Hulu deal would broadcast mixed signal

November 13, 2015

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Adding Time Warner as a Hulu owner would broadcast the promise and pitfalls of the U.S. video-streaming service. It’s already backed by Comcast, Walt Disney and Twenty-First Century Fox. The ownership structure warrants a discount.

Hulu has been growing rapidly since a botched attempt to sell four years ago for some $2 billion. Earlier this year, Hulu said 9 million people were paying $8 a month to watch TV shows like “Empire,” “Seinfeld” and “South Park.” An ad-free option for $12 was started in September.

That means Hulu could have some 10 million subscribers by year’s end, assuming it grows twice as fast as rival Netflix, which counts 43 million U.S. subscribers. That suggests Hulu is generating about $1 billion of sales from customers.

Unlike Netflix, however, Hulu has a second revenue source. Advertising probably accounts for about 60 percent of its top line, Barclays estimates. If that’s the case, it would amount to another $1.4 billion, bringing Hulu’s total revenue to about $2.4 billion.

By comparison, Netflix is on track to generate $6.8 billion in sales this year, according to Thomson Reuters data. That means the $47 billion company led by Reed Hastings trades at 6.9 times 2015 revenue. At that multiple, Hulu would be worth almost $17 billion.

Time Warner’s acquisition of a one-quarter stake would value Hulu at only about $5 billion, according to the Wall Street Journal. The yawning valuation gap could be explained by many reasons, including the scale and global reach at Netflix. Another big reason, though, is probably the multiple stakeholders.

Hulu’s relationship with its parent companies has been tense. Comcast’s voice is stymied because of an agreement it struck with regulators when it bought NBC Universal. Dissension among the owners led to the abrupt departure of its highly regarded chief executive a few years ago. Twice, Hulu has been put on the block.

Joint ventures by their nature are hard to get right. Divergent views about how to adapt to rapidly changing TV-watching habits makes this one even harder. Time Warner’s desire to join the party speaks to the strength of the paid-streaming business model, but also complicates the chances of Hulu’s success.

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