Rich Greenfield's Memo to Hulu Owners: Be More Transparent About Financials

Joel Stillerman - Getty - H 2018
Rich Fury/Getty Images for Hulu

The streamer's lack of public disclosures on who benefits from losses makes it hard for investors to understand reported numbers, especially at Disney and Fox, writes the top media analyst.

As the streaming wars heat up, Hulu is a brilliant financial vehicle for its owners Comcast, Disney, Fox and Time Warner.

The more money that goes into Hulu, the more consolidated revenue and EBITDA it can create for its owners as it buys more content, while Hulu's losses build without impairing its owners' balance sheets. With the launch of Hulu Live in 2017, a streaming cable TV-like service that carries the networks of its owners, Hulu added a new layer of fully owned revenue for its owners (retrans fees and affiliate fees) and off-balance-sheet losses.

But media investors in Hulu's three primary owners (Comcast, Disney and Fox) should demand greater disclosure of Hulu's positive impact on its owners — Disney investors especially, since Fox's share of Hulu is in the process of being sold to Disney and would increase Disney's ownership to 60 percent. When Hulu's losses and parent company investment were small, its ability to skew the reported financials at its parent companies was relatively modest. But as its owners' investment balloons and losses grow, Hulu's positive impact to its owners no longer can be ignored by investors. 

Hulu losses are ramping up dramatically as it accelerates its purchase of content from its owners and increases marketing spend on Hulu Live to acquire subscribers, both of which have a materially positive impact on its owners. Putting Hulu’s losses in context, it is losing roughly half as much as Netflix, despite being U.S.-only with 85 percent fewer total subscribers than Netflix. Yet we have virtually no disclosure on that impact. So far, all we have been able to find is the following from Disney's fiscal September 2017 10-K: "The Company enters into transactions in the ordinary course of business with our equity investees, primarily related to the licensing of television and film programming. Revenues from these transactions were $0.5 billion, $0.5 billion and $0.4 billion in fiscal 2017, 2016 and 2015, respectively."

Unfortunately, Disney does not give this disclosure on a quarterly basis, and Comcast and Fox have never broken out this disclosure at all. Yet they talk about the benefit on their quarterly conference calls without detailing the positive revenue and earnings impact. Disney CFO Christine McCarthy said Feb. 6 on Disney's fiscal first-quarter 2018 conference call, "So the increase [in Hulu losses in fiscal September 2018] is largely related to the content licensed from Hulu's equity owners. And as one of the equity owners, our portion of these incremental costs will largely be recouped by ABC's program sales, as well as affiliate revenues to some of our various networks."

Disney's share of Hulu losses in the fiscal year ending in September 2018 increased from an additional $100 million forecast in November 2017 to an increase of $250 million in February 2018. Does Disney's $150 million increase in loss forecast for fiscal 2018 imply that Hulu will lose $500 million more in total than the Hulu owners anticipated just two months ago?

It is critical for Hulu's owners to make more detailed quarterly disclosure of the following: 1) revenue contribution from sale of TV/film content to Hulu; 2) Hulu Live subscribers and the associated broadcast retrans and cable network affiliate revenue generated by Hulu Live; 3) cash invested into Hulu; and 4) losses absorbed from Hulu.

Rich Greenfield is a media analyst at BTIG Research

A version of this story first appeared in the Feb. 14 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.