TWC’s Bid for Hulu Begs Question: What’s It Worth?

Valuations Vary Widely
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Speculation last week that Time Warner Cable was considering joining the bidding for online video pioneer Hulu cast a spotlight on an issue that has dogged the television industry practically since the advent of the Internet — just how much is online content really worth?

Sources confirmed several published reports last week that Time Warner Cable is considering an investment in Hulu, either as a minority partner or an outright buyer. The online service is currently owned by Walt Disney Co., News Corp. and Comcast, each with about a one-third interest. The reports said the second-largest MSO in the country could pair up with one or more cable operators on a bid.

Officials at both Time Warner Cable and Hulu declined comment.

Valuations for the online video pioneer have ranged from a few hundred million dollars to nearly $2 billion.

Hulu initially hit the auction block in 2011. Disney and News Corp. are apparently at odds concerning the future direction of the service. Comcast, which inherited its one-third interest when it acquired NBCUniversal, agreed as a condition of the merger not to make management decisions for Hulu.

Hulu has been a popular free Web destination. It has older, ad-supported shows from 410 different companies and counts about 24 million monthly unique visitors. Its Hulu Plus subscription service offers current and back-season shows from major networks for $7.99 per month. At a recent advertising presentation, Hulu said Hulu Plus exceeded 4 million subscribers last year, and the company generated about $700 million in revenue in 2012.

Although those numbers seem impressive, the Hulu auction initially didn’t generate much interest. In 2011, it had reportedly attracted interest from Dish Network and Google, but bids were far short of the reported $2 billion asking price, prompting the owners to cancel the auction that October. Bidding restarted early last month, with a $500 million offer from the Chernin Group, less than half the new $1 billion to $1.5 billion asking price.

Disney and News Corp. can’t agree on what kind of content to distribute through the service, according to reports. Disney was reportedly more willing to give streaming access to firstrun shows. Therein lay the rub: While a one-stop shop for online content would be attractive to consumers and could provide the forum and catalyst for distributors to offer nationwide TV Everywhere, the jury is still out as to whether it would be economically feasible for programmers.

Content providers make a lot of money selling TV Everywhere rights to distributors as well as selling advertising for online content on their own websites. An additional sticking point is the question of Hulu’s existing programming rights should the company change hands. Some analysts believe those rights would disappear if Disney and News Corp. were bought out.

“At the end of the day, [the question of value] is what is the condition with programming rights,” said Pivotal Research Group media analyst Brian Wieser. “Any notion of valuation is dependent on the existing content licensors keeping up some of the economics because they think that Hulu for some reason can do it better than them.”

Wieser added that Hulu could be worth “a few hundred million” dollars to a third party that wants to avoid the headache of replicating its Web presence, “but the issue is when you get to $1 billion, where valuations were being floated,” he said. “That’s seems a little excessive, because it’s hard to imagine that comparable operations couldn’t be accomplished in a cheaper way.”

BTIG Research Group media analyst Richard Greenfield, a big Hulu booster, said he believes many investors and industry executives are missing the point when they assume Hulu’s main value lies in its content rights.

“Hulu has invested significant financial resources and time in building a great user experience, which is no small feat in a world that has shifted from building one interface for the desktop PC world to now having to create for a seemingly endless array of smartphones, tablets, gaming devices and IP-connected TVs and related devices,” Greenfield wrote in a recent blog post.

TAKEAWAY

Speculation that Time Warner Cable is interested in Hulu raised yet again questions about how to value online content.

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