No Surprise, No Deal for Hulu. Here's What Changed.

Last evening, Hulu's owners announced in a short statement that the company will not be sold after all. The news came as no surprise to me. VideoNuze readers will recall that back on June 22, when the first rumors of Hulu potentially being up for sale surfaced, I posted, "Here's Why Any Deal for Hulu is Unlikely."  

In that post I explained how Hulu's primary asset - next-day distribution rights to ABC/Fox/NBC programs - would be at the heart of its valuation. The big challenge with selling Hulu was that its owners would have to pass these rights (albeit likely reformulated) to an unaffiliated and uncontrollable 3rd-party, at the same time as online video delivery has injected massive uncertainty into their businesses. This issue, rather than lower-than-expected bids as some have tritely suggested, is why Hulu's owners ultimately decided to pull Hulu off the block.

Though this was always the central issue in any Hulu deal, I believe 3 things happened in the past 4 months that crystallized the importance for Hulu's owners of maintaining full control of their distribution rights:

Netflix blunders strengthen Hulu's competitiveness - In many respects Hulu has lived in Netflix's shadow since its inception. Despite Hulu having next-day broadcast rights, Netflix has massively outspent Hulu for new streaming content, integrated with more connected devices and added millions more new paying, streaming-only subscribers. However, in the past 3 months, through its own self-inflicted wounds, Netflix has helped create a much more level playing field for Hulu and others. In particular, Netflix's misguided decision to cast-off its DVD business as Qwikster (although subsequently reversed), signaled that it preferred to compete in streaming only.

But it is important to remember that Netflix's streaming content deals are non-exclusive, and mostly for library TV programs. So by focusing on streaming only, Netflix's decision had the effect of dramatically raising the value of Hulu's exclusive next-day broadcast rights. No doubt that caused Hulu's owners to recognize that as long as this remains the case, Hulu has a a meaningful leg up on Netflix and other competitors, which it can leverage to grow Hulu Plus.

Starz's decision to reject a lucrative renewal deal with Netflix - Now lost in the Netflix's Qwikster fiasco, Starz's decision in August to walk away from a reported $300 million/year renewal offer from Netflix was also very significant. Putting aside what this means to Netflix, for Hulu's owners, Starz's decision was a stark reminder that short-term financial gain must be balanced against longer-term strategic interests. For its part, Starz decided $300 million wasn't worth the damage it would sustain by inciting its traditional pay-TV distributors.

While Hollywood is a famously short-term oriented town, Starz's decision must have made Hulu's owners re-think how handing their distribution rights to a threatening interloper like Google or Amazon would harm their lucrative retransmission consent fees, not to mention their cable network carriage renewals. Pay-TV operators are the economic locomotive of the entire content industry and despite the ongoing chatter around cord-cutting, they will be for a long time to come. Nobody wants to do anything to jeopardize these relationships.

Amazon introduces the Kindle Fire - While fully expected, Amazon's introduction of the Kindle Fire, a direct iPad competitor, reinforced the primacy of premium content's value to new devices and platforms (Amazon actually kicked off the Kindle Fire buzz by announcing a deal with Fox). This is not news to Hollywood, but still, there's something highly tangible about actually seeing a goliath like Amazon roll out a critical new product to its future, and knowing your content is central to its fate. Further, the titanic battle that's shaping up among Amazon, Apple, Google and Microsoft over whose devices will dominate in the future means Hollywood will enjoy lots of negotiating leverage. Ceding distribution rights now, when billions of dollars of licensing fees loom just  ahead, would be a serious miscalculation.

Now consider that all of this played out in just the past few months. And lots of other things happened as well, together demonstrating how volatile the online video space currently is. In a fireside chat interview I did this week at Akamai's Edge conference with Jon Miller, News Corp's Chief Digital Officer and Hulu board member (video coming Monday hopefully), Jon was very articulate on this central question of how content providers are constantly trying to calibrate how much control to retain vs. how/when to work with new/existing distributors. Fox's recent decision to create an 8-day authenticated pay window is a perfect example of this. It's a fascinating dynamic, fueled by online video's rise.

Hulu's owners were justifiably curious to test the waters of selling Hulu. But given the swirling uncertainty, I believe they made absolutely the right decision to choose long-term flexibility over short-term financial gain. Hulu's best days are likely still ahead of it.

Categories: Aggregators, Deals & Financings

Topics: Comcast, Disney, Hulu, News Corp.