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Hulu Retools: After Auction Stalls, A Look at Next Steps (Analysis)

Generic No Sale Sign - P 2013

The streaming service, owned by 21st Century Fox, NBCUniversal and The Walt Disney Co., faces these seven challenges as it moves forward.

Hulu has gone on the market -- and off the market -- for the second time. 

At least one knowledgeable source told The Hollywood Reporter that the reason came down to price. Bidders DirecTV, Peter Chernin and AT&T and Time Warner Cable each offered around $1 billion for the streaming service. That's around half of what 21st Century Fox, NBCUniversal and The Walt Disney Company were after.
 
A source close to the owners insisted it was that the owners realized the equity value going forward was so great that it would not be right to sell. 
 
But that wasn’t the only holdup. The streaming service’s restrictions on the use of content, and the limits on how long the owners would guarantee access to their shows in the after-market, also gave bidders pause. 
 
So the owners sent a news release on Friday calling off the sale (again), and announcing they’re investing in Hulu, earmarking $750 million in new investment. Why? A source tells THR that the streaming service could eventually come back on the market a third time -- but only after the owners beef up the revenue, profits and distribution, to justify the price they’re seeking. 
 
 
Here are seven challenges Hulu faces in the near future:
 
CONTENT:  A major portion of the $750 million is earmarked to ramp up the production of original content. That is something the Hulu executives -- including now-departed exec Jason Kilar -- have long wanted. The challenge is that Netflix and Amazon are already ahead of them in defining what kind of content can make a service must-see TV. It’s also unclear if they will do this alone or if their owners at Disney and Fox will help (NBC Universal is barred from active involvement under terms of the Comcast sale deal). Other purposes for the money include marketing to build the brand equity and for technology to keep it on the cutting edge. 
 
EXCLUSIVITY AND WINDOWS: One big issue in the sale was whether ABC, Fox and NBC would continue to make their shows available to Hulu after a short delay; whether Hulu got them first (or exclusively), and if not, what new restrictions would be placed on the use of those shows in the after-market. Some say the owners were chafing under the exclusivity requirement and wanted to re-sell their content to others on a non-exclusive basis, or use it more themselves on their own websites. While Hulu gets the shows, most are also shown on the network's websites. The reason Hulu gets 24 million unique visitors a month is the availability of that content soon after it airs on the broadcast network -- will that change? “It is so difficult to reconcile tensions on ensuring content availability for any buyer to support a concrete business model for Hulu without endangering the core network business at ABC, Fox and NBC," said Wunderlich Securities analyst Matthew Harrigan. "It makes sense that they are keeping it." One possible problem is that Hulu’s interests might be different from those of its owners.  "CBS very wisely stayed out of it and retained much more flexibility" for its various online licensing deals, said Wieser. "There will always be questions about whether Hulu's owners are leaving money on the table, especially the better CBS does."
 
 
PARTNERS: One thing that came up in the sale process is the possibility of other investors. Time Warner Cable and even DirecTV might be willing to come back as a partner and investor. But do the three owners even want them? Hulu used to have a fourth investor, Providence Equity Partners, which owned 10 percent. Disney and Fox bought out that stake last October. Do things look different now?
 
CEO: Kilar abruptly quit as CEO in January of 2013, reportedly because he was at odds with the three owners -- most likely over whether they would invest in more original programming. Andy Forssell is the interim CEO. Now the partners need to decide if they want to keep Forssell in that role, or if not, define the kind of executive who will take charge under the new mandate. Should that person help expand distribution or oversee the creation of content? It's time to get serious about finding a permanent CEO for Hulu. (However, analyst Brian Wieser of Pivotal Research raised the question of whether the CEO would really be full time and in charge, since the owners call the shots.)
 
STAYING HYBRID: Hulu has a hybrid structure, with both free ad-supported content and a premium section behind a pay wall. Will that continue, or will they shift to even more of a pay wall approach? Which way will raise the most revenue? 
 
STREAMING: Hulu, until now, has been essentially a website people visited. But should it be more of a free-standing streaming service like Netflix? Should it be available to anyone who has broadband, even if they have cut the cord on video services offered by pay TV providers? Should it be both a website and a streaming service? 
 
BROADER DISTRIBUTION: One idea that came out of the near sale was that Hulu can grow by being more than its own website; by being distributed more broadly on cable systems like those owned by Time Warner Cable. If they go that route, would it cannibalize its existing site? Would they offer the free ad-supported part of their site, or the premium side that could be sold like another pay channel along with HBO, Showtime, Starz and Epix? Not everyone thinks that's a good idea. BTIG analyst Richard Greenfield said in a blog post: “We continue to believe strengthening a major multi-channel video distributor, such as DirecTV or Time Warner Cable, is a mistake. Why give [a pay TV firm] more leverage in already difficult programming negotiations?" Greenfield believes Disney and/or Fox should own 100 percent themselves.