Disney is having a Hulu issue.
The entertainment juggernaut and Comcast reached an unusual agreement in 2019. Disney acquired Fox’s 33 percent ownership of Hulu two months earlier as part of a $71 billion acquisition, giving it a controlling interest in the streaming service.
Brian Roberts, the CEO of Comcast, found himself in an odd situation as a result. 33 percent of Hulu’s ownership was held by Comcast. Roberts anticipated that as more people started watching streaming videos, the value of Hulu would rise, but he didn’t need or want to own a passive stake.
After spending lavishly on Fox and taking operational control of Hulu, Roberts and then-Disney CEO Bob Iger came to an agreement to temporarily save Disney billions. Comcast consented to maintain its ownership of Hulu through January 2024. Then, Comcast has the power to compel Disney to acquire its 33 percent stake in Hulu for a minimum price of $27.5 billion. Depending on the estimated fair market value of Hulu in 2024 as determined by a neutral third party, the price could go up.
The Hulu puzzle
The deadline for Disney to pay Comcast billions for a third stake in Hulu is 2024.
Disney hasn’t made clear what its long-term strategic goals are for Hulu.
One option is for Disney to sell Hulu to Comcast, but doing so would require Comcast to forego receiving at least $10 billion in payment from Disney.
At that time, Disney+ was under construction. Eight months later, in November 2019, it would debut. As millions of Americans abandoned cable TV in favor of free and paid streaming services, Hulu appeared to be a highly strategic asset.
After three years, investors, analysts, media executives, and even Disney employees are unsure of the purpose of Hulu and its future. As of April 2, Disney+ had 138 million global subscribers, making it the company’s premier subscription streaming service. With just over 41 million subscribers, Hulu is a U.S.-only service.
Disney is responsible for shelling out billions of dollars for a possession that currently fits the bill strangely. There isn’t much proof that investors are interested in Hulu’s quarterly earnings. In fact, the more successful Hulu becomes, the more money Disney will have to pay Comcast in 2024 to purchase the remaining portion.
Jon Miller, a former member of the Hulu board from 2009 to 2012, claimed that Disney had never publicly stated its Hulu strategy. “Does it act as a distributor for other goods? Does Disney have an adult brand? Running a single significant SVOD [subscription video on demand] service is challenging enough. Disney+ is already available. How many chips can you afford to have on the board at any given time and still win? is what Wall Street wants to know.”
Executives at Disney and Comcast have at least considered alternatives as a result of this dynamic. This week, Roberts and Bob Chapek, CEO of Disney, are attending the annual Sun Valley media conference. Approximately six months have passed since the two executives last spoke, claims a source with knowledge of the situation. However, the conference, which is known for its extensive discussions of major media transactions, might be the ideal setting for new negotiations.
Rich Greenfield of Lightshed Media suggested that Comcast might purchase Hulu from Disney rather than the other way around.
Greenfield stated in a note to clients, “We see no reason why Disney+ cannot be a broad entertainment service. “Children can no longer access more mature content thanks to parental controls. This begs the enormous question: Why does Disney even want to own Hulu?”
The bizarre story of Hulu
Supporting Disney+ subscriptions may be Hulu’s most crucial strategic objective. Due to its inclusion in the “Disney bundle,” it achieves this. Disney’s family and kids service is called Disney+, its expansive Netflix-like offering is called Hulu, and its sports service is called ESPN+. For $13.99 a month, Disney promotes and offers all three together, increasing Disney+ subscribers and reducing churn.
The rest of Hulu’s move at Disney is awkward. Because Hulu is not an international product, Disney+ cannot be used to promote it globally. Thousands of hours of licensed films and TV shows as well as original programming, such as the revival of the former Warner Bros. animated series “Animaniacs,” are available on Hulu for kids, just like on Disney+. The “not-Disney Disney” content is housed on Hulu. That might make sense to the Disney executives who decide what shows appear on Disney+ versus Hulu, but it might not make sense to customers.
Disney+’s addition of the well-known reality competition program “Dancing with the Stars” in place of Hulu furthers the confusion by appearing to be pushing the envelope in terms of the service’s target audience. However, not every family-friendly reality show is available on Disney+. For instance, “MasterChef Junior” by Chef Gordon Ramsay is only available on Hulu.
The final two rounds of dancing for the remaining four couples this season will take place live in the season finale, where one will take home the coveted Mirrorball Trophy.
Later this year, when Comcast removes its current-season TV shows like “Saturday Night Live” and “The Voice,” Hulu will also lose a sizable portion of its popular programming. The programming will be available on Peacock, Comcast’s premier streaming service.
In addition to the programming issues, Hulu with Live TV is a totally different product that combines Hulu’s paid video on demand service with a collection of digital cable networks for $69.99 per month. More than 3 million people subscribe to this service, which offers linear network programming and live sports.
