Life After Being Googled
Yahoo! Inc. (NASDAQ:YHOO) has a tough fight as it works to take on Google Inc (NASDAQ:GOOG) and transform its business at the same time. While the company is still an important industry player, revenues peaked in 2008 and have been generally heading the wrong way the last few years. Looking to get more aggressive, the company brought in a Google Inc (NASDAQ:GOOG) alum to lead Yahoo! Inc. (NASDAQ:YHOO)
Part of Marissa Mayer’s goal is to make her new company more entrepreneurial. She is also working hard to push into the mobile world. Both are great ideas and sound a lot like the game plan at Google Inc (NASDAQ:GOOG). So it shouldn’t be surprising that Mayer is also hot to own a video service.
Buying Change
Mayer is blessed to have a huge cash balance at her disposal. That came from the sale of half of Yahoo! Inc. (NASDAQ:YHOO)’s stake in Alibaba for around $7 billion. The bulk of her acquisitions so far have been small and in support of mobile and an entrepreneurial culture. Essentially, she is bringing new ideas and the people behind those idea to Yahoo! Inc. (NASDAQ:YHOO) It’s a good way to slowly change the culture without throwing the company into disarray. However, with so much cash and the other half of the Alibaba stake still to sell, Mayer has the money to make bolder moves.
A Video Deal Falls Through
The first big rumor about video was the potential acquisition of France’s Dailymotion. The two companies already have a partnership, so a purchase isn’t outlandish. However, the government of France stepped in to scuttle the deal. That was probably a good thing for Yahoo, since it is in the process of revamping its culture and trying to take on a new distribution medium would likely require much bigger business changes.
An Also Ran
However, almost as soon as the Dailymotion talks ended, The New York Times reported that Yahoo! is in talks with Hulu. Hulu is owned by several of the large television networks, including The Walt Disney Company (NYSE:DIS), which owns ABC, News Corp, which owns FOX, and Comcast Corporation (NASDAQ:CMCSA), which owns NBC.
Hulu has been rumored to be on the selling block for a long time now and has been the subject of numerous rumors. Yahoo! has both the money and the name to pull off such a deal. And the U.S. government isn’t going to stand in its way. That said, Hulu has real problems that Yahoo! shouldn’t get into right now.
Content
Hulu was created as a way for content owners to control the distribution of their media. It was largely a response to the success of Netflix, Inc. (NASDAQ:NFLX). The idea of Hulu is good, but the execution isn’t living up to the promise. The biggest hurdle has been the mindset of the owners, which still live and die by the old media model. That includes advertising, even for paying customers, and delayed posting of content so Hulu’s airing doesn’t interfere with regular broadcasts.
Netflix, Inc. (NASDAQ:NFLX) has been so successful because it has broken completely away from the old media mold. No ads and customers can watch what they want, when they want, and how they want. With content becoming increasingly important online, it’s understandable that content owners would want to get out of the distribution business.
For example, Disney just signed a deal with Netflix, Inc. (NASDAQ:NFLX) for content. Although the Disney deal is separate from ABC, why bother having to deal with owning and operating the distribution for ABC content when it, too, could simply be sold to the highest bidder. Getting out of Hulu, then, could be a big boon for Disney, which also has Lucas Films content, like Star Wars, still to sell. Content sales, then, is an issue Disney shareholders should keep an eye on.
Netflix, for its part, is getting increasingly picky about the content it buys. So in-demand content is only likely to increase in value. NBC and FOX see this, too. The more valuable content that Neflix has locked into exclusive deals, the more subscribers it is likely to get, or hold onto, as the online video market matures. Content bidding wars will be a big issue for the company’s shareholders to keep an eye on. Though, at this point, it is still unclear how much is too much to pay.
Fundamental Issues
The problem that Yahoo! Inc. (NASDAQ:YHOO) faces from buying Hulu is primarily distraction. Hulu’s model doesn’t compete well with Netflix and is vastly different than Google’s YouTube offering. Moving to compete with YouTube doesn’t seem like a good plan, particularly with Dailymotion already trying to break into the U.S. market. And, such a transaction would be a massive business shift for Yahoo!
On the other hand, once the main content providers sell out of Hulu, it isn’t certain that they will be willing to allow the changes necessary to better compete with Netflix. While some sort of content contracts would be likely, there is a big risk that the content providers could simply bide their time until they can just get out of the venture altogether, effectively gutting Hulu.
The idea of buying Hulu is sound, but Yahoo! is likely to find the reality of such a purchase proves more difficult than it would like. Hulu simply isn’t executing well enough to be a quick add on, it’s a fixer-upper.
The article Desperate For Video originally appeared on Fool.com and is written by Reuben Brewer.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
