The owners of Hulu, the online television streaming service, are reportedly shopping the website around to potential buyers in order to gauge interest. While a sale might not be imminent, we appear to be inching closer as the two major stakeholders with a voting interest – The Walt Disney Company (NYSE:DIS) and News Corp (NASDAQ:NWSA)– can’t agree on a proper strategy for the service going forward. With a bevy of buyers expressing interest in the company, the owners have a lot of potential suitors for when they do decide to sell.
Why sell now?
Hulu is showing excellent signs of health. Last year, revenue grew 65% to $695 million as the company more than doubled its subscriber number to 3 million. CEO Jason Kilar reported earlier this month that the company set records for both subscriber additions and revenue in the first quarter of 2013. With all this fantastic news about the company’s growth, why would the owners want to sell?
The main driving point toward a Hulu sale is Newscorp and Disney’s inability to agree on what the future of the website should look like. Newscorp would like to see Hulu transition away from ad-supported free streaming, and create a subscription-only service. Disney prefers to leave things as is.
From Newscorp’s perspective, offering its shows for free on Hulu diminishes the value of its content, which makes licensing deals with companies like Netflix, Inc. (NASDAQ:NFLX) or Amazon.com, Inc. (NASDAQ:AMZN) less profitable.
From Disney’s perspective, providing a free service prevents viewers from turning to the services provided by Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN). A sale of Hulu would alleviate the owners from this conflict of interest, and allow the value of the content they produce to rise faster.
How much?
Last year, Providence Equity Partners sold its 10% stake back to Hulu for $200 million valuing the company at $2 billion. Earlier this year, CEO Jason Kilar announced his impending departure after cashing out a portion of his stake for roughly the same valuation. The problem is the website is much more valuable in the hands of Disney, Newscorp, and Comcast than it is in almost anyone else’s.
With these three companies stake in Hulu, the service pays less for content. That’s why when the owners shopped Hulu around previously, they didn’t sell to the high bidder, DISH Network Corp. (NASDAQ:DISH), because it wanted the content rights included. These content licenses give Hulu the majority of its value; so while the company might be worth $2 billion to the current owners, it’s unlikely to garner much of a premium unless it packages a content licensing agreement.
Best fit
While the owners have received interest from numerous parties, it seems hesitant to part with its valuable content licenses. Still, it seems unlikely that any of the buyers would express much interest without them.
Because the owners are mostly interested in increasing the value of the content they create, they are likely less interested in selling to companies with which they already have licensing deals. This leaves two big names that have expressed interest – Yahoo! Inc. (NASDAQ:YHOO) and Microsoft Corporation (NASDAQ:MSFT).
Marissa Mayer’s new mobile focus for Yahoo has put the company at the forefront of the mobile acquisition game. While Hulu isn’t a pure mobile play like many of Yahoo’s recent acquisitions, mobile video is increasingly popular. While the company is already in talks with France Telecom about acquiring a 75% stake in DailyMotion, Hulu provides a much bigger bolster in an area where Yahoo lags behind the competition.
But Hulu doesn’t quite fit into Marissa Mayer’s MO. Her recent acquisitions of small mobile startups are usually less than $100 million. A Hulu buyout would require billions. With just over $2.5 billion of cash on the balance sheet, the company would likely need to finance the acquisition with debt in addition to the content licensing obligations the buyout necessitates. While Yahoo could certainly afford to take on additional debt, it doesn’t appear to be the direction Mayer wants to take the company.
Microsoft provides another name that has long held interest in video streaming as it transitions its Xbox brand from a gaming system to an entertainment hub. Multiple rumors of a Netflix, Inc. (NASDAQ:NFLX) buyout often link Microsoft as a potential suitor.
Hulu could be a nice consolation prize for Microsoft, and become extremely additive to its Xbox Live service, for which the company is already developing original content. Bundling Hulu Plus service with Xbox Live would certainly help move systems, and further establish Microsoft’s presence in the living room as an entertainment hub.
Additionally, there’s potential that Newscorp and Disney would agree to sell to Amazon. Hulu would be extremely synergistic with Amazon’s Prime service, as the company already has licensing deals that overlap with a lot of the content on Hulu. If the owners refuse to include a large portion of the licensing deals that provide the value of Hulu, Amazon.com, Inc. (NASDAQ:AMZN) is likely their best opportunity to sell.
An Amazon.com, Inc. (NASDAQ:AMZN) takeover, however, seems to me the least likely of cases as the content providers want to increase competition and bidding on their main product. They’d be better left keeping Hulu under their wings, and licensing content to the company at the family discount.
One other solution
Another solution would be for Newscorp or Disney to buy out the other’s stake in Hulu. This would provide the company with a unique outlook for its future monetization policy while maintaining the level of competition in the video streaming market.
The owners can take their time, however, deciding exactly what to do as Hulu’s growth doesn’t appear to be slowing down. It’s clear, though, that Hulu’s revenue is rather inconsequential to these big media companies, and it will likely do better without the company holding back potential licensing agreements.
The article Who Could Buy Hulu? originally appeared on Fool.com is written by Adam Levy.
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