After an unsuccessful attempt in 2011, the time may finally be ripe for the sale of Hulu, an online streaming content provider. In the past few weeks, bids have escalated among the host of serious contenders vying for the company. The latest figure: more than a billion dollars.
Hulu was founded in 2007 and today is owned by News Corp, Disney, and NBC Universal, a subsidiary of Comcast. The Los Angeles based company boasts 4 million subscribers who pay a monthly fee of $7.99 for its premium service. Coupled with revenue from advertising, it made $695 million in 2012, up 65% from the year before.
Hulu’s board is currently weighing buyout proposals from at least seven different sources. Price was the sticking point when buyout negotiations stalled in 2011 but that hurdle may have been cleared this past weekend when DirecTV and two other bidders allegedly raised their bids to over $1 billion. This figure clocks in significantly higher than the $600-800 million reportedly tendered by Yahoo. Other players in the pursuit include Time Warner Digital, media mogul and former News Corp executive Peter Chernin, private equity firms KKR and Guggenheim Digital, as well as a joint bid between Silver Lake Management and talent agency William Morris Endeavor.
While many of Hulu’s internal metrics, including member base and monthly visitors, continue to perform well, the real reason the company’s value has jumped so much this time around is that views on its potential upside have become clearer. Two years ago, media content served over the Internet was still finding its place, searching for acceptance by the masses. Today, it has developed into a force that can’t be ignored — in a single month, 181 million U.S. internet users watch over 37 billion online videos, with the average American spending almost 22 hours per month watching online videos.
The bid for Hulu therefore presents an opportunity to capture a company primed to capitalize on this transition from linear to internet television. Reed Hastings, CEO of Netflix, believes this replacement is inevitable and stakes his company’s future on a world in which apps replace channels. It’s not a far-fetched thought when you look at the numerous advantages — the accessibility of programming on your schedule rather than the network’s, the convenience of portable screens, the promise of more personalized and relevant advertising, a faster, more reliable Internet, the list goes on. As one of the leading providers of TV content on smartphones and tablets, Hulu is also well positioned to be a dominant player in the mobile market.
This progression belies a more seismic shift in the media landscape and there are those who believe we are at the advent of an entertainment revolution. Put simply, the next several years may determine a radical transformation that will see the passing of power from content distributors to content producers.
Hulu’s days of exclusive rights to popular content are limited. Networks and studios are beginning to sign non-exclusive deals licensing their content to multiple providers, including Netflix, Amazon, and Google. As streaming content becomes more widely available, these companies must find new ways to stand out and thrive. The natural solution is to invest in proprietary programming. With the success of shows like Netflix’s House of Cards, the much-hyped fourth season of Arrested Development, and Hulu’s A Day in the Life, online platforms are already becoming both the new home for original media content and a fresh battleground for audiences.
As negotiations continue over Hulu’s future, a number of questions persist. Despite an impressive income statement, the company has yet to disclose its profits — if any. Furthermore, its lack of international presence — Hulu is currently available only in the U.S. — could become a glaring weakness as competition stiffens with other streaming video providers like Netflix and Amazon.
Perhaps most consequential will be how the company navigates its expiring content deals and which direction it pursues in acquiring new content. In light of these uncertainties, Providence Equity Partners was able to sell its 10% stake in Hulu for $200 million last fall, effectively giving the company a valuation of $2 billion. Whether Hulu can live up to its future potential, and these high premiums, remains to be seen.