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Netflix Shouldn’t Fear a Google or Microsoft Buyout of Hulu

Suitors have different reasons to like Hulu, but many challenges


Each day the Hulu investing landscape changes. One moment it looks as though the Netflix (NASDAQ: NFLX) antagonist is about to break away from its corporate owners, with Hulu stock going public in an IPO The next, it’s perfectly satisfied to stay in the comfortable care of broadcast parents News Corp. (NYSE: NWS), Disney (NYSE: DIS), and Comcast (NASDAQ: CMCSA). So what is the ultimate fate of Hulu going to be on Wall Street?

There have also been a number of rumors running over the past few years about someone swooping into acquire Hulu in its entirety as a grand move to take control of the streaming video market. The latest Hulu suitor is Google (NASDAQ: GOOG).

The L.A. Times published a report on Friday that the omnipresent technology company was bidding on Hulu. The acquisition would certainly fit in with Google and its ongoing strategy of expansion through acquisition. Just a few irons Google has in the fire are its new social network Google+, it’s Groupon competitor Google Offers, and its Google Web Apps services that are cutting in on Microsoft (NASDAQ: MSFT) and its lucrative office tools business. So why not get into the Hulu game too to enhance its YouTube property?

Even though Google’s never been able to find a way to transform the $1.65 billion YouTube into a significantly profitable division, investors seem to sense potential in a Google controlled Hulu. Netflix stock dropped almost 2% in the minutes after the Times report was published.

But Google isn’t the only company looking to add Hulu to the family. A Bloomberg follow up report said that as many as 12 different companies were vying to purchase the streaming video outlet, including AT&T (NYSE: T), Microsoft, and Yahoo (NASDAQ: YHOO). Each could use Hulu differently in the coming years: AT&T would get a foothold in the entertainment services on competing telecom networks like Verizon (NYSE: VZ); Microsoft already has ambitions for expanding its television business on the Xbox 360 game console; Yahoo could use Hulu the most, refocusing its diminished brand with streaming video while also bolstering its advertising business.

Whoever buys Hulu though needs to understand that they are not making a risk free purchase. Even if Google picks up the service, it runs the chance of spending nearly $2 billion on a business that will earn about as much as YouTube has for them over the past five years. Make no mistake, Hulu’s business is healthy. A Citigroup report on Web video traffic reprinted at All Things Digital on Jun. 16 found that Hulu accounts for almost 23% of all viewership online. Just behind Netflix’s nearly 25% market share.

Netflix’s viewership comes entirely from paid subscribers though, whereas the majority of Hulu’s traffic is from free content. Free advertising-supported content, but free content nonetheless. Anyone purchasing Hulu has to contend with the fact that Netflix has a base of more than 23 million paying subscribers. Hulu’s premium subscription service Hulu Plus meanwhile has just above 1 million subscribers. Hulu has a very lucrative partnership with every major television network, but that access to NBC, ABC, Disney Channel and Fox content will be complicated as soon as the companies that control that content no longer have a stake in Hulu’s business. An acquisition may very well make Hulu even more vulnerable to Netflix.

The report about a Google bid may have caused Netflix stock to drop. Netflix has nothing to fear right now, and Google and Hulu’s other suitors would be wise to ere on the side of caution.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.

Article printed from InvestorPlace Media,

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