Now that NBCU has revealed its launch plan, pricing and forecast for the Peacock streaming service, some quick math shows how much Comcast missed out on by not buying out Disney’s stake in Hulu. VideoNuze readers will recall this is what I proposed back in May 2018 (“Why Comcast Should Take Control of Hulu”) when Comcast and Disney battled to take over Fox. With Disney and Comcast each owning around 30% of Hulu at the time, as well as Fox owning around 30% and AT&T 10%, it was clear that whoever ultimately bought Fox would assume majority ownership of Hulu.

At the time I articulated all the reasons why, as part of any deal Comcast might make to step away from Fox, it should negotiate to take control of Hulu. Instead Comcast prioritized Sky (which it ultimately bought for $39 billion) and made a subsequent deal with Disney to sell off its Hulu stake. Disney also acquired AT&T’s approximately 10% stake in Hulu, making it Hulu’s 100% owner. Taken together, the moves make Disney CEO Bob Iger look like a genius, even if Disney was overcoming a late entry into the streaming party.

Comcast could have likely acquired the 70% or so of Hulu it didn’t own for around $13-15 billion, based on the $5.8 billion Disney ended up paying Comcast for its 30% share (Comcast also has an upside based on Hulu’s valuation  in 2024) Comcast could have done this in reverse. All of this is assuming Disney would have sold its share to Comcast. My hunch is there was a deal to be had if Comcast had said it wouldn’t bid up Fox’s valuation, in turn saving Disney billions of dollars. All in all, it would have been a very modest deal for a company Comcast’s size.

I think all of my original reasons why Comcast should have acquired Hulu still stand up pretty well a year and a half later. But now some quick math also reveals that acquiring could have generated nearly $6 billion/year for Comcast and NBCU and the springboard it could have become for Peacock, before even factoring in cost savings. I suppose it is worth keeping in mind that had the deal gone the other way, Comcast wouldn’t have received the $5.8 billion for its share in Hulu, but then again Comcast didn’t need the cash, so does that really matter?

In my view there are 5 key things to understand, 3 that relate to subscription revenue and 2 that relate to advertising revenue.

Subscription

1. NBCU would have inherited Hulu’s ad-supported subscribers.

2. NBCU would have inherited Hulu’s ad-free subscribers.

3. Hulu would have enabled Peacock to scale its subscription revenue faster.

Advertising

1. NBCU would have inherited Hulu’s advertising revenue stream, scale and pricing power.

2. Hulu would have allowed Peacock to achieve higher ad revenue per unit.

Here is the back of the envelope math on each:

Subscription

1. NBCU would have inherited Hulu’s established business model.
The last time I know of that Hulu reported its subscribers (May 2019), it said it had 28 million, of which 22 million were on the $6/month ad-supported plan (recall Hulu had actually LOWERED the price of this plan from $8/mo in January, 2019). Assuming conservatively that Hulu now has 30 million total subscribers and 80% of them are ad-supported, that’s 24 million x $6/mo x 12 months = $1.7 billion incremental revenue/year to NBCU.

2. NBCU would have also inherited Hulu’s ad-free subscribers.
Assuming Hulu now has 6 million subscribers that are ad-free that pay $12/mo, so that’s 6 million x $12/mo x 12 months = $860 million incremental revenue/year to NBCU.  

3. Hulu would have enabled Peacock to scale its subscription revenue faster.
One of the more interesting things Peacock announced was that its ad-supported Premium tier (the rough equivalent of Hulu’s ad-supported tier) would be priced at just $5/month (and with just 5 minutes of ads/hour of content, more on that below), yet another “streaming wars bonanza” for viewers. NBCU clearly felt it needed to be aggressive since it was coming so late (akin to what Disney felt vis-a-vis Netflix in ad-free SVOD, which is why it too priced so aggressively at just $7/mo but with no ads)

Anyway, let’s assume that IF Comcast had acquired Hulu, it could have then offered Hulu’s 24 million ad-supported subscribers a bundle including Peacock for $12/mo, pricing Peacock at $6/mo in a bundle or on its own, same as Hulu’s price (fair assumption when weighing quality of their respective content…if anything Peacock maybe could have even priced at $7-8/mo, remember it’s going to be the exclusive home of “The Office” will includes wall-to-wall Olympics, offer late-night comedy earlier, etc.). Another assumption could be that Peacock would grow far faster by leveraging Hulu than it could on its own. Yet another assumption is that Hulu’s 6 million ad-free subs could have been leveraged to bolster Peacock’s ad-free business.  But to be conservative, let’s not even factor in these last two. Instead, just focusing alone on how Peacock could have been market priced at $6/mo, $1/mo higher than its $5/mo plan x 10 million subscribers (estimated first year) x 12 months = $120 million incremental revenue/year to NBCU.

Advertising
As interesting as the subscriber analysis is, the advertising analysis is even more.

