PARAP - Disney's Dilemma: Hulu Is Poised To Reshape The Streaming Wars Once Again

2023-07-18 08:12:07 ET

Summary

• The fate of Hulu appears to be another high stakes poker game between Disney and Comcast that is poised to alter the future landscape of the streaming wars.
• Shifting focus exclusively to Disney+ makes sense on paper, but the competitive dynamics of Hulu create a complex dilemma for Bob Iger.
• Competitors stand to benefit if the Hulu brand falls into their hands as the second tier of streaming platforms need a boost to survive.

Disclaimer: The author of this article, Nicholas Cartier, is the former head of corporate intel at Hulu and is not a current shareholder in Disney or Comcast. This article is intended to be speculative in nature based on his tenure as an executive in the streaming sector.

The Walt Disney Company ( DIS ) created a stir last week when rumors of Bob Iger's interest in selling Disney's stake in Hulu spread across the market.

Hulu will certainly go down in TV history as one of its greatest experiments, as the rise of OTT streaming managed to bring together media's fiercest rivals - Disney, FOX, NBCU, and Time Warner - under one umbrella (which created a complicated Board dynamic that at times resembled HBO's Succession).

The Mouse House's rumored divestiture of Hulu's less than profitable business makes perfect sense on paper, given branding confusion with Disney+, Hulu's lack of international presence, and Iger's desire to have full control over its content distribution and maximize profits.

Marrying the techie Hulu brand with the family oriented Disney empire always felt like a stretch, even from the get-go when Disney acquired Fox's 30% stake in Hulu. However, the question of whether or not Disney should retain (or expand) its stake in Hulu continues to boil down to competitive dynamics.

Who is willing to take over the control of Hulu?

Comcast (NYSE: CMCSA ) is the obvious buyer here given its current equity stake and its intimate knowledge of the asset through historical ties (don't forget NBCUniversal was the initial baker of Hulu ahead of Disney back in 2007). Thus, it's feasible to think Comcast would be willing to pay top dollar for the asset, ditch the "Peacock" brand, and transform Hulu into its direct-to-consumer powerhouse. All of which is great long term value for Comcast and merely a short term gain for Disney.

Next up is Paramount (NASDAQ: PARA ), which was the lone major media conglomerate left out of the Hulu joint venture. There's no doubt Paramount+ could use a boost in its library of intellectual property and Hulu's audience demographic aligns with Viacom's properties (e.g., South Park was Hulu's crown jewel for nearly a decade). Again, I believe Paramount will be willing to pay top dollar for control of Hulu and there's a scenario where Peacock (Comcast) and Paramount+ could join forces under the Hulu brand to battle Disney+, Netflix ( NFLX ), and Amazon Prime Video ( AMZN ) in the streaming wars.

Again, both scenarios above would be fueling the fire of competitors that will need a boost to survive in the hyper competitive streaming distribution arena, which would be a strategic miscue that Bob Iger can't ignore.

Alternative options for Hulu that make sense for Disney

Bundle : Stay the course! Disney has aggressively been pushing a bundle of its various SVOD properties (Hulu, Disney+, and ESPN+) for quite some time, which is working to a certain degree. However, I can't help but feel trying to market and build three separate distribution brands in conjunction places Disney at a disadvantage when compared to the streamlining of Netflix, Amazon, and now Max ( WBD ).

Spin off Hulu Live (virtual-MVPD) : Hulu currently operates two primary business models 1) SVOD and 2) Virtual-MVPD and vastly different price points. The SVOD business is an on-demand subscription plan (priced $7.99+) that overlaps with the pricing and packaging model for Disney+. Hulu Live is a digital cable package (priced $69.99+) that aggregates pay-TV networks (think live sports and live news) and resembles the traditional cable package business model.

Hulu Live provides value to Disney (the owner of ESPN and 20+ other pay-TV networks) because it's pulling young consumers back into the ultra lucrative traditional cable model, while helping Disney justify its monster affiliate rates across all MVPD distributors. It's worth noting that Hulu Live has little value to Comcast, given the company's massive investment in its own MVPD brand with Xfinity X1.

Perhaps, there's a scenario where Disney can merge Hulu's SVOD business (+ subscribers) into the "Disney+" brand and keep the Hulu brand alive exclusively as a virtual-MVPD built around live sports and news.

Shutter the Hulu brand : Call me crazy but buying out Comcast's equity stake and shuttering Hulu could make sense for Disney. There's a scenario where sunsetting the Hulu brand and taking a massive write-off in effort to prevent Hulu from falling into the hands of a competitor provides long term value for Disney's streaming operations. It's easy for the market to overemphasize the value of Hulu's brand on Wall Street because it's a household name domestically, but it's important to remember the Hulu brand shutters in comparison to Disney overseas.

Recommendations

In the unlikely scenario where either Comcast, Paramount, or both take the reign of Hulu I'd recommend a strong buy for either controlling stakeholder. I believe an acquisition of Hulu for a "tier 2" direct-to-consumer streaming will immediately elevate its distribution to "tier 1" (alongside Disney, Netflix, and Amazon) and cement the company as a long term player in the streaming ecosystem. In conjunction, I believe a deal of this nature would create a short-term bump for Disney, while diminishing the company's long term value due to increased competitive pressure. I believe Disney made too big of a bet in its $70B+ acquisition of Fox to let Hulu slip into the hands of a rival streamer.

In the scenario where Disney keeps (and ultimately expands) its controlling interest in Hulu, I see a moderate bump in long-term value if the company. Acquiring NBCU's remaining 30% stake in Hulu will be a short term "tax" Disney will have to pay to maintain its position as a market leader but I see value in combining all SVOD (Disney+, ESPN Originals, and Hulu) into the Disney+ offering and keeping the Hulu brand in tact as a live TV service (or sunsetting the Hulu brand all together). All the scenarios above, combined with Bob Iger's strategic compass should provide long term equity value to investors.

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