Hulu is our b’te noir. We can’t see it because we live in the UK, and we said that it couldn’t take off. Were we so wrong? Well it seems it’s about to file for an IPO. But do you want it in your portfolio?
Our precise wording was that it would not make it past 2008 and that was in September 2007. It’s the first major area that we have got wrong at Faultline, but actually we blame’. Huh? Hulu?
This is perhaps because the thing was born out of confusion. It was launched at a time that NBC Universal was pulling its content from iTunes, and when Viacom (although not a founder of Hulu) was suing YouTube. It was a time when big content in the US, thought it was being put upon by the big breakthrough web businesses of the time, and wanted one of its own. And it never really said what Hulu was, or wanted to become. Our logic was simple, under those conditions, and given that the respective partners all had active web sites with lots of visitors, that they would be slow to release content that they might show on their own site first, and would also be slow to sell advertising around Hulu content, when their own advertising was not sold out.
But of course Hulu is neither iTunes nor YouTube, and as such much of the confusion that was out there, still has not been resolved. At least not until the launch of Hulu Plus ‘ making it clear that the company would for the most part be a seller of content, not of adverts, and this is the first time that its plan has been visible, or at least its first business plan, has been visible, since many internet companies have more than one business plan in their lifetimes.
We’re pretty sure that this decision was never envisaged when Hulu was formed. It was formed as an act of defiance. Instead it was brought about by the rising tide of OTT (Over The Top) streamed video, which has become more and more popular as it has become more and more possible to deliver it with anything approaching TV quality. This has been led by the arrival of a variety of adaptive streaming improvements, all which have become commodity over the past four years, which in turn has led to more and more devices coming onto the market which can receive internet broadcasts and VoD files as streams. Netflix alone has been responsible for something like 20 devices being able to take streams over the internet and show them on a TV, each of the top five US TV manufacturers have made devices which will absorb content over the internet, using widgets and an Ethernet or WiFi connection from the router, and of course Intel and Yahoo! in 2008 launched their alliance around Yahoo! widgets which triggered that whole new way of thinking for TVs which can run apps.
Once you have all that under the industry’s belt, then a paid Hulu always had a chance to transition free to air content into paid catch up internet content ‘ but we’re pretty sure from early leaks from Hulu about how many adverts it would need to have in each program in order to become profitable, that this was never the plan at the beginning.
That being so, is it an IPO made in heaven and will it (or perhaps should it) fly?
Well in July, when Hulu Plus was announced we described it as the ‘War for Middle Earth’ taking the expression out of the Lord of the Rings (which we’re sure will one day be on Hulu for VoD viewing) and as such, do you really want to invest in a war. Well we would imagine that Hulu, post the Hulu Plus announcement, will one day make money, but that day will be a long ways off, with many battles to win.
The risks are simple and take in anti-trust concerns, competition with parent companies, conflicting and argumentative shareholders and a series of rival services, including both iTunes and Netflix.
The first is that this large amount of content cannot only be offered on these terms to a unit owned by those studios (this now includes content from Disney since it bought part ownership later in Hulu’s life). Disney, Fox and NBC would immediately hit a solid anti-trust dispute if they collectively tried to do that. So they must offer similar terms to rivals of Hulu and that could mean Google, Apple and Netflix. Another risk is just how will advertising which is shown on Hulu split in revenue terms. Will it be like pay TV ‘ where the same adverts are mostly carried in the new medium and the TV network (owner) keeps most of the advertising revenue. This then results in making the buying the content cheaper for Hulu. If this is the case it gives less opportunity to Hulu. What might be a good thing is that once Hulu can command a premium for its advertising, it could take over sales and retain the premium, or have the option to do so, as some TV affiliates do. That kind of detail will not be out until the IPO paperwork is filed, and maybe it won’t be explicit and public even then.
Another major risk is that pay TV survives the pending investigation into the fairness of TV Everywhere strategies, where paid content can be obtained VoD over the internet for free to existing pay TV subscribers. If so perhaps Hulu will end up broken on the vast high quality content block controlled by cable, IPTV and DTH, suddenly available over the internet.
Consumers may perceive that cable based TV Everywhere policies mean the content is free (as long as they keep paying their old cable bill) whereas Hulu Plus may take off, but only if people pay for content which was traditionally free and use it to replace cable. That strategy has not really worked elsewhere in content unless you count iTunes. Certainly in Europe the equivalents of Hulu, far more advanced right now, are paid for entirely out of advertising revenues, still under the control of the broadcasters. The only separate organizations here are those which manage the technology obstacles, such as Canvas in the UK.
But of course the US is a law unto itself, and is the most advanced market for pay TV penetration, by an order of magnitude, so perhaps a pay TV service CAN come from free to air content.
So if Hulu is an investment it’s not so solid an investment as content companies per se, and therefore in the verbiage of investors, it’s not for widows and orphans.
The good side of such an IPO is that the management of Hulu will get a free hand, one that is not overly directed by shareholder interests. Given that NBC will soon be controlled by the management team at Comcast, and that Comcast very much has its foot in a different camp (TV Everywhere) it may well wish to either a) Sabotage Hulu or b) cut it loose or worse still c) deprive it of NBC content. Those kinds of shareholder conflicts will make a public Hulu a steadier ship than if it answers directly to just three shareholders on a daily basis.
In fact getting down to brass tacks, surely the IPO is a way for NBC to get out of Hulu. It is Comcast’s way of saying ‘Cut it loose and we can own a bunch of stock, but have nothing more to do with it,’ which would make the FCC happier with the NBC takeover anyway, while Fox and Disney are perhaps saying, ‘Let’s give the management team its head and enough money to see the project through, before Comcast interferes with it.’ And that, as far as we can see, is perhaps not the most enterprising set of reasons for an IPO.
Bottom line is that Hulu programming is popular and that investors will see this, and that should allow it to reach a decently priced IPO, and perhaps achieve the $2 billion valuation that the New York Times reported it hopes for. But long term success is not assured and will be eked out in its day by day strategy and that depends upon the quality of its management (in this case CEO Jason Kilar, a former Amazon executive) like so many other investments, but also on the willingness going forwards, of its shareholders to continue to grant it content rights and that’s outside the management’s control. We’d say that it is about as certain an investment as YouTube has turned out for Google. Remember Google paid $1.65 billion a few years ago for YouTube and has yet to make a cent from the deal and still has a $1 billion lawsuit hanging over YouTube.
Will investment banks see this as an exciting IPO adventure? We suspect so, despite a weak IPO market. It took revenue of $100 million last year and is on track for $200 million this year. However a softness in its viewing figures was highlighted by Comscore which says that viewing numbers have fallen to 24 million in June from 43.5 million in May, although that may have been more down to a change in Comscore’s methodology than any real viewing drop off.