Extreme Reach leaderboard - 11-8-20
  • Hulu Owners Realize "You Can't Have Your Cake and Eat It Too"

    Last Friday afternoon, Hulu's owners Disney, Fox and NBCU/Comcast (note NBCU/Comcast is a passive owner) announced that they wouldn't be selling Hulu, despite an active bidding process. Instead, the companies will retain their interests and plan to invest $750 million in Hulu to grow it. Although the principal reason for the sale was a disagreement over Hulu's business strategy, the announcement said Fox and Disney are "fully aligned in our collective vision and goals for the business (although what they actually are were not disclosed).

    This was the second time a Hulu sale failed to materialize and I believe that once again, the reason was that Hulu's owners realized "you can't have your cake and eat it too." Translation: Disney and Fox wanted to retain all kinds of content rights and flexibility, yet still wanted a very high valuation for the business. Since Hulu's next-day broadcast rights are at the core of its valuation, Disney and Fox's attempt to chip away at them led bidders to reduce what they were willing to pay, obviously beyond the level at which Fox and Disney felt it was still worthwhile selling the business.

    As I wrote last week, I believe that Fox and Disney's desire to retain maximum value and flexibility was correct for at least 3 reasons: their need to satisfy pay-TV operators' TV Everywhere goals, their desire to tap into lucrative OTT licensing deals and the potential of online video advertising. These and other imperatives led Fox and Disney to seek all kinds of content carve-outs that would effectively undermine Hulu's consumer appeal and therefore its financial potential.

    Nonetheless, Fox and Disney made the right call by putting Hulu up for auction to test prospective buyers' interest. With so many different potential buyers, each with its own strategic priorities and assumptions about the unfolding TV landscape, there was a legitimate chance that one would be willing to pay an uneconomic price to own Hulu, despite the content restrictions (as a reminder of how people are plenty willing to pay uneconomic prices, see Netflix's ridiculous current 630 price/earnings ratio).

    In this case however, with bids reportedly hovering around $1 billion, nobody appears to have been willing to make an uneconomic decision. So Fox and Disney did the smart thing by pulling the plug on the sale. Now comes the hard part. As Hulu's owners, Fox and Disney must decide for themselves how much of their precious content rights they should continue to provide to Hulu, and at a broader level, what Hulu's business strategy should be (despite the above, high-level statement about being "fully aligned," numerous nitty-gritty details about Fox and Disney's shows will determine what the Hulu service actually consists of).

    The $750 million commitment Fox and Disney are making to Hulu is certainly better than nothing, but in a free-spending OTT landscape now dominated by Netflix and Amazon, the sum won't buy much great content in reality, including from the partners themselves, who have benefited handsomely from OTT's largesse. How Hulu will continue to bolster its content to compete with Netflix and Amazon (and others) isn't clear.

    Hulu's non-sale closes another chapter in the company's tortured corporate life, but raises lots of new questions about what's ahead.

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