Here's Why Any Deal For Hulu Is Unlikely

Late yesterday, the WSJ reported that an unnamed company made an unsolicited offer to acquire Hulu, prompting Hulu's board to consider soliciting other offers. Following up, the LA Times reported that Yahoo is the bidder. However, neither article cited any named sources and so it's unclear how legit any of this is. But even if it is legit, the odds of any Hulu acquisition at this point are actually quite low. Here's why:

Despite the dozens of content partners Hulu has signed up, its core asset continues to be exclusive next-day distribution deals with its studio/broadcast TV network owners, News Corp/Fox, Disney/ABC and Comcast/NBC (Comcast came into the picture via its acquisition of NBC). These same companies, along with PE firm Providence Equity, own the lion's share of Hulu and their representatives comprise Hulu's board (except Comcast which accepted a non-board role as one of the conditions of the NBC deal).

Despite the short-term payout a Hulu deal would provide its studio owners, the big issue will be their reluctance to see their distribution rights transferred to a new entity they don't control. And make no mistake, any would-be acquirer would be singularly focused on the broadcast TV program distribution rights as the main asset they'd be acquiring. Subtract these from the deal and Hulu's value plummets by such a significant amount that it's hard to see anyone being interested. Just 6 months ago Hulu's rumored IPO plans were reportedly nixed by its content deals not being sufficiently long-term.

The studios are justifiably concerned about distribution control because online video has introduced enormous uncertainty into their businesses. The last thing any executive wants to do in an uncertain environment is make long-term deals that limit future options because they look very foolish if they're perceived as having not sufficiently protected the value of their assets. Everyone's favorite poster child for this is Starz's former management team, whose deal to license its library to Netflix for streaming for about $30 million/year now looks ridiculously cheap (personally I don't happen to agree that Starz made a bad deal, but I'll leave that for another day). Another more recent example is that many cable network CEOs have been reluctant to provide any of their programming to cable operators for TV Everywhere distribution as part of their current affiliate deals, lest they be forgoing potential value down the road.

While the main issues are distribution control and uncertainty, these are further complicated by the unique characteristics of any potential acquirer. To name just a few: Google (not trusted by anyone), Apple (perceived to only care only about hardware and too aligned with Disney), Yahoo (unstable management, questionable strategic direction), Amazon (video would be just another product), Microsoft (hands full with Skype and mobile OS issues), Netflix (too much market influence already), etc. Then throw into the mix that each Hulu owner has its own particular biases (e.g. Disney strengthening its direct-to-consumer efforts, Comcast preserving the value of its own video subscription service, etc.) and the likelihood that the companies could agree on an acquirer, and that conditions could be agreed upon that are acceptable to all seem pretty remote.

Hulu's been a unique creature from the start - technically an independent company with its own management, but dependent on its owners for content that forms the core part of its service. Figuring out how to unlock its value in an acquisition isn't impossible, but for now, it feels like a long shot. We'll see.

Categories: Aggregators, Deals & Financings

Topics: Comcast, Disney, Hulu, News Corp.