Hulu was never intended to be a Disney-only service, which accounts in large part for its confusing position within Disney. It debuted in 2008 with support from News Corp., which owned Fox, and NBCUniversal, which at the time was still a part of General Electric. Disney acquired a stake one year later.
When it first launched, Hulu was a free streaming service funded by advertising, primarily used as a platform for viewing previous seasons of broadcast TV shows. By 2016, Hulu had completely switched to a paid subscription model with both ad-supported and ad-free tiers. The transition occurred at the same time as a shift to original programming and large-scale licensing deals for both films and TV shows, including “Seinfeld.” Comcast, which had since acquired NBCUniversal from GE, Disney, and Fox all sold a little more than 3 percent of Hulu to Time Warner in the same year, expanding Hulu’s content offerings.
The Handmaid’s Tale on Hulu was the first streaming program to be awarded the Primetime Emmy for Outstanding Drama Series in 2017.
The part Hulu plays in the streaming wars
Disney became the major shareholder in Hulu after purchasing the majority of Fox in 2019. Time Warner consented to sell its ownership interest in Hulu to Disney and Comcast again, giving the two companies a combined 66 percent and 33 percent of the company.
The same year, international media companies started refocusing on streaming video in their business models. Disney introduced Disney+ in place of Hulu. Peacock was introduced by Comcast in July 2020 following a three-month test period.
Disney+ was an instant hit, surpassing 10 million subscribers in its first day thanks to its $6.99 per month offer that gave users access to nearly every significant Disney film ever made. Disney increased its 2024 forecast for Disney+ to 230 million to 260 million global subscribers by the end of 2020. Disney shares have largely increased or decreased over the past 2.5 years depending on how many subscriber additions the company reports.
On July 6, 2021, Comcast CEO Brian Roberts arrives in Sun Valley, Idaho for the Allen & Company Sun Valley Conference.
Chapek recently renewed his agreement with Disney and will serve as CEO through 2025. Whether Disney reaches its 2024 Disney+ goal will be used to evaluate him. It is certain that he won’t be evaluated based on Hulu’s subscriber counts.
As Hulu evolved into a figurative appetizer for Disney+, its management has changed. Hulu’s CEO from 2017 to 2020 was Randy Freer. Kelly Campbell succeeded Freer as Hulu’s CEO in February 2020. After less than two years, Campbell left Hulu to join Peacock.
Nevertheless, since 2018, Hulu’s subscriber base has increased by half. “Pen15,” “Dopesick,” and “The Dropout,” among other critically acclaimed series, are still being produced by the streaming service.
The former Hulu board member Miller said, “The irony of Hulu is that if they’d failed at programming, this would actually be an easier problem to solve.”
Future of Hulu
Hulu has a strong brand recognition due to its 15 years in business, especially when compared to rivals who have only been around for three years or less on average. According to MoffettNathanson, it has an integrated advertising business that will generate $2.7 billion this year, more than any other streaming service.
Executives at Disney have seen Hulu as a way to maintain the transparency of Disney+’s price-value proposition. According to people familiar with the situation, some Disney employees believe that Netflix’s recent struggles are proof that the world’s largest streaming platform charges too much for too little content, a problem that has caused millions of people to stop using cable TV. Some executives are worried that if Hulu is combined with Disney+, users may perceive Disney+ as a bloated product rather than a reasonably priced niche service when Disney raises the price, which is inevitable.
Getting Disney’s various divisions to swim in the same direction is one of Chapek’s goals there. Further integrating Hulu with Disney+ appears to be one of the objectives, particularly as Disney gets ready to introduce an ad-supported Disney+ later this year. To better synchronize the technology, Disney is implementing its Disney Streaming Services (previously known as Bamtech) across all of its streaming properties. Selling advertising on Disney+ and Hulu with the same sales team and a shared technology stack results in clear cost-saving synergies.
But it’s reasonable to question the service’s long-term value if Hulu merely becomes a tile within Disney+, similar to HBO within HBO Max. Disney is already able to implement parental controls for adult-themed content on Disney+, as Greenfield pointed out.
Comcast thus makes more sense as Hulu’s ultimate owner, according to Miller.
Disney+, according to Miller, is one of the best global streaming platforms. “Hulu might be Comcast’s solution.”
As Paramount Global has done with Pluto and Paramount+, Comcast could use Peacock as its free, advertising-supported platform if it acquired Hulu, according to Miller. Comcast could then shift its expenditure on premium content to Hulu while also developing it as a platform for aggregation distribution.
Comcast is a much better fit for Hulu’s third-party distribution business, according to Miller. While Comcast has long sold cable TV, Disney isn’t by nature a distributor.
The issue is that Comcast would probably have to reimburse Disney for billions of dollars, and it’s still unclear whether Hulu’s original content and NBCUniversal’s content would be potent enough to rival Netflix, Amazon, Apple, and Disney globally. If it can’t, Comcast would be investing more money in a venture that might end up losing money.
Additionally, Comcast already has a guaranteed check from Disney in the amount of $10 billion, if not more, that it can use however it pleases.
