Final bidding was scheduled to close last Friday in the Hulu sale process, with the list of potential buyers apparently narrowed to DirecTV, Chernin Group/AT&T and Guggenheim Digital Media. According to various reports (here and here), Hulu's active owners Disney and Fox (Comcast is a passive owner) have been insisting on a number of content licensing related deal points.
Hulu's next-day access to its 3 broadcast owners' hit shows has always been the heart of the company's value proposition. But a lot has changed in the online video landscape since Hulu was initially formed in March, 2007. As a result, in my view, there are at least 3 key reasons Hulu's owners are justified in bargaining hard over content licensing rights: the importance of TV Everywhere, the growth of well-funded over-the-top licensees and the potential of online video advertising. Following, I delve into each.
The concept of TV Everywhere didn't surface until over 2 years after Hulu was formed, and although it hasn't achieved anything close to its full potential yet, it remains the pay-TV industry's most strategic priority. Because Disney and Fox are significant cable TV network owners, deriving billions in annual pay-TV carriage fees, and because their broadcast TV networks receive growing retransmission consent fees from pay-TV operators, both Disney and Fox are heavily invested in TV Everywhere's success. TVE is why Fox decided to limit next-day access to its programs on Hulu to authenticated pay-TV subscribers (non-subs wait 8 days) and ABC recently decided to limit online access to live streams to pay-TV subscribers.
Carriage and retrans fees dwarf Hulu's revenues and therefore are crucial to protect. Pay-TV operators are leaning on TV network owners for TV Everywhere rights, so Disney and Fox must weigh these requests against what content to guarantee to Hulu going forward.
Well-funded over-the-top (OTT) licensees
While Hulu is the TV industry's online baby for current season programs, its owners have been strictly arm's length when it comes to licensing programming for prior seasons (see last week's "New Girl"-Netflix deal as one example). In this distribution window, OTT players like Netflix (and more recently Amazon) have ruled, doling out billions in licensing fees. Networks have benefited from viewers' newfound love of binge-viewing via myriad connected and mobile devices. With Netflix back from its Qwikster debacle and writing big checks again, plus Amazon finally flexing its financial muscle, TV networks and their studio brethren are in the happy place of having multiple well-funded new buyers for their content. Further, nobody knows the ultimate value of the OTT distribution channel, but if - and it's still a big "if" - cord-cutting were to gain traction, OTT outlets could become even more critical to networks/studios' financial success.
Potential of online video advertising
TV advertising is still many times the size of online video advertising, and the latter is still hobbled by inconsistent viewer measurement among other things. Nonetheless, online video advertising is already about a $4 billion/year business and its non-skippable ads are music to the ears of network executives dealing with DVR penetration now above 50% in the U.S. Hulu is a consistent top 5 video ad property according to comScore. Then throw in targeting, engagement, buying efficiencies of online video advertising and the fact that connected TVs are blurring remaining distinctions between online video and TV anyway and it's understandable why Disney and Fox would want to maintain strong control over online advertising in their programs delivered via Hulu.
The result of all of the above is that Disney and Fox are correctly seeking terms to retain maximum value and flexibility, even though this diminishes Hulu's value to prospect buyers. Hulu's sale gives Disney and Fox the ability to take some money off the table, but as I said in the wake of the last failed attempt to sell Hulu, I'm biased toward Hulu's owners choosing long-term flexibility over short-term financial gain. If leaning this way suppresses buyer interest beyond a point of making a sale worthwhile, then the owners should bail on the sale once again and just keep the site nicely chugging along.