How Disney Will Benefit From Becoming Hulu's Majority Owner Via Its Fox Deal
Disney can "greatly accelerate" its push into the direct-to-consumer space and flow "more content" towards the streamer, while "managing Hulu becomes just a little bit more clear," says Bob Iger.
The Walt Disney Co. has agreed to acquire Fox's stake in Hulu, giving it majority ownership of the streaming service, as part of the $52.4 billion purchase of the Rupert Murdoch-owned media company's assets.
Under the deal, Disney will add Fox's 30 percent stake to its own stake of the same size. Comcast/NBCUniversal and Time Warner currently own 30 percent and 10 percent stakes in the business, respectively.
Disney is expected to take advantage of its majority ownership by leveraging Hulu's streaming technology and existing subscriber base as it prepares to launch two new over-the-top businesses — one for IP from Star Wars, Marvel and Pixar and another for streaming sports — in the next two years.
"Hulu obviously is a great opportunity to expand in the direct-to-consumer space," Disney chairman and CEO Bob Iger said Thursday on a call about the transaction. "Owning roughly a third of it was great, but having control of it will enable us to greatly accelerate Hulu into that space and become an even more viable competitor to those that are already out there."
He added: "We will be able to do that not only by flowing more content in Hulu's direction, but by essentially having control to the extent that managing Hulu becomes just a little bit more clear, a little bit more efficient, a little bit more effective with a controlling shareholder."
The Disney boss said the company will, after the deal, have a chance to offer several streaming services focused on different audiences, with Hulu likely to be positioned as a more adult oriented service, compared with a planned ESPN sports service and a planned Disney family service.
Iger also highlighted that Hulu has boosted its spending on original and acquired content, but wasn't willing to immediately say whether the original programming budget could further increase once Disney takes a controlling stake.
The Disney CEO on Thursday reiterated past comments that the company is pushing into direct-to-consumer offers more aggressively while continuing to offer its content in the traditional pay-TV ecosystem. If that ends up facing majors challenges amid cord-cutting, Iger said Disney could simply adjust its strategy and "flip a switch" to focus even more on the direct-to-consumer space.
Even before the deal announcement, Wall Street observers suggested there would be benefits for Disney. "Owning a second major studio [after the Fox deal] could help Disney build out its OTT platform due to launch in 2019 with more content, and owning a majority stake in Hulu would give Disney control of this SVOD service as well as a potentially large virtual bundle to help offset cable sub declines," Macquarie Capital analyst Tim Nollen said in a report published before the deal was unveiled.
Hulu launched in 2008 as a joint venture of News Corp., NBCUniversal and Providence Equity Partners, which sold its stake in the business in 2012. The following year, Disney joined the venture as an equal stakeholder alongside its media counterparts. Time Warner joined the venture in 2016 when it acquired a 10 percent stake in Hulu for $583 million, valuing the business at $5.8 billion.
Disney and Fox have been the two most active owners of Hulu in recent years, with three directors each on the company's board. NBCU gave up its positions on the board in 2011 to comply with the FCC's conditions for its sale to Comcast. That agreement is set to expire in September 2018, at which point NBCU would be able to become an active owner once again. (Time Warner does not have a Hulu board seat.)
"Given that a Fox acquisition will take at least a year to close, Comcast/NBC will have regained the ability to be a voting partner in Hulu," BTIG analyst Rich Greenfield said. "We believe major decisions require unanimous consent of the Hulu voting partners, meaning 10 percent owner Time Warner is excluded."
In the nine years since its debut, Hulu has transformed from a home for next-day television into a destination known for prestige television (multiple Emmy winner The Handmaid's Tale), exclusive library content (Seinfeld, The Golden Girls) and live television. Much of this growth took place under Mike Hopkins, the former Fox executive who became CEO in 2013 after the owners called off sales efforts and reinvested in the business. Hopkins left Hulu in October to become chairman of Sony Pictures Television, and Fox Networks Group's Randy Freer stepped in as his replacement.
Hulu remains a smaller player in the streaming space with 47 million monthly unique viewers in the U.S. as rivals Netflix and Amazon operate global businesses with tens of millions of subscribers. It has also been an unprofitable business while management invests $2.5 billion in content to grow market share. Greenfield estimates that Hulu lost $353 million during the first half of the year, wider than the $195 million lost during the same period last year.
"Disney's 30 percent equity share of Hulu losses will rise $100 million in [fiscal year] 2018 as Hulu spends to push its skinny bundle," B. Riley FBR analyst Barton Crockett wrote in a recent report. "But the fees Hulu pays to Disney for content, subs and ad share more than offset equity in losses."
Already it seems Iger has plans to make Hulu an even bigger rival to Netflix. He told Bloomberg TV during a Thursday morning appearance that Disney will consider ending licensing deals with Netflix, just as it ended its own distribution deal with Netflix in August.
On the movie front, the exec pointed to 21st Century Fox having a different output deal with HBO, which could also lose Disney movie content when that deal ends. "[Fox has] a relationship with Netflix as well. But again, we will be looking at more direct-to-consumer opportunities for our company and if that requires us to wean the businesses and relationships with other distributors, then that's what we will do, just as we did with Netflix,” he said.
Iger added Disney will use the 21st Century Fox IP "to grow Hulu, probably at a more accelerated pace. We will also use the Fox assets to help complement our other services as well, our Disney branded direct to consumer services, as well as on the sports front." The Disney boss said the studio had to look long and hard at ending its Netflix licensing deal, but concluded it had to do so to push deeper into the direct-to-consumer market.
"We're in the business of creating long-term value," Iger added. "As we looked ahead and saw a world where the direct-to-consumer proposition is far more compelling for the consumer and the distributor, we believe it was time, and we will obviously take the same approach to exit the Netflix relationship, and we will take that approach with the assets we're buying as well."
Etan Vlessing contributed to this report.