Hulu’s Buyer Will Face an Uphill Battle

by Jonathan Berr | July 9, 2013 9:18 am

The guessing game over the future of Hulu is mercifully nearing an end.

Yahoo (YHOO[1]), Time Warner Cable (TWC[2]), AT&T (T[3]), DirecTV (DTV[4]) and even private equity players such as KKR & Co., Guggenheim Partners and former News Corp. (NWSA[5]) COO Peter Chernin’s Chernin Group have all expressed an interest of one sort or another in Hulu.

It’s the corporate equivalent of picking a puppy at an animal shelter.

Interestingly, 21st Century Fox (FOXA[6]) and Disney (DIS[7]) — two of Hulu’s original backers — are not interested in buying the company, which they think is worth about a $1 billion. Instead, they expect to decide on the sale in the next eight weeks.

Of course, not everyone is beating on Hulu’s door. Comcast (CMCSA[8]) is precluded from making an offer for Hulu under the terms of its takeover of NBCUniversal, while other big names including talent agency William Morris Endeavor and its partner Silver Lake, a private equity firm, have pulled out of the sale[9]. Yahoo’s interest in Hulu also is apparently waning.

If you ask me, such reluctance is understandable.

The company that buys Hulu will have to figure out how it can excite users about the service, which has been suffering from paralysis by analysis since the company’s multiple owners were unable to agree what to do with the site.

Oh, and having a lengthy public sale process doesn’t help either.

Adding to the uncertainty has been the steady exodus of senior Hulu executives. Founding CEO Jason Kilar left in March, followed by Chief Technology Officer and Vice President for International Operations Johannes Larcher. Plus, Pete Distad — Hulu’s senior vice president for marketing and distribution — plans to depart later this summer, according to The New York Times.

One reason such names are fleeing Hulu may be the looming battle it faces with media companies, which want to limit the service’s access to their shows — especially shows from the season. This is problematic consunder — as The Wall Street Journal put it[10], current season offerings “are at the core of the business.”

To make matters worse, Hulu isn’t profitable despite the fact that it earned about $700 million in revenue last year. That likely lessens its appeal even more to a potential buyer.

Then there are the demographic challenges. Young people are not watching as much television as they have in years past. These people aren’t cord-cutters who moved away from paid services — they just never had it in the first place. As The Atlantic[11] put it:

“The broke twenty-somethings who survive off of Hulu, Netflix (NFLX[12]), bootleg streams of their favorite shows, and stealing each others’ HBO Go passwords now, might get used to a life without paying for cable, causing a generational shift in the way Americans consume things.”

Such a reality should worry any potential owner of Hulu.

Hulu has also ventured into the cutthroat world of original content and expects to produce 20 original shows this year and to do an additional 40 over the next few years. That business, though, has proven to be more difficult than the company expected.

“Hulu has been investing in original shows for more than two years, though to date, none have come close to the budgets of those Netflix shows,” reported a June story in The New York Times[13].

For the cherry on top, there’s maybe the biggest uphill battle for the streaming site: competition. Practically, the entire media universe ranging from Netflix to Time Warner (TWX[14]) competes with Hulu on some level.

The bottom line is that, if Hulu were a house, it would be a fixer-upper in a good neighborhood. It has potential … but it still needs to be spruced up in order to attract a buyer.

As of this writing, Jonathan Berr did not own a position in any of the aforementioned securities. Follow him on Twitter@jdberr

  1. YHOO:
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  8. CMCSA:
  9. have pulled out of the sale:
  10. as The Wall Street Journal put it:
  11. The Atlantic:
  12. NFLX:
  13. The New York Times:
  14. TWX:

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