Quick Thoughts: Wither Hulu?

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Disney, News Corp and Comcast have put their internet streaming venture Hulu on the block for sale.  At first glance, the service, which boasts 28 million users enjoying exclusive on-line access to the current programming line-ups from 264 content partners, including ABC, NBC, Fox and the Viacom family of channels, appears a hot property.  Revenues, driven by advertising and subscriptions to a premium ad-free service, are projected to nearly double YoY to $500 M for 2011.  Videos watched per user is up more than 10% year to date and paid Hulu Plus subscriptions are on track to top 1 million by year end.  The company claims that it is already profitable.  With recent streaming music IPO Pandora trading to a $2.7 B market cap while losing money on sales that are 30% lower, one would expect interest to be keen.  Nonetheless, would-be acquirers have been cautious in kicking Hulu’s tires.

The key issue?  How long and under what terms will network programming available to a Hulu buyer?  Already, Fox has announced its intent to lengthen the time between the initial broadcast of an episode to its availability on Hulu from 1 day to 8.  (NB the window would remain 1 day for Hulu Plus, and for confirmed subscribers to the Dish Network)  Will other networks follow Fox’s lead?  Currently, Hulu is the exclusive source for most of its programming, other than the content owners’ own sites.  How soon would a buyer expect to see the Hulu content sold in parallel to video streaming competitors?  Media reports suggest that the proposed window for future exclusivity is two years, a short head start given the ambitious plans of many deep pocketed players.   Reportedly, Yahoo has already asked that the window be extended as a condition of its bid.  When will a buyer have to return to the bargaining table?  Again, media reports suggest contractual access to programming with a 5 year expiration date.  Finally, will there be further conditions on the presentation of Hulu programming?  Disney, News Corp and NBC/Universal have demanded an ever greater advertising load.  Today, Hulu averages one minute of advertising for every 4.66 minutes of program viewing.  Clearly, the terms will determine the value to any buyer.

If Hulu’s owners are not willing to offer a measure of exclusivity and a reasonable term before programming terms must be renegotiated, these negotiations may go nowhere.  However, assuming that Disney, Fox and Comcast are serious about the process, these issues will be addressed and would expect either Amazon or Google to emerge as the services new owner.  Either would enjoy dramatic synergies with existing services and skill sets.  In the end, it will fall to the valuation each bidder makes of Hulu AND of the comfort the current owners have with the prospective buyers – it may not be a matter of highest bidder wins.  Given the pace of the proceedings, we would imagine that we would have an answer well before year end.

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