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NEWS ANALYSIS - Hulu: Bye-Bye Buy

22 Jul, 2013 By: Erik Gruenwedel

The online content aggregator is off the market, but corporate owners Disney, Fox and NBC Universal are reportedly looking to add a fourth partner

The sale of Hulu may be shelved for the second time in two years, but its corporate owners reportedly are still in discussions with Time Warner Cable about making the cable operator a partner.

TWC, which had sought to acquire 25% of Hulu, could prove invaluable to co-owners The Walt Disney Co., 21st Century Fox and NBC Universal — especially since the companies pledged $750 million in new funding during their July 12 announcement halting the sale.

The funding underscores the need and associated costs of licensing popular TV shows and movies to effectively compete with Netflix, Amazon Prime Instant Video and other SVOD players.

The talks with TWC — first reported by Reuters — also stress the incremental value Hulu’s owners see in online video distribution and SVOD.

“If the future of Hulu is bright, we should hold on to it,” said Disney CEO Bob Iger.

BTIG Research analyst Rich Greenfield said a multichannel video program distributor such as DirecTV shouldn’t have been encouraged to acquire Hulu — a scenario he believes would have given the satellite-TV operator too much leverage in content license negotiations. He advocated selling Hulu to a non-MVPD, if at all.

Chase Carey, president and COO of 21st Century Fox, said Hulu’s owners had “meaningful conversations” with potential buyers, which reportedly included AT&T, in a joint bid with former News Corp. executive Peter Chernin, Time Warner Cable and DirecTV, among others.

“We believe the best path forward for Hulu is a meaningful recapitalization that will further accelerate its growth under the current ownership structure,” Carey said.

Who Owns the Content?

Notwithstanding Disney and Fox’s apparent newfound esprit de corps supporting Hulu going forward, the conflicts inherent in owning and distributing content on a proprietary platform that jeopardizes existing distribution channels — including home entertainment — can’t be dismissed. Indeed, Hulu’s owners have expanded third-party SVOD license deals in recent years, most notably Disney, which agreed to a landmark SVOD license deal with Netflix slated to begin in 2016.

Fox and NBC Universal have been more cautious, favoring SVOD deals abroad while supporting existing distribution channels domestically. Fox recently agreed for the first time to license a major comedy, “New Girl,” to Netflix — a deal, Gina Brogi, EVP of worldwide of for pay-TV and VOD at Fox TV Distribution, characterized as key in building a relationship with Netflix.”

Fox doesn’t allow repurposed distribution of its TV content on third-party (and Hulu) sites until eights days after the network broadcast. NBC Universal last September for the first time licensed select cable (USA Network, SyFy) network shows to Netflix.

The strategy is aimed at enhancing the value of the programs’ initial broadcast and on-demand viewing on TV Everywhere platforms by authenticated viewers. It also upped the monetary value of licensing the programing to SVOD.

Indeed, Netflix spent about $1.7 billion contracting third-party content in 2011 — a tally that has grown commensurate with its domestic subscriber base, according to the service’s regulatory filings.

That content spending is at the heart of Hulu’s detraction to its owners and potential suitors. Why should Disney, Fox or NBC put proprietary programming on Hulu when it can generate incrementally more in fees at third-party sites? Conversely, Hulu’s new owner would likely see third-party content costs rise to the point that it might become economically unviable to license.

“An additional $500 million to $700 million in [annual] content costs would very likely have been tacked on to [operating costs] to make the service a viable competitor against Netflix,” B. Riley & Co. analyst David Miller wrote in a July 16 note. “That’s essentially what killed the deal.”

Indeed, Hulu Plus ended the first quarter with 4 million subscribers since launching in 2010. It generated $690 million in revenue in 2012.

Commercial Overload

So how does Hulu grow revenue with a SVOD subscriber base just 13% the size of Netflix’s? Chances are if you watch TV shows on Hulu or Hulu Plus, you’ll be subjected to more video ads than on any other entertainment website. Hulu again ranked No. 1 among video websites targeting users with advertising. (See story, page 19.)

The tally is up 10 ads per viewer from April and more than twice the frequency YouTube targets its viewers with ads. At the same time, YouTube reaches 35.5% of the U.S. households compared with Hulu, which reaches 6.1%, according to comScore.

Hulu ended June with nearly 1.4 billion videos totaling 533 minutes, which was unchanged from May.

Netflix does not run advertising on its SVOD content.

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