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3 reasons Hulu is a tough sell

Hulu’s board of directors has hired investment banks Guggenheim Partners and Morgan Stanley to consider options for a sale of the online video startup, according to the Los Angeles Times. The possibility of a sale comes after reports of an unsolicited bid from Yahoo, (s YHOO) and it suggests that the broadcasters who own the site may finally be ready to part ways with it.

Independence from media partners and stakeholders could be good for Hulu, as it would finally give the company some freedom to go its own way. But that freedom could be constrained by its next round of content deals and effective leadership if the transition isn’t managed well.

Here are three reasons why Hulu is a tough sell:

Price. Any bidder for Hulu will have to be ready to pony up some serious moola. The company was valued at $1 billion when it was founded with a $100 million investment from Providence Equity Partners. It announced $260 million in revenues last year, and it is expected to approach $500 million in sales this year. Last year, when it considered going public, Hulu was reported to be valued at $2 billion. All of which suggests that any deal will be priced in the $2.5 billion range.

Unfinished business. Hulu is reportedly in the process of renegotiating content deals with ABC, (s DIS) NBC (s CMCSA) (s GE) and Fox (s NWS) — deals that were expected to be done months ago. Any buyer will want those deals finished before a purchase is announced. But since its broadcast partners would no longer have a vested interest in its success, any re-up with Hulu would have much less favorable terms than the way its current broadcast TV deals are structured. Any new owner can expect a longer wait time and shorter access period for new TV shows, which could negatively impact viewership — and ultimately the value of the property.

Management concerns. Jason Kilar has been the heart and soul of Hulu ever since he took over the startup in early 20072009. In a strange twist of fate, Om even suggested that Yahoo buy out Hulu more than two years ago, in part due to confidence in Kilar as a strong No. 2 to just-hired CEO Carol Bartz. Echoes of that sentiment can be heard these days, as the Yahoo board reportedly seeks a replacement for Bartz and Yahoo has been linked to a purchase of Hulu. The only problem is that there’s no guarantee that Kilar will stick around to see Hulu through the next phase of its evolution, as word is that Kilar’s contract is up this summer. Just as any new owner would want to make sure Hulu has content deals intact, it would probably help if Kilar stayed on board.

Hulu’s forecast of $500 million in revenues might look attractive, but there’s no guarantee that it will be able to hold the attention of viewers or continue to execute without favorable content deals and effective leadership. That is, anyone who buys Hulu right now might not actually get what they have bargained for.

8 Responses to “3 reasons Hulu is a tough sell”

  1. Solid points all around. If Yahoo has the cash they look like the only one that could pull off a profitable buy. Imagine mixing Hulu Plus with the upcoming Broadcaster Interactive on those 8m devices with the Connected TV platform. Price is the killer, but promising smart and sophisticated ad platforms and targeting could help it with the content renewals.
    I think Kilar is more of a mixed bag when it comes to getting content licenses. I’m a fan but Kilar’s prior comments – typically made loudly and publicly – might also make it tougher for a new owner to start off on the right side of the content owners and former Hulu parents.

    • DavidS

      I agree that on paper, the benefits to Yahoo and to advertisers do seem persuasive. Yet Yahoo’s management team would surely botch the integration and within a fairly short period, its culture would chase away many of the most talented people at Hulu.

      Assuming a private equity group isn’t involved, I think Amazon would be the best potential suitor. Kilar and the core Hulu product team are all Amazon veterans, and from a strategic perspective, combining Amazon’s streaming service with Hulu Plus would be very compelling. Also, in contrast to some of the other names floated as possibly acquirers, Amazon has very good relationships with the studios and networks, and could become a formidable competitor to Netflix if it properly integrated Hulu.

      • I like Amazon too, but I’d see their integration being somewhat different especially when looking at the next-day-airing content.

        Hulu has a better video player and overall user experience than Amazon Prime and a lot more content than what Amazon is offering, so a buy could help. The only issue here is getting to keep all the rights and licensing, and being able to make such a potentially expensive purchase worth the cost if it could afford the $2.2 to $2.5 billion cost.

        Amazon would most benefit from this purchase if it transitioned its Prime offering to augment content sales (this is what I think it should be anyway). Users could get access to free digital copies of any DVD or Blu-ray they purchase plus a related film or a teaser of the next season’s first two or three episodes when purchasing a TV
        Amazon is a great retailer and a decent streamer.
        Enhancing retail could be a happy place for Hulu’s existing owners.

  2. LosFelizRider

    Isn’t a lot of that Hulu ad revenue the result of the current ownership stakes? The media corps that own Hulu push their traditional media sales teams to funnel buys to Hulu to improve Hulu’s revenue picture. If an acquisition does occur, those media owners won’t be incentivized to do that anymore, causing a double-whammy: content deals get worse *and* the ad revenue declines.

    A joint venture among sworn enemies whose own traditional business lines are [seemingly] hurt by the joint venture itself = structural problem for any acquirer

    • DavidS

      Hard to say. Who gets to sell the ad inventory is undoubtedly a major concern during negotiations. It’s generally understood that Hulu had previously only seen about 10% of the ad revenue from its broadcast network partners.

      Hulu has a very good reputation in the market, as it’s probably far and away to best place for brand advertisers to spend their money (there’s still a shortage of quality video ad inventory in the market), so I doubt having Hulu sell vs. the partners sell would make too much of a difference. Only major exception is the role combined linear TV-online video sponsorship packages play in the revenue equations, as these buys tend to command the very best pricing.

      Acquiring the programming rights is likely to be a much more difficult problem by comparison.