Why the Studios Might Sell Hulu (Analysis)

Modern Family - TV Still - Ed O'Neill - 2011

Despite Hulu's success as a streamer of premium content, insiders and analysts aren't surprised that Disney, News Corp. and NBCUniversal are at least considering selling their stakes in the asset.

Online video site Hulu is officially on the auction block with investment banks Morgan Stanley and Guggenheim Partners on Wednesday emerging as the financial advisors that will look for bidders for the company that is owned by four partners.

If Hulu can find a buyer for $2 billion or more, it could represent a quick one-time financial benefit for the media conglomerates that are partial owners of the online company founded four years ago. Beyond that, though, a sale could also relieve some headaches, offload some testy partnerships and maybe even bring content licensing deals for the owners of TV content that are worth more over the long-term.

The conglomerates that own Hulu along with Providence Equity Partners – NBCUniversal, Disney and News Corp. – are competitors who haven't always agreed on how Hulu should be run, when to make content available, how much and whether any of it should be exclusive.

And conglomerate executives' opinions haven't always jived with those of Hulu CEO Jason Kilar who famously threatened to quit last fall and earlier this year enraged his corporate overlords with a blog post about the future of TV, including the statement that "traditional TV has too many ads." Some of his conglomerate bosses, meanwhile, have been pushing for expanded ad slots on Hulu.

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Beyond that, Hulu and its owners have also not been aligned on questions of exclusivity of content and access to it. NBC, for example, gave new Saturday Night Live episodes to Netflix, and Disney unveiled free, ad-supported access to some ABC shows via the iPad in moves that Kilar felt undermined Hulu.

No wonder then that the Internet streamer is for sale, some say. “Content company owners separately started making some of their content available in various windows on services other than Hulu’s, such as Netflix, which upset other owners,” noted Miller Tabak analyst David Joyce. “As such, the disparate corporate interests again have made the joint venture difficult to sustain.” Observers said joint ownership often leads to delays in decisions and conflicts over strategy.

While some see a sale as the logical future, others argue that content giants may have an even harder time striking deals with an entity owned by someone else. Some observers also argue that Comcast and its NBCUniversal are likely more inclined to want to retain a stake in Hulu than its partners -- at least in certain cases. "Hulu is more of a threat to Comcast if in the wrong hands, while Disney and News Corp. content will always be needed," said Janney Montgomery Scott analyst Tony Wible. "Anyone that could aim to spur cord cutting or [cord] shaving" would be an unwelcomed owner for Comcast/NBCUni, he said.

The sale optimists point out though that Netflix's streaming service has become a lucrative content deal partner, and Hulu's entertainment industry owners may look for the site to become another buyer without the need to own a stake in it and sit in on board meetings. Under that view, content revenue from online streamers like Hulu, Netflix, Amazon.com and others will soar in the coming years.

"They don't need it, [but] Hulu can't exist without their content," said one former executive of one of the Hulu owners about the relationship between Hulu and its owners.

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Conglomerate executives, including News Corp. COO and deputy chairman Chase Carey, have been looking for ways to make more money for the parent company by getting top dollar for content -- whether from retransmission consent fees or online distribution rights. Hulu, of course, has often hoped for exclusive and early access to TV shows and films.

The conglomerates’ incentives to get big bucks for licensing content to online streamers while protecting traditional TV distributors, which deem content less valuable when it is also available online, can put content biggies at odds with the goals of an online distributor, those who favor a sale of Hulu highlight. Turner Broadcasting System CEO Phil Kent said earlier this year, for example, that he was dissuaded from bidding too much for cable syndication rights to Modern Family because it was “a little too prevalent” on the Internet.

The need to consider a sale of Hulu might have further intensified during recent negotiations wih its conglomerate owners to extend current content deals, which are believed to be in their final stages.

One major open question is what will happen to Hulu's current content deals with its owners, which are seen as the key asset of the firm, in the case of a sale. A Hulu spokeswoman declined to comment.

But a source confirmed that News Corp.'s Fox and Hulu have agreed in principle on a new arrangement that would keep such Fox TV shows as Family Guy on the streaming video site in return for expanded ad time within the shows on Hulu.com. Some believe the other Hulu partners will soon seal new longer-term content deals as well, which could help ensure that a buyer doesn't simply end up owning Hulu.com, but could also rely on content for some time to come. 

Carey and Disney CEO Bob Iger had already been tipped to prepare to drop their board seats at Hulu in a sign that the company needs streamlined decision-making and sending a signal that Hulu ought to be a customer for content, and not a distribution asset.

“Hulu needs to change its ownership structure. There are too many conflicts with its current owners,” Wible put it bluntly.

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Insiders say the notion that the content giants may one day get out of Hulu gained some traction after a couple of its bigger proponents, former NBC Universal CEO Jeff Zucker and former News Corp. COO Peter Chernin, left their respective companies. But a recent approach about a potential sale led to the decision to fully consider such a move.

It’s still a secret who the lone bidder for the Hulu is, though there’s speculation that if it wasn’t Yahoo, it soon will submit a competing offer. Others are also expected to join the fray.

Ross Levinsohn, the former News Corp. executive who Yahoo recently appointed its head of media, ad sales and partnerships in the Americas, told FT.com on Monday that Yahoo intends to “double down” on its investment in premium content.

Some view that remark alone as confirmation that Yahoo is interested in purchasing Hulu. Other suitors could include AOL, Google, Amazon.com, DirecTV and Apple, as well as private equity firms.

Hulu, through advertising and its premium subscribers who are expected to total 1 million by year's end, will post about $500 million in revenue this year. The company didn't pursue an initial public offering that it considered last year that probably would have valued it at $2 billion, though a sale price today could approach as much as $3 billion, some analysts predict.