Were the Buyers Aware of Hulu’s Business Risk?


Hulu (Photo credit: Evan Hamilton)

Video streaming company Hulu is no longer on the auction block, after its current ownersNBCUniversal21st Century Fox and Disney (NYSE: DIS) decided to inject $750 million into the business rather than sell. The owners believe that the additional capital injection will boost the company’s growth campaign, as it seeks to gain more market share from giant Netflix(NASDAQ: NFLX), as well as online retail giant Amazon.com (NASDAQ: AMZN). Several companies had expressed interest in acquiring the video streaming company founded in 2007, but only a few seemed serious.


The companies believed to have had serious offers include AT&T’s joint bid with Chernin GroupDIRECTV and Private Equity firm, Kohlberg Kravis Roberts. All these companies are believed to have made bids to acquire Hulu, but according to reports, it seems as though none of the bids met the current owners’ asking price. Were the bids too low, or did the owners place a hefty premium on the actual valuation of Hulu? Well, it could be a little bit of both.


Last week, NBCUniversal, 21st Century Fox, and Walt Disney issued a press release announcing the close of the auction, and a change of strategy thereof. This is the second time Hulu owners have tried to sell the company, following 2011’s failed attempt. In the press release, the owners wrote, “Hulu has emerged as one of the most consumer friendly, technologically innovative viewing platforms in the digital era. As its evolution continues, Disney and its partners are committing resources to enable Hulu to achieve its maximum potential.”


How much is Hulu worth?


According to reports, Hulu is estimated to be worth about $2 billion. The company generated $695 million in revenues last year, but still remains unprofitable due to small margins. The company faces stiff competition from Netflix, which has a massive subscriber base, and a huge financial muscle, giving it the ability to leverage on small margins. The company has about 4 million subscribers, paying approximately $8 per month.


Reports indicate that DirectTV and two other bidders’ bids were well above $1 billion, eclipsing Yahoo!’s $600 million-$800 million bid placed earlier. Nonetheless, it is clear that these bids were well below the company’s valuation of $2 billion, which perhaps is one of the reasons the owners opted not to sell.


What is Hulu’s business risk?


Netflix accounts for about 89% of video streaming market share, with Hulu’s premium content unit Hulu Plus accounting for about 10%. On the other hand, Amazon accounts for about 2% of the overall market share in the video streaming industry. However, while Netflix’s market share dropped from 93% in the fourth quarter of 2012 to about 89% in the first quarter, Hulu Plus and Amazon gained ground from 7% to about 10% and 1% to about 2% respectively.


Nonetheless, Hulu Plus’s biggest business risk is wrapped around its business model. The company only had short-term contracts with content providers, meaning the buyer would have to work to renew these contracts or find other sources of content. This meant that in order to make the acquisition viable, the buyers would have to dig deep in their pockets in negotiating new contracts with content providers, as well as adding to the current portfolio.


This would have meant additional costs probably in the region of what the current owners of Hulu have added to the business. Additionally, Hulu’s inability to wrap-up long-term deals with content providers is a further testimony of the company’s business risk. Why aren’t content providers willing to make such deals? Perhaps, Amazon and Netflix offered a more promising outlook for the content providers in terms of guaranteed payments.


Additionally, Hulu’s streaming service is believed to have a lot of ads, targeted at the 30 million monthly visitors the company receives. These ads can sometimes be a nuisance to the user. Nonetheless, the company enjoys a massive share of the popular TV shows market, with 44%, compared to Netflix’s 33% and Amazon’s 7%. However, Netflix holds the edge overall given because most of its content is exclusive to its platform, as compared to Hulu and Amazon.


These risks are a good justification that the current owners including Walt Disney, might have been asking a little too much. Lack of long-term agreements means that the $695 million revenue reported last year is not guaranteed going forward. Subscribers will want to see the latest content. Therefore, if the company cannot secure deals with content providers, then Hulu does not guarantee the best for its subscribers.


So what future does Hulu hold for its current owners?


The immediate failed sale of Hulu is the second one in the company’s six-year history. As it stands, Hulu is the only genuine challenger to Netflix in video streaming market share.


Walt Disney and partners have now put in some more cash injection to boost their company’s competitive ability in terms of services. The cash will help the companies secure more long-term deals with content providers, which in turn could help grow Hulu’s market share going forward.


Additionally, video streaming industry is growing sequentially with advances in technology. The shift to mobile technology is bound to grow video streaming industry by huge margins as the use of tablets and smartphones continues to grow.


Therefore the current Hulu owners’ injection of $750 million is an indication that they are preparing the company for the inevitable growth in the industry going forward. This could probably offer Walt Disney and partners more value in the long-term than they would have received from the sale of Hulu.


The bottom line


Disney and partners’ option to inject more capital into Hulu’s business was inevitable. Had one of the bidders succeeded, the same would have happened. The additional capital will go a long way towards strengthening the company’s position in video streaming industry, but still trails the giant Netflix by miles.


Amazon and Netflix already have the financial muscle to leverage against competitive subscription rates. On the other hand, Hulu now must focus on getting some concrete agreements with content providers in a bid to position itself well for the future.



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