Signage is seen at the 2019 Deadline Contenders Hulu reception at the Paramount Theater on the Paramount Studios site April 7, 2019 in Hollywood, California.
Rachel Murray | Getty pictures
Disney has a Hulu problem.
In 2019, the entertainment giant entered into an unusual agreement with Comcast. Two months earlier, Disney had acquired Fox̵[ads1]7;s 33% stake in Hulu as part of a $ 71 billion acquisition, giving it a majority stake in the streaming service.
That put Comcast boss Brian Roberts in a strange position. Comcast owned the other 33% of Hulu. Roberts thought the value of Hulu would increase as the world switched to video streaming, but he would not or did not need to own a passive stake.
Roberts and then-Disney boss Bob Iger signed a deal to temporarily save Disney billions after playing on Fox while taking operational control of Hulu. Comcast agreed to keep its stake in Hulu until January 2024. Thereafter, Comcast could force Disney to buy its 33% of Hulu for a minimum value of $ 27.5 billion. The price tag may be higher depending on the real market value of Hulu in 2024, determined by an independent third party.
The Hulu riddle
At that time, Disney + was built. It was to be launched eight months later, in November 2019. Hulu seemed like a very strategic resource when millions of Americans canceled cable TV in favor of free and subscription streaming services.
Fast forward three years, and its existence and future of Hulu is unclear to investors, analysts, media executives and even Disney employees. Disney + has become Disney’s flagship subscription streaming offering, with 138 million global subscribers as of April 2. Hulu is just the United States, with just over 41 million subscribers.
Disney is about to pay billions of dollars for an asset that now seems like a difficult fit. There is little evidence that investors care about Hulus’ quarterly results. In fact, the better Hulu performs, the more Disney will have to pay Comcast to buy the rest of it in 2024.
“Disney has never stated what the strategy is for Hulu,” said Jon Miller, who sat on Hulu’s board from 2009 to 2012. “Is it a distributor of other products? Is it Disney’s brand for adults? It’s hard enough to run a single larger SVOD [subscription video on demand] service. Disney already has Disney +. Wall Street wants to know: ‘How many chips can you afford to have on the board at any one time with success?’
This dynamic has led executives at both Disney and Comcast to at least consider alternatives. Roberts and Disney CEO Bob Chapek are at the annual media conference in Sun Valley this week. The two leaders have not spoken to each other in about six months, according to a person familiar with the matter. But the conference, known for big discussions about media transactions, can be a place to renew conversations.
Lightshed media analyst Rich Greenfield has given the idea that Comcast could buy Hulu from Disney instead of the other way around.
“We see no reason why Disney + cannot be a broad-based entertainment service,” Greenfield wrote in a note to customers. “Parental controls are now available to prevent children from accessing more adult content. This raises the multi-billion dollar question of why Disney even wants to own Hulu?”
The strange saga of Hulu
Hulus’ perhaps most important strategic purpose is to support Disney + subscriptions. It does this by being part of the “Disney package”. Disney + is Disney’s family and child service, Hulu is the broad, Netflix-like offering, and ESPN + is the sports service. Disney markets and sells all three together for $ 13.99 per month, which helps increase Disney + subscribers and reduce departures.
Otherwise, Hulus’ fit at Disney is clumsy. Hulu cannot be marketed with Disney + globally because it is not an international product. Like Disney +, Hulu also has children’s programming – thousands of hours of licensed movies and TV series, and original programming, such as the reboot of the old Warner Bros. animated series “Animaniacs”. Hulu serves as a home for “non-Disney Disney” content. It may be easy to understand for Disney executives who decide what appears on Disney + versus Hulu, but it’s not necessarily easy for customers.
To add to the confusion, it seems that Disney is pushing the boundaries of Disney +’s audience, adding the popular reality competition program “Dancing with the Stars” to the flagship service instead of Hulu. But not all family-friendly reality shows are on Disney +. Chef Gordon Ramsay’s “MasterChef Junior”, for example, is only on Hulu.
This season’s remaining four couples will dance and compete in their last two dance rounds in the live season finale, where one will win the coveted Mirrorball Trophy.
Eric Mccandless | Disney General Entertainment Content | Getty pictures
Hulu is also about to lose much of its popular programming when Comcast removes its current season TV series, such as “Saturday Night Live” and “The Voice” later this year. Comcast puts the programming on its own flagship streaming service, Peacock.
Beyond the programming challenges, Hulu with Live TV is a completely separate product that combines Hulu’s subscription video-on-demand service with a bundle of digital cable networks for $ 69.99 per month. This offer has more than 3 million subscribers and includes live sports and programming on linear networks.
Hulus’ messy positioning at Disney is largely due to the fact that it was never meant to be a service just for Disney. It was launched in 2008, with the support of NBCUniversal, still owned by General Electric at the time, and News Corp., which owned Fox. A year later, Disney took a stake.
