The Future of Hulu
An analyst examines what Apple and Google gain (and Netflix loses) if the $2 billion business strikes a deal.
With 26.7 million unique viewers a month, Hulu has momentum, a good brand and a great market opportunity. But the video site also finds itself in a difficult position: Its ownership structure -- Disney, News Corp. and Comcast hold the major chunks -- creates an inherent conflict of interest that prevents the company from maximizing its growth potential. Its owners are forced to balance Hulu's needs against those of their broadcast-station partners, distribution outlets such as Time Warner Cable, Comcast and DirecTV and competing platforms such as Netflix and Amazon. In some ways, Hulu threatens its owners as much as it provides the value of distributing studio content online. It is, at its core, an alternative distribution platform that could trigger ratings erosion and/or cord-cutting, thus reducing affiliate fees paid by traditional satellite and cable companies.
That said, the right buyer could see a large return on investment by eliminating these conflicts, cultivating unique synergies and shaping the business to gain share from Netflix, which dominates the streaming market with more than 20 million customers. The recent Netflix price hike of 60 percent for streaming and DVDs-by-mail -- and widespread backlash from consumers -- creates an opportunity to reposition Hulu as dissatisfied subscribers seek other platforms. A deal would not be cheap -- it could be priced at more than $2 billion -- but Amazon, Apple and Google each have a vested interest in building out a platform to grow or protect their legacy business.
Buying Hulu would instantly help Amazon gain retail market share. While the $100 billion company has $7 billion in cash reserves and a built-in user base, its Amazon Prime is not well known and is a bit confusing because it is bundled with its premium shipping service. Still, at $79 a year it is cheaper than the $7.99 a month that Hulu Plus (the subscription service) and Netflix charge for streaming only. Hulu, with its studio deals, would add more content and immediate recognition of the streaming service it is building out. Amazon's July 28 deal to acquire streaming rights to more than 1,000 Universal films, which came on the heels of a similar deal for CBS shows, might suggest the online powerhouse is not in the running for Hulu. But a deal nonetheless could be extremely valuable if it provides exclusive content and helps market the service.
While Apple has not formally launched a major push into the TV market (Apple TV is a test product), it is only a matter of time -- the company is so large that it will need to seek opportunities to sustain growth. While music is big, film/TV is the world's largest media segment. TVs are primed to go through a "smart" revolution, as we saw with cell phones, and Apple could lead the charge. Its recent cloud product, a massive North Carolina data center and its deals with Rovi, which provides next-generation TV technology, could be seen as signs it is moving in that direction.
Hulu could provide Apple with an immediate content portfolio and a service over which it has direct control. More importantly, Hulu would allow Apple to monetize the demand for streaming that it now passes along to Netflix. Apple already sells and rents titles on iTunes; Hulu would simply complete its media portfolio by providing ad-supported and subscription-based products. Apple's strong relationship with Disney (Steve Jobs sits on both boards) could help maintain a steady flow of content to Hulu. But Hulu's other owners likely are wary about supporting the multimedia giant.
The search behemoth could use Hulu to advance its leading position in the ad-supported video market and as a means for entering the subscription-based video rental market.
Google's YouTube dominates its competitors with 149 million unique viewers a month, so a combination with Hulu could solidify its lead in this market, which continues to see rapid growth in ad dollars. Hulu would also provide Google with a higher caliber of content and a subscription-based pricing model. But is Hulu worth the cost when Google already owns YouTube?
It is important to consider two other players: DirecTV and Liberty Media.
DirecTV might need Hulu to establish a strong streaming platform because its competitors have TV Everywhere streaming initiatives and its closest rival, Dish Network, recently acquired Blockbuster.
Liberty could also be a player. The cash-rich company could fund Hulu's growth, and its Starz network could be used to improve the quality of Hulu's content. Liberty has been known to take advantage of unique market opportunities and has shown interest in digital distribution, based on its bid for Barnes & Noble.
Regardless of who ends up owning Hulu, my colleagues and I believe it will be a much stronger entity and could emerge as a strong competitor to Netflix.
Tony Wible is an analyst at Janney Montgomery Scott who covers the media and entertainment sectors.