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Summary:

After weeks of speculation, a sale of Hulu seems inevitable. But while bids from companies like Google, Amazon, Yahoo and DirecTV are expected Wednesday, there’s a compelling case to be made that Hulu’s owners and content partners might be better off not selling.

for sale

Hulu is in the midst of a sales process that could soon take it out of the hands of Fox, Disney and NBC/Comcast. After weeks of speculation, a sale of Hulu seems almost inevitable at this point. But while bids from companies like Google, Amazon, Yahoo and DirecTV are expected Wednesday, there’s a compelling case to be made that Hulu’s owners might be better off not selling.

The case for selling Hulu

It’s easy to see why its corporate stakeholders might want to sell off Hulu:

  • The original team that created Hulu — Peter Chernin of News Corp. and Jeff Zucker at NBC — are both gone from their respective roles.
  • Disney, which joined in 2009, never seemed fully committed to the venture. It even created competing products, like the ABC iPad app, which was available well before Hulu’s own subscription app launched on the tablet.
  • Thanks to conditions around its purchase of NBC Universal, Comcast was left with an ownership stake but no seat at the board of directors or input into how Hulu would be run.
  • Management at News Corp. seems less interested in the incremental ad dollars it gets from Hulu, and more interested in maximizing retrans dollars it sees from pay TV operators.

In short, there are too many cooks in the kitchen and too many disparate interests at play for Hulu to be run efficiently. This has caused tension between its management, led by CEO Jason Kilar, and its content partners and stakeholders.

Furthermore, though it’s expected to pull in close to $500 million in revenues this year, there’s a question about its long-term viability and ability to invest in content licensing. There’s competition coming from Netflix, Amazon and Google’s YouTube, all of which are better positioned to shell out cash for licensing agreements. Hulu’s content partners could potentially make more money by selling to a deep-pocketed third party than by allowing it to compete on its own.

And the case against

While Hulu’s stakeholders seem intent to sell and initial bids on the company are due Wednesday, BTIG analyst Richard Greenfield makes a compelling argument that Fox, Disney and Comcast would be better off holding on to the company rather than putting it in the hands of a third party.

There’s the revenue argument to be made — that by continuing to support Hulu, its content partners can help build yet another outlet to increase their ad dollars. But beyond that, Greenfield also argues that holding onto Hulu could push forward the networks’ agenda for enabling authentication on the site, which Fox has already begun. A third party like Amazon or Google won’t be as interested in maintaining relationships between content owners and their other distribution partners.

Greenfield writes:

Media companies should be going out of their way to retain ownership of Hulu and allow it to flourish. The bigger Hulu gets, the more dollars it can pay content creators on an annual basis. While that may be true if it is owned by a third-party as well, being invested in Hulu and sacrificing near-term profits for long-term value creation appears far too compelling.

Finally, while Greenfield doesn’t make this argument, controlling Hulu gives the broadcast networks significant leverage in their negotiations with both online competitors and with traditional distributors. On the online side, the existence of Hulu means their content will remain available to consumers regardless of whether or not Netflix or Amazon decides to license it.

Hulu so far has been a stumbling block in negotiations with pay TV operators — after all, no one wants to pay retrans dollars when the broadcast networks are giving their content away for free online. But the emergence of an authentication model on Hulu turns those negotiations on their head: Now that next-day access to shows is limited to subscribers whose pay TV operators hook into Hulu’s login system, networks like Fox can argue that distributors should be paying more for those rights.

With Hulu, so goes the TV industry

One shouldn’t underestimate the importance of Hulu’s place in the digital content ecosystem. Its access to content and easy user interface make it the go-to place for most online video viewers to catch up on shows they might have missed. Although most of its stakeholders seem more focused on the short-term bottom line, ensuring that Hulu is a viable, well-funded distribution outlet for the long term could be vital to their own long-term business models, particularly as viewers shift to more online viewing.

Photo courtesy of (CC BY 2.0) Flickr user Casey Serin.

  1. In one of Tom Clancy’s books a Japanese businessman makes fun of another who spent hundreds of millions of dollars buying a US movie studio. And what did he get for his money? A name, a library of old movies, and a bunch of overpriced California real estate.

    All Hulu has to offer customers is content. And while Google, Amazon, and others might bid, what are they getting? A website, basically.

    Let’s say, for example, Amazon bids and wins. Now the studios and media companies looks and say, “Well, we can’t let Amazon take over the download industry. That would give them too much control.”

    So they simply stop licensing their content to Hulu, or they pretend to do so, but at unacceptable terms. Which leads to no content and no customers.

    And then Google is left with little more than a name and a bunch of overpriced web real estate…

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    1. The last line should have been, “And then Amazon is left…”

      Mental typo.

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  2. Surely they want to sell because they get 50% of the ad CPM on Hulu vs 100% on their own websites.

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  3. If you’re a content producer, like NBC, or a traditional content distributor, like Comcast, controlling a popular and increasingly profitable method of digital distribution seems like something you might want to hold onto. Selling Hulu now reeks of an odd lack of insight into the increasingly digital future. It seems like they’re just giving up. Here Netflix… we’ll let you take over from here.

    Maybe all these television companies think they’ll be able to set up their own little islands of gated content in their own web apps and then hope that someone like Google or Boxee will be able to effectively (and profitably!) provide the directory that serves the content from all the different sources. When has any platform ceded profits or control to content producers if they can wrest more dollars out of being part of the distribution chain? When have content producers been able to effectively and consistently sell their own wares without platform support?

    If Random House and Penguin controlled their own popular digital book distribution platform, do you think they’d be getting rid of it now if they knew they’d have to give 30% of their future profits to Apple?

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  4. The logical flaw in the “don’t sell” argument is that Hulu is a place where anyone goes to do anything. My friends who miss shows don’t go to Hulu unless a google hit or facebook post takes them there… The rest of the time they’re finding streams any number of ways, or simply setting up bittorrent subscriptions to their favorite shows and cutting out cable TV entirely.

    Hulu needs to be sold simply because by virtue of being run by *some* networks, it can never achieve its potential as a centrally housed platform for *all* networks’ content online. The relationships with News Corp and NBC only guaranteed Hulu wouldn’t be sued into oblivion when it was first getting real traction.

    Now that it has at least some market recognition, it really needs to get out on its own, and sink or swim as the case may be. And yeah, it’s about a 95% chance of “sink”, but perhaps there’s a way to navigate through the waters as a “network friendly, revenue generating” alternative to the Pirate Bay et al…?

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  5. Look at the big picture. FCC has said that cable companies can cap bandwidth and exclude it’s own video over Internet protocol. Over the top video hits a wall as a result. 200 gb monthly caps can easily be surpassed by family ESP with hd and high bandwidth consumption video like 3d and 4k. Content providers realize that they are active to mso’s. You’ll see more online offerings from networks like hbo go and max go tied to cable subscription

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  6. great thoughts Ryan – I especially agree that there are too many cooks at the table. I do think they are ready to divest themselves of it in part because they think they have learned all they can from it and now want to roll out their own version without partners.

    for what its worth, i put my own thoughts together on this topic a week or so ago: http://bit.ly/hulu4sale

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  7. Hulu is so much better then the junk on Netflix.

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    1. Joe, its not that its better – its just different purpose. Hulu is the near term, “catch up content”, while Netflix is the back catalog, “just looking for something to watch” collection of content

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  8. Hulu is dead in the water as the 60% drop in viewership in 2010 showed. Geoblocking has been a fatal business model and the desperation to sell in 2011 is a proof of this. Let it die and let’s see a viable channel with a global vision of the web space show everyone how it’s done.

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