Hulu was being considered as an attractive pick with at least three prospective buyers including DirecTV (NASDAQ:DTV) reportedly offering over $1 billion. However, the owners – 21st Century Fox, Disney (NYSE:DIS) and Comcast (NASDAQ:CMCSA) yet again withdrew Hulu from sale. It is clear that they either didn’t receive bids meeting their expectations or saw value in keeping control of the streaming service. The owners decided to keep the video streaming website and will invest $750 million to help it grow.  While the move maybe good for its current owners if they manage to end their disagreement over Hulu’s future, it is definitely a setback for DirecTV for which Hulu could have been a key strategic asset.
Why Is Hulu Important For DirecTV?
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Hulu is a subscription-based service offering on-demand streaming of TV shows, movies and other media content from various networks. The company, which is jointly owned by Comcast, Disney and Newscorp 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, as well as content owners such as Disney to offer their own streaming services. Beyond television, Hulu offers movie streaming, but it is too small when compared to Netflix (NASDAQ:NFLX), which offers a variety of content to a huge subscriber base.
Hulu can be an important asset for pay-TV operators such as DirecTV and Time Warner Cable (NYSE:TWC). DirecTV lacks any significant online presence and unlike cable operators such as Time Warner Cable and Comcast, it lacks broadband service and cannot take advantage of bundled offerings. Additionally, it doesn’t have any plans to enter the wireless business like Dish (NASDAQ:DISH) to fuel its growth. This gives DirecTV the most to gain among the group of bidders. The company charges a premium to its subscribers for offering NFL Sunday Ticket, but that contract expires in 2015.  Hulu would have been an add-on service to DirecTV’s subscribers and could have helped the company retain the premium it charges. DirecTV has also started developing original content and could have created exclusive content for Hulu to help it grow.  Moreover, DirecTV has a strong foothold in Latin America where Netflix is currently expanding. With DirecTV, Hulu could have given a tough competition to Netflix in Latin America. However, as Hulu goes off the sale radar, DirecTV will have to look at other options for growth.
Issues With Hulu’s Owners
There has been disagreement over Hulu’s future among its current owners. The two companies 21st Century Fox and Disney had disagreements over what the service’s core business model should be. While Disney prefers an ad-supported model, 21st Century Fox sees subscriptions as the best area to focus on.  Currently Hulu offers both, a free version as well as its expanded Hulu Plus subscription service. Comcast owns the majority of the remaining of Hulu but due to regulatory restrictions put in place with its acquisition of NBCUniversal, it is not allowed to participate in any operational capacity.
The subscription business has failed to take off for Hulu the way it has for some of its competitors. Netflix has over 29 million streaming subscribers compared to just four million for Hulu.  One reason for pulling Hulu out of sale could be the lower valuation. An offer of $1 billion for 4 million subscribers is essentially $250 per subscriber. This is far less than that of Netflix, which has a market value of $14 billion for around 29 million subscribers, thereby translating into $490 per subscriber. It would be interesting to see the direction Hulu ends up going in. This is the second time the media companies have decided against selling the site. The first time they weighed selling Hulu was in 2011 when it received valuations as high as $2 billion.
It is clear that if the owners want to keep Hulu they must resolve the disagreement over the direction of its future growth. With $750 million infusion in business, focus on original content for Hulu could be on the radar and it would make a lot of sense as it is something which is clearly fueling Netflix’s growth. The current owners can also bring in a fourth partner with a minority stake who could help settle the disagreement and help the streaming website grow. Time Warner Cable has been eyeing a minority stake in Hulu. The cable company could offer Hulu to its customers as a bundled service. It would be interesting to see if it manages to get a piece of Hulu and expand its online streaming services.
Our price estimate for DirecTV stands at $59, close to the current market price.Notes:
- 21ST CENTURY FOX, NBCUNIVERSAL AND THE WALT DISNEY COMPANY TO MAINTAIN OWNERSHIP POSITIONS IN HULU, Disney Press Release, Jul 12, 2013 [↩]
- Hulu’s Website [↩]
- DirecTV’s SEC Filings [↩]
- DirecTV goes ‘Rogue’ with original programming, Biz Journals, Jan 9, 2013 [↩]
- Hulu’s future uncertain as Disney and News Corp. reportedly discuss selling their stakes, The Verge, Mar 3, 2013 [↩]
- Netflix’s SEC Filings [↩]