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Why Verizon should buy Hulu

The search for a Hulu buyer continues, with reports emerging that the company is making pitches to a wide range of media and technology companies. While much of the press so far has focused on the big technology companies — Google, (s GOOG) Microsoft, (s MSFT) Yahoo (s YHOO) and the like — little attention has been paid to the other potential buyers. Verizon, (s VZ) in particular, seems like a good match for the company, as it has shown a willingness to invest in online video, but not at the expense of its traditional FiOS TV business.

Business interests are aligned

Google and others in the tech world are all about innovation and disruption, but that’s not necessarily what ABC, (s DIS) NBC (s CMCSA) and Fox (s NWS) want from a buyer. With Verizon, they’d be getting a partner they’re already doing business with. More importantly, both Verizon and the broadcasters have the same interests, and neither will blindly support growth at Hulu at the expense of live TV viewing or fewer people paying for FiOS.

Verizon, therefore, is less likely to balk at crippling terms in Hulu’s recently renegotiated rights deals. Some reports suggest those deals could extend the time between shows being broadcast and becoming available online by up to a week, rather than being up on Hulu the day after they air.

There’s also the belief that broadcasters could start tying next-day access to Hulu shows to their cable subscriptions. Many cable networks already use pay TV subscriber logins to authenticate users, in a scheme referred to as TV Everywhere. But the latest talks suggest this TV Everywhere plan could be extended to broadcast TV.

While HD over-the-air signals for broadcast TV are free, many broadcasters have begun demanding pay TV operators pay retransmission fees for access to their shows, in the same way they pay per-subscriber fees for cable networks. As a result, those operators might demand Hulu begin authenticating its users in the same way cable networks do.

Google, Amazon, (s AMZN) Yahoo and other tech companies might be opposed to such a requirement, as it could affect viewership on the newly acquired site, but it’s actually in Verizon’s best interests to support such a plan. After all, Verizon wants to sign up as many TV Everywhere users as possible, who could then view content from Epix (s via) (s lgf), HBO, (s TWX) Showtime (s CBS) and other networks that have made their content available through the service.

Verizon is betting big on online video

One might ask what Verizon actually gets from Hulu. After all, if the telco is fine with certain rights requirements — like longer windows and authentication — that might limit growth and consumer adoption, and one could argue it’s not fully committed to growing the online video company as an independent business. If that’s the case, then why buy it at all?

For one thing, this type of move isn’t entirely unprecedented. Comcast purchased Fandango back in 2007 and used it for the basis of its Fancast online video portal, which later became Xfinity TV Online. (s CMCSA) And let’s not forget: Verizon is essentially an IPTV play, and has been supporting IP video for years. It has also recently made a number of moves that suggest it could begin getting a lot more aggressive in the online video space in particular. An acquisition of Hulu would merely supplement those already existing initiatives.

Take, for instance, its plan to allow subscribers to purchase video-on-demand titles through the program guide and watch them online or across a number of mobile or connected devices. Or its yet-to-be-released live streaming iPad app (s aapl). Or its plan to make its streaming VOD service available to users that aren’t even FiOS subscribers, potentially pitting it against iTunes, Amazon Video On Demand and Walmart’s Vudu. (s WMT) These efforts show a willingness to jump into the online video market, and Hulu would be complementary to those services.

Then there’s Verizon’s Digital Media Services initiative. At NAB this year, it was being pitched as a way to simplify the delivery of broadcast video online, while also lowering the cost of distributing to as many devices and platforms as possible. It’s clear Verizon isn’t just thinking about online video to grow its revenues from the traditional TV or VOD perspective, but it’s also looking at its role as part of the broader ecosystem.

No one else is a good fit

Now that we’ve discussed Verizon’s pros, let’s look at some of the other potential buyers — and why they wouldn’t make such a good fit. Of the aforementioned suitors, there are serious issues with each one:

  • Google is already knee-deep in its own work to transform YouTube into a destination for long-form professional and semi-professional content, and any combination of YouTube and Hulu is likely to face serious regulatory scrutiny.
  • Amazon is Hulu CEO Jason Kilar’s former employer, and has invested in an online VOD and subscription video service. But it has shown no interest in ad-supported video, which is Hulu’s bread and butter.
  • Microsoft has never invested heavily in digital media properties and seems unlikely to start now.
  • Given Yahoo‘s recent history of acquisitions, it seems clear to most people that a purchase of Hulu could have disastrous results for the site.

In other words, there are plenty of reasons why Hulu might not work with some of the larger tech firms. But there are some very good reasons why a distributor like Verizon would want to buy into a startup like Hulu, even if it is potentially disruptive to the traditional TV business. That’s not to say a Verizon-Hulu mashup would be a slam dunk, but if Verizon were really committed to investing in Hulu’s business as a potential new growth engine, it could be an easy lay-up.

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

11 Responses to “Why Verizon should buy Hulu”

  1. I agree with Ryan. To add to the argument already laid out, Verizon, along with other carriers, should be considering purchases or partnerships with big players like Hulu. Beyond the business objective alignments that Ryan mentions in this piece, carriers are constantly being left out of the equation when it comes to content providers like Hulu and Netflix. Carriers have devolved into a traffic delivery service, and no longer have any say in what goes across the networks—but they constantly take the heat for quality of service problems. Verizon and other carriers should seriously consider how services like Hulu will impact them, and start aligning themselves more with these players before they become obsolete.

    • Ryan Lawler

      Paul, I agree that Hulu probably needs to be a standalone entity. Unfortunately, I think IPO has been taken off the table. And given all that’s already been sunk in, it’s going to be difficult to spin it out from its existing stakeholders without someone making a big investment. Maybe private equity?

      • That would be the best outcome for Hulu, in my view. Whether a private equity player would see enough value there to beat out Verizon or Google or Amazon if it got into a bidding war is another question. If that were to happen, my guess is that some existing player would pay stupid money for it for stupid reasons.

    • DavidS

      It would be a shame if it went to a PE group, but I wouldn’t be surprised given the pump-and-dump bubble mentality out there in techland at present. PE groups don’t give a rat’s a** about anything other than flipping companies to make a quick profit. They do this by dressing up their accounting, laying off workers, and saddling the company with debt to prepare it for sale to a greater fool.

  2. coolrepublica

    I guess the author is not fond of customers. Verizon the king of nickle and dimming customers should stay as far away from things I love. Hulu first on the list.

    Amazon does show interest in advertising. Amazon is very interested in starting an adversting business. They are doing it with Kindle offers, display ad business. I am sure that’s their main reason for trying to get Hulu in the first place.

    But whomever gets Hulu should not be named Verizon. I am not fond of getting bend over.

    • mindctrl

      Verizon could, and probably would, exclude bandwidth used viewing Hulu. Makes sense with their stance on net neutrality. Television 2.0 is on the march.