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16 May 2019

Comcast clears way for Hulu’s BAMTech makeover

In a move more hurried than the plot of Game of Thrones Season 8, Comcast has struck a deal to sell its 33% stake in Hulu to Disney within five years – although full operational control falls to the house of mouse effective immediately. Reading between the lines of Disney’s earnings call last week basically spelled out the imminent nature of Comcast giving up the ghost in the Hulu ownership tug of war – which we emphasized to readers while most outlets hastily disregarded the hidden caveat.

Battle lines have finally been drawn in the sand, with Disney paying at least $5.8 billion for the privilege. But while Comcast’s NBCUniversal says it will honor its Hulu licensing agreement until 2024 – despite the arrival of a rival streaming service next year – there is a catch stating NBCU can recall exclusive programming from Hulu in 2020 and all programming by 2024. It comes in the same week WarnerMedia said it plans to pull all shows from competing services once it launches later this year. All in all, this sets the scene for a bloodbath – drowning consumers as a result.

But while Faultline Online Reporter has long predicted how Disney owning Hulu outright was an inevitability, at the same time we have highlighted how Comcast might struggle to make an impact in OTT video without Hulu in its holster. That said, focusing fully on the NBCUniversal streaming service could put the cableco in good stead, and retaining relationships with Netflix rivals like Hulu is the only realistic way of challenging the top dog.

Disney doubters have all but vanished since the unveiling of plans for Disney+, brushing the sheer scale of challenges ahead under the carpet simply because Disney is Disney. Don’t get us wrong, Disney+ will be a huge success story and the rise of Hulu needs no introduction, but making money is a different story entirely. Disney suffered an operating loss increase from $188 million to $393 million in Q1, due to investments in ESPN+ and Disney+, as well as a loss from the consolidation of Hulu. In a technical sense, Disney has not exactly provided an OTT masterclass, although that changed somewhat in 2017 with the acquisition of BAMTech, which will soon form the backbone of Hulu, as revealed by CEO Bob Iger this week.

We might have to wait until Disney’s second quarter results call until the company details what the Hulu roadmap will look like without interference from Comcast and AT&T, other than its increased reliance on BAMTech infrastructure, although an international expansion effort is strongly touted, along with building on its recent advertising momentum. Hulu also used its recent Upfront presentation to showcase a “binge advertising” format in which viewers with a palate for binge viewing will be targeted with ads relevant to their situational binging tastes. Hulu claims it onboarded 3 million new subscribers from March to April, to total a user base of 28 million, of which 26.8 million are paid.

Last week, Iger implored Comcast to cooperate in order to realize the full potential of Hulu should the cableco retain its 30% holding. It may be a case of Comcast and Disney failing to see eye to eye regarding Hulu’s future, but the pace at which an agreement came to fruition suggests Comcast jumped at the opportunity to cash out – and cash out big. On the other hand, and what seems more likely, is that Disney’s hurried approach to the deal, where no cash been exchanged yet, was with an eye for its Upfront presentation on Tuesday of this week, where the deal was announced.

Comcast could have played a very clever card here. Knowing full well the rate at which Hulu’s stock has rocketed in value, stretching out a sale over a five-year period could see the 33% stake inflate above and beyond the reported $5.8 billion today (soaring from $4.3 billion one month ago). Some small print in this “put/call” agreement places a minimum future valuation of $27.5 billion on Hulu, which would value Comcast’s stake at an astronomical $9 billion, with the two companies required to execute an exchange by 2024. As part of the deal, Comcast and Disney have agreed to jointly fund Hulu’s buyback of the 9.5% stake from AT&T for $1.4 billion.

“We are now able to completely integrate Hulu into our direct-to-consumer business and leverage the full power of The Walt Disney Company’s brands and creative engines. We’re not purposely trying to do anything to damage the bundle, because it still has a lot of value. But there’s a reality that exists that we had to come to grips with, and not just come to grips with it by basically saying that it exists but by doing something about it. We’re prepared to pivot in a new direction, and we’ll see what happens,” said Iger.

“Disney is clearly succeeding in sweet talking Comcast into an agreement and we sense it won’t be long before Faultline Online Reporter’s predictions are realized,” read a statement from last week’s issue.

So, Disney – which has eternally struggled to find a leg to stand on in OTT video – has all of a sudden managed to craft three seemingly sturdy legs in the form of Disney+, ESPN+ and Hulu. We remain skeptical of Disney’s monetization efforts, but concede that its three legs will together form a formidable weapon in the fierce OTT battleground.