to investors and shareholders. The demand for shares would increase, improving the value and potential of the entire industry. For example, the movie production industry would improve in the North American region, making America-based companies more competitive globally. In turn, this would spur the rise in demand for quality promoting grassroots production studios.

5           Conclusion

Among the acquisition prospects available for Netflix, Hulu emerges as the most profitable because of many reasons. Hulu has a large customer base in North America that would benefit Netflix by increasing its competitiveness. Netflix’s resources could propel Hulu to higher standards in terms of video quality and customer experience. Seemingly, it would not be without benefits to the customers and the industry at large. For instance, users would enjoy higher video quality and better user experience on the platform supported by Netflix’s superior technology and resource availability. Top Netflix competitors are continually innovating, rebranding, and coming up with new strategies to increase their competitiveness. Thanks to technology, the critical barriers to entry that have reduced competition over the years are getting eliminated. It is allowing innovative companies to compete with established brands. An acquisition could be vital for Netflix to retain its market leadership position.

References

Guadiana, G. (2020). A Netflix experience: reimagining the direct-to-consumer platform [Doctoral dissertation]. https://dspace.mit.edu/bitstream/handle/1721.1/126900/1191623004-MIT.pdf?sequence=1&isAllowed=y

Palumbo, E. (2020). Knowledge Graph Embeddings for Recommender Systems [Doctoral dissertation].

Sadq, Z. M. (2013). Analysising Netflix‟ s Strategy. International Journal of Science and Research (IJSR)–Режим доступа: https://www.ijsr.net/archive/v4i3/22031503.pdf.

Varadarajan, R., Yadav, M. S., & Shankar, V. (2007). First-mover advantage in an internet-enabled market environment: Conceptual framework and propositions. Journal of the Academy of Marketing Science36(3), 293-308. https://doi.org/10.1007/s11747-007-0080-y