Yesterday’s confirmation by Comcast that it is preparing an all-cash bid for Fox assets that would top Disney’s current bid came as no surprise. All that remains now for this corporate drama to go into overdrive is the decision on June 12th in the AT&T-Time Warner court case. If that deal is approved (which I believe is likely), Comcast is expected to formalize its Fox offer almost immediately. As these machinations continue, one looming question is what will become of Hulu?
Hulu is of course a joint venture among Disney, Fox and Comcast (via its NBCUniversal acquisition), with each company owning 30% and Time Warner owning 10% (that’s rounding as Hulu employees also own a piece). That means the ultimate owner of the Fox assets - Disney or Comcast - will also become a majority owner of Hulu. It seems to me Hulu would be more valuable to Comcast, and indeed Comcast should be angling to try to figure out how to take control of Hulu regardless of how the larger Fox deal sorts out. Why?
Hulu has become a unique player in the TV ecosystem - a scaled business with 20 million subscribers with a competitive SVOD offering powered by both licensed and original content and consumed mainly on connected TV devices. Its user experience is among the best and its brand is well known.
Hulu offers both ad-free and limited ad options to subscribers, who disproportionately choose the latter. Hulu gives advertisers the ability to target younger viewers watching brand-safe premium content on TVs, which is extremely valuable. This directly addresses the problem Netflix and Amazon have created of sucking viewers out of the ad-supported TV ecosystem.
More recently Hulu has expanded to offer a skinny bundle linear TV service for $40/month, including access to its SVOD library. For sheer breadth of content, it’s the best value among the 5 major skinny bundle providers.
Comcast would benefit from all of Hulu’s attributes because Netflix and SVOD are driving cord-cutting and Comcast needs a response now that X1 adoption is topping out. Last quarter, Comcast’s video subscriber losses accelerated and the growing adoption of low cost skinny bundles means traditional pay-TV operators like Comcast are extremely limited in their ability to raise video rates even as their programming costs continue to rise.
Meanwhile AT&T is already showing that a skinny bundle (DirecTV Now) can be used strategically to offset traditional video losses, while supporting a larger corporate priority (wireless in AT&T’s case). Comcast has said it believes skinny bundle economics don’t work, and there’s no question they’re a far cry from the lush (though diminishing) profitability of the traditional multichannel bundle.
But the reality is that video is becoming a national, if not global, business and Comcast's - and other cable operators’ regionalized footprints are putting them at a significant disadvantage. This will only intensify as wireless companies ramp up 5G launches that will better support video streaming. Meanwhile Google is all in with YouTube TV, its skinny bundle. And Amazon is accounting for 55% of all new direct-to-consumer video subscriptions.
Hulu would give Comcast a national footprint immediately. It would give Comcast a real world way of better understanding how the ad model can work with a lighter load of ads that can be targeted and interactive that would help NBCU. Hulu would complement the digital ad infrastructure that Comcast has been building through the acquisition of FreeWheel and other ad tech companies.
Yet another consideration here is that if Disney inherits Fox’s Hulu stake, then subsequent to Disney launching its own SVOD service next year (which is virtually guaranteed to be a success), Disney will control 2 of the biggest SVOD services, putting Comcast at a further disadvantage.
Netflix is now worth more than Comcast and about the same as Disney. Wall Street understands how the video landscape is changing - to an on-demand, over-the-top, connected TV and mobile model. Comcast’s best avenue for participating in this shift now appears to be by taking control of Hulu. There are many chapters yet to come in the Fox-Disney-Comcast saga, but from Comcast’s perspective, maneuvering for Hulu should be a top priority.