Hulu's Final 3 Bidders: Analyzing the Pros and Cons of Each
Heading into the final stretch of bidding, sources tell The Hollywood Reporter that Hulu has narrowed down the list of prospective bidders to three major suitors: DirecTV, The Chernin Group and Guggenheim Digital Media. The streaming-media company owned by Disney-ABC Television, Fox Broadcasting Company and NBC Universal collected $695 million in revenue in 2012 via advertising and 4 million premium subscribers, and the company could fetch more than $1 billion in the auction. Bidding was set to end at 2 p.m. PT on Friday. Here’s how the asset would fit with each of the potential new owners.
With DirecTV service available nationwide, Hulu is a better fit with the deep-pocketed satellite provider of television than it would be with a more localized cable service (like Time Warner Cable, which also had courted Hulu) says Steve Birenberg of Northlake Capital Management. “They could use it with their own business and develop it nationally as a stand-alone business,” he says.
“It provides access to a customer segment they probably weren't servicing,” adds Brian Wieser of Pivotal Research Group. And analyst Richard Greenfield says that DirecTV could use Hulu “to build the best TV Everywhere app,” thus gaining a bargaining chip in future retransmission and programming negotiations. And too, it already pays content providers billions of dollars — experience that would be valuable in managing Hulu.
DirecTV also could use Hulu as a retention tool to keep its 20 million subscribers on board. If one-third of those subscribers signed on to Hulu after an acquisition, DirecTV revenue could increase by 3 percent, says Amy Yong of Macquarie Capital.
“They need to get into the Internet, and Hulu would do it,” says Tom Taulli, author of High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders. “The company has also reached the saturation point of its core business. So it really needs to look at acquisitions for growth,” he says.
One downside, says Yong, is that an acquisition of Hulu would send mixed signals about DirecTV’s core business, and even highlight the need for consumers to have access to a robust broadband connection, something DirecTV lacks as a service offering. “Strategically, it’s a double-edged sword,” says Yong.
An interesting twist: DirecTV already competes against Comcast, the owner of NBCU. And while Comcast might not want Hulu to go to a competitor, it won't have a say in who buys Hulu. As a condition of its acquisition of NBCU, Comcast relinquished all managerial oversight of Hulu to satisfy antitrust concerns.
Guggenheim Digital Media
If Hulu’s current owners, all of whom license content for Internet streaming, sell to Guggenheim, it could establish for all of Hollywood a new content buyer that would provide increased competition to Netflix and Amazon and possibly drive up the value of content. "Selling Hulu to private equity buyers ... or an Internet company that plays no major role in the current multichannel video distribution ecosystem,” says Greenfield, “adds to points of distribution for Disney, Comcast/NBC and [21st Century Fox] and could actually add to their leverage with the current class of multichannel video programming distributors." Says Taulli: “They are savvy with media plays and have extensive relationships. They would be able to run the operation, although not for the long term. They will probably try for an IPO at some point to get a payback.” Birenberg adds that Guggenheim’s endgame might be simply to grow the operation and resell it for a profit.
Another advantage to going with Guggenheim (the parent company of The Hollywood Reporter) is that its CEO, Ross Levinsohn, who served as interim CEO of Yahoo!, has a lengthy digital track record. He also was one of the original architects of Hulu during his time as president of Fox Interactive Media. Some observers say Hulu could best retain its entrepreneurial spirit if it goes to a company like Guggenheim, which isn't encumbered by legacy relationships. The lack of a significant corporate bureaucracy likely makes it more attractive to Hulu's top executives.
But the fact that Guggenheim is an unproven player in the space occupied by Hulu, however, is one of the chief arguments against it. It lacks the experience of the other two bidders, and it can't bundle programming or existing subscriptions. Its pockets also may not be as deep as its competitors. “It is simply about investing in a business which would need to be capable of producing cash flows on its own," Weiser says, "or potentially serving as a platform around which to build a stand-alone business.”
The Chernin Group
Contrary to most reports, telecom giant AT&T is the money behind the bid fronted by Peter Chernin, a former president and COO of the old News Corp., whose self-named company has garnered most of the headlines. The pros of an AT&T deal are fairly clear: As with DirecTV, AT&T could use the video site as its own TV Everywhere platform. And AT&T, as the provider of the U-Verse television service and broadband services to homes nationwide, brings not only more cash to the deal but also the potential for much wider distribution for Hulu, says Taulli. Adds Birenberg: “If they can use a two- or three-year window for more exclusive broadcast content, maybe they can grow large enough that the next content deal will be affordable for Hulu and impossible for the broadcast networks to decline.”
Another factor in the group's favor: Chernin is well liked in Hollywood and has existing relationships with many content players, and he also has a bit of an inside-track advantage in the overall auction for Hulu, given he is a former board member who helped create the company in 2007. “Peter knows the asset extremely well and probably knows where to take it to get more value,” says Taulli.
The argument against AT&T? The Dallas-based company isn't known for innovation, and it might be difficult to retain employees of the more entrepreneurial Hulu. Also, if the current owners choose AT&T and Chernin, it could create friction with DirecTV, which already pays Fox, Disney and NBCU billions of dollars for content.
Chernin also may have hurt himself Monday when 20th Century Fox Television signed a multiyear exclusive agreement allowing Netflix subscribers to stream New Girl, the Fox comedy co-produced by Chernin Entertainment. That can't have gone down well inside Hulu's L.A. headquarters.