Hulu is planning to launch an over-the-top streaming television service in the first half of next year, and it just brought on one of the most important partners in the cable industry. Time Warner (NYSE:TWX.DL) disclosed that it purchased a 10% stake in the streaming video service with the release of its second quarter earnings results. Time Warner will join Walt Disney (NYSE:DIS), Twenty-First Century Fox (NASDAQ:FOXA), and Comcast's (NASDAQ:CMCSA) NBCUniversal as a minority owner without a board seat.
As part of the deal, Turner's portfolio of cable networks will be available for live streaming and on-demand via Hulu's upcoming streaming service. However, the agreement doesn't include any additional on-demand streaming rights for Hulu's on-demand-only service that currently has 12 million subscribers.
The addition of Time Warner makes Hulu a formidable force as it looks to launch its offering, which will compete with DISH Network's Sling TV and Sony's PlayStation Vue, among others.
The owners' interests
Time Warner has been quick to adopt new digital services like Sling TV and PlayStation Vue. Disney has noted that getting ESPN into more skinny bundles is a key part of its strategy to help turn around subscriber losses at the all-important network. Fox recently struck a deal with Sling to position its networks in its expanded multistream package.
With more than two-thirds of ownership aligned on their goals to expand viewership through these digital deals, Hulu should have an easy time negotiating affiliate agreements with three of the biggest cable companies.
With its allegiances to parent company/cable giant Comcast, NBCUniversal is the odd one out. But when Comcast purchased NBCUniversal, it agreed to become a silent partner in Hulu per the orders of the Justice Department. That gives Hulu an easier path forward to launch its new OTT service, but NBCUniversal may be more difficult to negotiate with.
Nonetheless, Hulu stands to benefit from its relationship with its stakeholders.
Maximizing revenue with Hulu
It's unlikely Hulu's pricing will vary drastically from what we've seen from PlayStation Vue and Sling TV. The media companies that own it all have an interest in preserving their relationships with existing distributors and continuing to expand distribution with other potential offerings in the future.
But Hulu may benefit from additional perks included in its agreements, including more on-demand content. There are a couple reasons for that. First, it gives the media company owners leverage to get more traditional distributors to pay up for full-season stacking, increasing affiliate fees. Second, with more serialized dramas (and comedies, for that matter), the ability to catch up on a new show will likely produce an increase in live viewing.
And live viewing on Hulu may be more valuable than live viewing on traditional TV. Hulu ads have the benefit of better targeting. Hulu's 12 million subscribers and millions more free viewers often explicitly tell Hulu if an ad is relevant to them. Time Warner is trying to mimic the effectiveness of digital advertisements for its traditional broadcasts, and it's even taken to slashing the total number of ads shown during some of its primetime programming. Those efforts will only be magnified if viewing shifts to Hulu's upcoming streaming service.
Hulu should benefit from access to on-demand content that its current competitors like Sling and Vue don't have access to, making it more appealing as a cable alternative. Meanwhile, its owners benefit from being able to ask traditional distributors to take on more content and higher carriage fees. That's a win-win for Hulu and the content owners.
Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Time Warner and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.