Hulu is in the midst of a sales process that could soon take it out of the hands of Fox, (s NWS) Disney (s DIS) and NBC/Comcast. (s CMCSA) (s ge) After weeks of speculation, a sale of Hulu seems almost inevitable at this point. But while bids from companies like Google, (s goog) Amazon, (s amzn) Yahoo (s YHOO) and DirecTV (s DTV) 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, (s aapl) 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, (s NFLX) 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.
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.