At launch, Hulu was a free streaming service supported by commercials, mainly used as a vehicle to watch episodes of broadcast television programs. In 2016, Hulu had switched to paid subscriptions, with price levels for ads and no ads. The shift coincided with big money licensing agreements for both movies and TV series, such as “Seinfeld”, and a transition to original programming. Also that year, Comcast, which had then bought NBCUniversal from GE, Disney and Fox, all sold a little more than 3% of Hulu to Time Warner, and brought in more programming to Hulu.
In 2017, Hulus’ “The Handmaid’s Tale” became the first streaming program to win the Primetime Emmy for the Outstanding Drama Series.
Hulus’ role in the power wars
When Disney bought most of Fox in 2019, Disney became the majority owner of Hulu. Time Warner agreed to sell its stake in Hulu back to Disney and Comcast, giving 66% control to Disney and 33% to Comcast.
That same year, global media companies began to change their business models to focus on streaming video. Instead of relying on Hulu, Disney launched Disney +. Comcast unveiled Peacock in July 2020 after a three-month test run.
Enhanced by giving users access to almost every Disney movie ever made for just $ 6.99 a month, Disney + became an instant success, surpassing 10 million subscribers in its first 24 hours. By the end of 2020, Disney had increased its 2024 forecast for Disney + to 230 million to 260 million global subscribers. Every quarter for the past 2.5 years, Disney shares have largely moved up or down based on how many subscribers the company reports.
Comcast CEO Brian Roberts arrives at the Allen & Company Sun Valley Conference on July 6, 2021 in Sun Valley, Idaho.
Kevin Dietsch | Getty pictures
Chapek has just signed a new contract with Disney to continue as CEO until 2025. He will be judged on whether Disney reaches the Disney + target for 2024. It is safe to say that he will not be judged on Hulus’ total subscriber base.
As Hulu became a metaphorical starter for Disney +, it has also experienced a change of leadership. Randy Freer served as Hulus ‘CEO from 2017 to 2020. In February 2020, Kelly Campbell replaced Freer as Hulus’ CEO. Less than two years later, Campbell left Hulu for Peacock.
Nevertheless, Hulu has doubled the total number of subscribers since 2018. The streaming service continues to win critically acclaimed series, including «Pen15,“”Dopesick “and” The Dropout. “
“The irony of Hulu is that if they had failed programming, this would actually be an easier problem to solve,” said Miller, a former Hulu board member.
Hulu has valuable brand recognition from its 15 years, especially compared to competitors that have mostly existed for three years or less. It has a built-in advertising business that will bring in $ 2.7 billion this year, according to MoffettNathanson – more than any other streaming service.
Disney executives have viewed Hulu as a way to keep Disney +’s value-for-money proposals clear. Some at Disney have looked at Netflix’s recent games as proof that the world’s largest streaming platform offers too much content at too high a price – a similar problem that has led to millions canceling cable TV, according to people familiar with the matter. If Hulu is merged into Disney +, when Disney inevitably increases the price, some executives have expressed concern that users may see Disney + as an inflated product instead of a relatively inexpensive niche offering.
One of Chapek’s missions at Disney is to get the company’s various divisions to swim in the same direction. Part of that goal seems to be to further integrate Hulu with Disney +, especially as Disney is preparing to launch an advertising-backed Disney + later this year. Disney distributes Disney Streaming Services (formerly Bamtech) across all of its streaming capabilities to better combine technology. There are obvious money-saving synergies by selling advertising on Disney + and Hulu with the same vendors using a unified technology table.
But if Hulu simply becomes a piece of Disney +, similar to HBO in HBO Max, it’s right to question the long – term value of the service. As Greenfield noted, Disney is already able to put parental controls around adult-themed content on Disney +.
That’s why Comcast makes more sense as the eventual owner of Hulu, Miller said.
“Disney has built one of the best global streaming platforms in Disney +,” said Miller. “Hulu may be Comcast’s answer.”
If Comcast bought Hulu, it could use Peacock as its free advertising-supported platform, just as Paramount Global has paired Pluto with Paramount +, Miller said. Comcast can then shift the cost of premium content to Hulu while expanding it as an aggregation distribution platform.
“Hulus’ third-party distribution business is much better suited for Comcast,” said Miller. While Comcast has been selling cable TV for decades, Disney is not a distributor by nature.
The problem is that Comcast will probably have to pay billions back to Disney, and it’s still unclear if Hulu’s original programming plus NBCUniversal’s content would be strong enough to compete with Netflix, Amazon, Apple and Disney around the world. If it does not, Comcast will double down on a potentially money-losing business.
In addition, Comcast already has what could be a $ 10 billion check, if not more, guaranteed by Disney, to spend on whatever it wants.
Hulu is stuck in the middle.
No, not “Stuck in the Middle”, the children’s TV series starring Jenna Ortega. It’s at Disney +.
Disclosure: CNBC is part of Comcast’s NBCUniversal.
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