1. NBCU would have inherited Hulu’s advertising revenue stream, scale and pricing power.
NBCU said in its presentation that “Wall Street analysts estimate that Hulu generates about $10 per subscriber on advertising alone today” (this is the monthly number). I’ve thought it’s closer to $8-10/mo. Some of Hulu’s inventory is no doubt tied to linear ad buys, so to remain conservative, say Hulu gets $8/mo x 25 million subscribers x 12 months = $2.4 billion incremental revenue/year to NBCU.

2. Hulu would have allowed Peacock to achieve higher ad revenue per unit
NBCU also said that “for 2024…we’ll have 30-35 million active accounts with $6 to $7 of monthly ARPU, which is primarily comprised of advertising.” A big part of this assumption is that Peacock will have very low ad density - just 5 minutes per hour of programming (another great consumer gift). Assuming $7/mo - the high end of this narrow range - and ads are 90% of it - then that’s about $6.30/mo in ad ARPU. Remember, Hulu is ALREADY generating $8-10/mo. What might they be generating in ads ARPU in ’24 - $14/mo? $16/mo? $20/mo? Given the rise of connected TVs, ad rates are extremely likely to move up nicely in the next few years. Yet another question - if Peacock is projecting $6-7/mo in 4 years, what’s it going to generate monthly in its first 12 months? $3/mo? $4/mo?

If NBCU had acquired Hulu it could have applied nothing more than its current ad rates and its ad density - which 25 million subscribers per month appear to deem acceptable. Even looking at just the first 12 months of Peacock, during which they could have gotten say $8/mo instead of say $3/mo, then it would be $5/mo of incremental revenue x 10 million subscribers x 12 months = $600 million incremental revenue/year to NBCU.

To recap:
$1.7 billion + $860 million + $120 million + $2.4 billion + $600 million = $5.7 billion of estimated incremental revenue/year to NBCU - just in year one of Peacock’s life, compared to the $2.5 billion revenue/year that NBCU is forecasting for Peacock - in 2024. Even if I’m 50% off in my assumptions, year one incremental revenue from owning Hulu is still at least 2x the ’24 forecast. And that’s revenue - imagine the bottom line when factoring in all the cost savings from cross-marketing, bundling, subscriber acquisition, cutting duplicative technology efforts (don’t like to say it but think of all the overlap in adtech staffing between Hulu and FreeWheel which Comcast already owns), Hulu’s well-known name, best practices learned over 10+ years, expert team, etc. It’s also before considering how Hulu’s value will grow going forward. All that for approximately $13-$15 billion it would have cost Comcast to acquire the 70% of Hulu it didn’t already own.

You don’t have to squint too hard to imagine how Comcast could have merged all of NBCU with Hulu down the road and taken the entity public, especially when the sizzle around CTV advertising is has only started heating up. Just floating this possibility would have solved a major problem dogging Comcast and its stock price - Wall Street’s pessimistic outlook for NBCU’s cable networks in particular. After reporting sterling broadband subscriber additions last week, Comcast’s stock has fallen around $3.50 per share (or over 7%), including Monday’s virus-related selloff, wiping out around $15 billion of market cap at the end of trading yesterday.

Admittedly Hulu is losing a lot of money as it invests to compete in the current “Peak TV” times, perhaps up to $2 billion per a year according to some estimates. But for a company Comcast’s size and given what the market values these days, Hulu’s losses would have been likely overlooked by Wall Street. Netflix stock is actually UP (around $5 per share, or 1.5%, even post virus selloff) AFTER giving a forecast last week that shows it will almost certainly lose US-Canada subscribers in Q2 ’20 and may even do so in Q1 ’20, which would have been considered jaw-dropping just 2 years ago.

Early in NBCU Chairman, Advertising Partnerships & Partnerships Linda Yaccarino’s Peacock presentation, she said “That means if you’re a marketer, the most valuable resource on the plane isn’t gold, it’s not oil, it’s not diamonds. It’s scale, because without scale, you can’t have impact. Without scale you can’t have brand awareness. And without scale, you won’t the sales you need to move your stock prices.”

She is, of course, exactly right. Scale has been the long-standing secret to success for broadcast networks. This Sunday we’ll witness the industry’s annual genuflection to scale at the Super Bowl.

But we’re now in a new era, when scale no longer purely means eyeball reach, but rather access to enough eyeballs and on a reasonably consistent basis such that targeting - at a level that matters to the biggest brands - is possible. It’s only when reach AND targeting are achieved that super-high CPMs can be realized. This axiom is the too infrequently discussed topic at industry conferences, in op-eds, etc: you can’t have a scaled, targeted ad business without a massive pool of eyeballs and inventory. Look no further than YouTube, Google and Facebook to illustrate this. And these companies are all raising scale and targeting to unprecedented heights. Amazon is coming up right behind them. All of this assumes of course that the U.S. and other governments don’t step in and say “no more.”

In the long run Peacock will do just fine, as will Comcast, Netflix, Disney, Google/YouTube, Amazon and others (don’t ask me about Apple - as far as TV goes - I’m still not sure). The difference is that Peacock could have started life with a huge running start with Hulu behind it and ultimately flown far higher than it will be able to on its own.

Am I missing something?