Time Warner Cable (NYSE:TWC) is in talks to acquire a stake in Hulu.  Given the increased demand of streaming videos on multiple devices, pay-TV operators have been offering television content online through their ‘TV Everywhere’ strategy. Cable operators have been struggling to counter the issue of subscriber churn. Comcast (NASDAQ:CMCSA), in particular, has been aggressive to address this issue and has come up with multiple services such as Xfinity and X1 to retain its subscribers. We believe that Time Warner Cable needs to do something similar. While an association with Hulu can allow the company to expand its initiatives beyond its iOS app which features streaming of various networks, a lack of live streaming and original programming can limit Hulu’s own growth in future.
Hulu is a subscription-based service offering ad-supported on-demand streaming of TV shows, movies and other media content from various networks. The company is jointly owned by Comcast’s NBCUniversal, Disney’s (NYSE:DIS) ABC and Newscorp’s (NASDAQ:NWS) Fox, and has more than 4 million subscribers in the U.S. The rising demand for streaming television content has led the pay-TV operators such as Comcast and DirecTV (NASDAQ: DTV), as well as content owners such as Disney’s ABC to offer their own streaming services. Time Warner Cable itself launched its iOS app offering live streaming of 8 channels.
Beyond television, Hulu offers movie streaming, but it is too small when compared to Netflix (NASDAQ:NFLX). Netflix offers a variety of content to a huge subscriber base, much larger than Hulu. The company also started offering exclusive streaming of original programming such as House of Cards, which has been a big hit and has helped the company gain more subscribers.
Hulu derives its value from the content it gets from its owners. Hulu’s fate is dependent on how long can it continue to get the content and it is unlikely that a customer will prefer to pay Hulu for television content, if they can get free stream from operators and content owners directly. If this deal works out, it would be interesting to see what Time Warner Cable will reap from the acquisition. Taking a stake in Hulu could expand the company’s subscriber base and help it gain online video revenues. One can argue that the company can build on its initiative of TV Everywhere. However, we believe that lack of original programming in Hulu will limit its potential growth.
Our price estimate for Time Warner Cable stands at $89 is roughly at 10% discount to the market price.Notes: