Almost from the beginning, Hulu’s media parents have feuded over their disruptive child’s future. The online streaming service, which launched in 2008 as the television industry’s solution for taming the Internet, created uncomfortable problems with the pay TV distributors who plowed billions into its corporate parents’ coffers.
Hulu survived the departure of its visionary founding CEO, Jason Kilar, who led an insurrection against the television industry’s status quo and ruffled too many corporate feathers. Over the course of a decade, the streaming service managed to surmount the epic board battles of the early days to attract some 20 million subscribers and make history as the first streaming service to win an Emmy Award for outstanding drama series with its dystopian series The Handmaid’s Tale. (Netflix leads the streaming field with more than 57 million U.S. subscribers.)
Now, Hulu is at the center of a power struggle between two of its corporate owners, The Walt Disney Co. and NBCUniversal parent Comcast, who’ve spent months locked in costly, acrimonious bidding wars for 21st Century Fox’s film and television assets and for British satellite broadcaster Sky. The dust from those big deals has settled, with Disney emerging victorious in the Fox hunt, and Comcast beating out Fox’s Rupert Murdoch in the quest for Sky.
The fate of Hulu hangs in the balance. Disney’s acquisition of Fox would give it a controlling 60% stake in the streaming service, with NBCUniversal parent Comcast holding a minority 30% interest. AT&T’s WarnerMedia holds the remaining 10% equity stake.
Some had speculated that a media land swap of sorts would take place, with Fox selling its 39% interest in Sky to Comcast in exchange for the U.S. cable giant turning over its holdings in Hulu to Disney. But British laws prevent such a quid-pro-quo maneuver. The Murdoch-owned Fox announced it would sell its shares in Sky to the Philadelphia-based media conglomerate for about $15 billion, and abandon its ambition to take ownership of the satellite service. But Comcast has been mum about Hulu.
The corporate chieftains holding the purse strings — and those who advise them — are declining to offer comment, with the Sky ink still wet and quarterly earnings season right around the corner. But media insiders are abuzz, with most expecting Disney to buy out Comcast’s position in Hulu. That move that would give the Burbank media conglomerate an over-the-top triple play: a cable-like broad TV subscription service in Hulu, a family-focused OTT offering under the Disney brand, and the sports-focused ESPN+. Some believe Comcast would willingly shed its stake in the money-losing streaming service to reduce its losses, even as it strikes a carriage deal that would pay the media conglomerate for its content and a 70% share of ad revenue.
“It goes from being a drag to being a profit center,” said one veteran digital media executive.
Another industry observer says Comcast has no reason to abandon Hulu, which he considers a strategic blunder. “It enables Disney to collapse its direct-to-consumer strategy and accelerate its direct-to-consumer plans, which would not appear to be in the interest of Comcast cable or Sky,” said BTIG media analyst Richard Greenfield in an interview with Deadline. Greenfield sees Hulu as a great revenue-creation machine for Comcast, one that benefits from 100% of the revenue from the NBC shows it sells to the streaming service, while absorbing just one-third of the losses.
Absent a definitive move, which may take a while, Macquarie analyst Amy Yong frames the scene in stark terms. “Hulu is in no-man’s land,” she wrote in a report today. With Hulu as Comcast’s lone OTT play (the once-ballyhooed niche mining of SeeSo failed to gain traction, and similar planned services were smothered in the crib), the company is unlikely to start from scratch.
After the consent decree governing the NBCUniversal acquisition expired earlier this year, Comcast was given more freedom to make its voice heard, and immediately appointed two new Hulu board members. Once Disney takes control, if Comcast remains a minority investor, the annual losses for Hulu of more than $1 billion would affect it less than Disney, another enticement for it to hang around. Plus, insiders note, compared with the pure losses at Netflix, the red ink reflects to some degree content costs paid to different sides of the same house — Fox “losing” money because of payments for Fox shows, etc.
For Disney’s part, chairman and CEO Bob Iger has been under pressure from Wall Street to make strides in the digital arena and lessen reliance on traditional distribution. In an April filing, Disney pegged the valuation of Hulu at $8.7 billion — a fraction of Netflix’s worth, but still not negligible. Iger included Hulu in a discussion on the company’s third-quarter earnings call in August that laid out the vision for three main direct-to-consumer offerings after the close of the Fox deal, which is expected in early 2019.
“Rather than one, let’s call it, gigantic aggregated play,” he said, “we’re going to bring to the market what we’ve already brought to market, a sports play. [Also] Disney Play, which is more family-oriented. And then, of course, there’s Hulu. And they will basically be designed to attract different tastes and different segment or audience demographics.”
The value for Disney, Iger said, could come in packaging and marketing all three in combination.
“If a consumer wants all three, ultimately, we see an opportunity to package them from a pricing perspective,” he said. “But it could be that a consumer just wants sports or just wants family or just wants the Hulu offering, and we want to be able to offer that kind of flexibility to consumers because that’s how we feel the consumer behavior, what consumer behavior demands in today’s environment.”
That’s a significant evolution of Disney’s digital strategy. According to once knowledgeable source, the Mouse House had considered selling its stake in Hulu earlier this year.
Not everyone is entirely convinced that Disney can execute that grand plan, even if it buys out the minority partners, especially when it involves articulating the brand proposition for Hulu relative to the Disney-branded service.
Doug Creutz, an analyst with Cowen & Co., put out a research note after the Sky auction, in which he questioned why media companies would agree to sell content to prop up a rival’s streaming service.
“Assuming Comcast and AT&T divest their stakes in Hulu,” Creutz wrote, “we think they will probably also ultimately withdraw their content as we don’t see a compelling strategic or financial reason to license their content to a competing asset (for both the distribution and content sides of their businesses). In our view this is a fundamental potential problem with any growth plans for Hulu.”
Hulu’s live television service gives it a point of differentiation from other streaming services — and creates an opportunity for non-equity holders, like CBS, to strike distribution deals similar to those reached with traditional pay TV distributors. The Hulu with Live TV bundle includes four major broadcast networks, cable channels such as FX and HGTV, news and live sports, in addition to on-demand content. It just reached 1 million subscribers.
“They have a unique proposition, not just compared with Netflix but also with YouTube TV or Sling,” said Hunter Sappington, an analyst with Parks Associates, in an interview with Deadline. “They have their VOD service included in the live offering. As a value-add, that’s something that puts them in a unique place.”
Parks, which has carved out a specialty in tracking the OTT marketplace, says there are now roughly 230 individual services being offered to U.S. consumers. Despite that glut, Hulu has gained enough traction that it will remain a heavyweight no matter who controls it.
“With OTT services, there comes a point when they reach a critical mass,” said Brett Sappington, also a Parks analyst (and Hunter’s father). “When they hit that point, they continue to grow. The awareness of that service makes it easier for them to grow. Hulu is way past that point.”