A giant in traditional TV programming and production, Time Warner Inc (TWX) is no fan of Netflix, Inc. (NFLX).
And it’s tough to blame Time Warner. After all, NFLX has almost singlehandedly put the cable industry on the defensive by pioneering web-based streaming video. Consumers are increasingly “cord-cutting,” opting to ditch pricey, ad-ridden cable TV in favor of cheaper and more flexible streaming services.
Well, TWX has had enough, and according to a Thursday report from the Wall Street Journal, the company may be on the verge of becoming a main investor in Hulu, one of NFLX’s few true rivals.
NFLX stock immediately shed almost 4% on the news. Why? Well because if the reports are true, Time Warner’s Hulu investment is tantamount to an act of war.
The Streaming vs. Cable Landscape
Increasingly, networks are offering their own streaming capabilities, as they desperately scramble to adapt to the changing habits of viewers. But right now, there are really only three relevant streaming video aggregators with diversified content catalogs: NFLX, Amazon (AMZN) Prime Video and Hulu.
Hulu is a joint venture between 21st Century Fox (FOXA), Walt Disney (DIS) and Comcast (CMCSA). These three cable heavyweights saw the danger NFLX posed and decided to take it on themselves to answer the threat, while hedging their business models in the process.
TWX is certainly late to the party, and if it buys into Hulu, it’ll likely have to do so at a valuation between $5 billion and $6 billion. The WSJ cites people “familiar with the matter” who say the deal would likely see FOXA, DIS and CMCSA draw down their equity stakes from 33% to 25%, making Time Warner an equal 25% partner.
The deal would also require Time Warner to license additional content to Hulu, making Hulu a more formidable NFLX opponent. Plus, it would provide Hulu with a cash infusion, which the company could use to invest and grow the business. Wall Street research firm Nomura estimates Hulu has stepped up content investments from $600 million in 2014 to $1.5 billion this year.
While I seriously doubt a cash infusion from TWX will be a game-changer that saps momentum from Netflix’s subscriber growth, a Time Warner-funded Hulu would make the war between traditional cable companies and NFLX official.
Just last week, TWX came out and openly complained about how Netflix was reaping the benefits from Time Warner and Netflix’s content licensing agreements. Basically, CEO Jeff Bewkes is sore because Netflix is wildly successful, and Time Warner has been enabling this success by allowing the streaming site to license TWX’s programming.
Bottom Line
I understand that Time Warner is sick of being the sucker. Maybe its involvement in Hulu will make that service moderately more attractive, but it’s not going to materially damage NFLX. It’s too little too late from a desperate cable has-been.
That’s not to say that NFLX stock holders are totally in the clear, though.
I tend to think shares are pretty dramatically overvalued … just not threatened in the least by Time Warner’s pathetic attempts to stay relevant.
As of this writing, John Divine was long AMZN stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
