What Hulu Really Gains From Time Warner's Investment

Mike Hopkins - Hulu CEO-H 2016
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The streamer agreed to sell a 10 percent stake in its business to Time Warner in a $583 million deal, freeing up cash to back its forthcoming live TV streaming service.

In its early days, Hulu’s complex corporate ownership was a point of ridicule as industry observers waited for it to fail. Now the streaming service is adding a fourth owner to the mix to prop up its position as it prepares to take on the cable industry.

Hulu on Wednesday agreed to sell a 10 percent stake in its business to Time Warner in a $583 million deal that values the streaming service at $5.8 billion. Simultaneously, the media conglomerate has agreed to an affiliate pact that will make its channels available on Hulu’s forthcoming live TV streaming service.

The long-awaited deal means that Time Warner will join existing Hulu owners Walt Disney, 21st Century Fox and NBCUniversal in the service, which is expected to launch next year. It’s a move that Hulu CEO Mike Hopkins called “a major step” for the company, which will now be able to offer customers access to live feeds from Time Warner-owned networks like CNN, TNT and TBS.

Hulu has been exploring the launch of a live television bundle for the better part of the year, inking early agreements from its owners for the service, which is targeting a price point of about $40 a month. It’s all part of Hopkins’ vision to transform Hulu from a destination for next-day TV — a product that has so far attracted about 12 million U.S. subscribers, about a quarter of Netflix’s domestic base — into an entertainment destination that offers something for everyone, from original series to on-demand shows to live programming.

The deal gives Hulu a cash infusion — its first since 2013 when its owners agreed not to sell and invested $750 million to help it take on the competition — as it builds out the new service.

Meanwhile, some observers are questioning Time Warner’s motivations for the deal, especially following CEO Jeff Bewkes’ recent comments that he would hold back his content from streaming services like Hulu — and competitors Netflix and Amazon — in order to extract more value from its traditional window. “It obviously would have been ideal to sell their channels into the venture and not have to absorb the losses [of an investment],” says BTIG media analyst Rich Greenfield.

But in an earnings call with investors, Bewkes explained that the Hulu deal fits the company’s strategy “like a glove.” That’s because, in part, financing Hulu with more capital to make larger content investments only benefits Time Warner, which owns a studio in Warner Bros. and networks in Turner and HBO.

Hulu also joins a growing roster of streaming assets under Time Warner, including the recent acquisitions of DramaFever and technology provider iStreamPlanet and the launch of over-the-top service HBO Now. Now, Time Warner also has a digital bundle play. “Part of this is Time Warner trying to ensure that it got into the virtual MVPD in a full and robust way,” says Greenfield.

Time Warner’s 10 percent stake in Hulu is much smaller than the streamer’s other owners, who all are equal majority shareholders. And the deal will not give Time Warner a seat on the board, meaning that it will not be active in Hulu’s governance. That leaves Time Warner open to remain semi-impartial as it continues to do deals with all the streaming players. “They don’t want to get overly involved with one MVPD when they need to make sure that they can also convey to their partners that they’re not favorite one over another,” says Pivotal Research analyst Brian Wieser.

But the smaller stake also means fewer complications for Hulu. Currently NBCU is a silent owner, but that will change when the antitrust deal that Comcast made when it acquired NBCU expires. Now, Hulu has Time Warner’s investment and content for its live service without adding another voice in the board room.

One of the few remaining holdouts is CBS, which launched its own over-the-top streaming service last year. Although some observers question whether Hulu’s bundle can launch without CBS, others say it won’t be a factor. “A typical consumer who uses over-the-top-services will look at channels and packages of channels as we do apps on our phones today,” says Wieser. “A multitude of services can coexist. The only thing that’s really important is that a Roku or a Chromecast makes it possible to access each of these services, not that each service has all possible channels.”