Why Pay TV Will Pay Big Money for Hulu (Analysis)

Brigitte Sire
Hulu's acting CEO Andy Forssell

It's all about defense for DirecTV, Peter Chernin and AT&T and even Time Warner Cable, which are still in the hunt for the streaming service -- while a bid from private equity powerhouses Guggenheim Digital Media and KKR falls out.

As the auction for Hulu nears its conclusion, it's looking like a pay TV provider will come out on top in a bid to ensure a viable business model in the era of cord-cutting and mobile viewing.

DirecTV, with a bid of more than $1 billion, appears to have the lead, but still in the contest is Peter Chernin's group in partnership with AT&T, with what sources tell The Hollywood Reporter is a bid that tops $900 million.

And sources say Time Warner Cable is also a contender, even though it wasn’t mentioned in reports of bidders who submitted final bids last Friday, a deadline set by the three current owners: 21st Century Fox, Disney and Comcast Corp. Time Warner Cable may not bid alone but could be an equity player working with another bidder.

On Tuesday, CNBC reported that Guggenheim Digital Media, which had partnered with the hedge fund KKR, had dropped out of the bidding for Hulu. Guggenheim is the parent company of The Hollywood Reporter.

STORY: Analyzing the Pros and Cons of Hulu's Final Bidders

Here's the thinking: Hulu would provide a defensive strategy to the pay TV companies, including AT&T, which operates a pay TV video service called U-verse. In theory, a pay TV service could turn Hulu into their version of TV Everywhere, which would be made available to only those who subscribe to their entire bundle or buy Hulu separately. DirecTV in particular could see that roadmap as a way to keep cord-cutters as customers.

In the past year, the number of pay TV customers has been slipping as people opt for streaming services or other over-the-top alternatives. While the pay services remain dominant, the downward trend clearly is on their minds.

DirecTV in particular has a problem because, unlike a Time Warner Cable or a Comcast, they don’t have land lines that lend themselves to providing lucrative broadband and phone services. They need to find ways to keep their customer base loyal to the primary service or this kind of alternative service.

It's also unclear what promises have been made by the sellers in terms of how much of their valuable content will continue to be available on Hulu. Until now the primary draw has been new shows coming off Fox, NBC and ABC, among others. That has helped Hulu draw some 24 million unique visitors a month and has allowed them to build a premium service to go with the ad support free to view platform.

STORY: Hulu Bidding Extended By a Week

On the other hand, without the current parents -- who have an agenda to use their creation to advance their networks -- Hulu would be free to acquire and produce other content and to offer a wider range of pricing schemes and packages for consumers. Hulu has done some original productions but could expand that, as Netflix has done with splashy series like House of Cards and Orange is the New Black.

The ad-supported side of Hulu hasn’t been growing very quickly but is said to be profitable; the premium offering is growing but isn’t yet profitable, say sources.

Comcast has taken a back seat to the other two owners in the sales negotiations. As a condition of its acquisition of NBCU, Comcast relinquished all managerial oversight of Hulu to satisfy antitrust concerns.

A deal is likely to be concluded by the end of the month, according to sources ... but there is no guarantee of that.