Here's why the deal is in the works and what it might mean for AT&T and -- perhaps more importantly -- Disney.
How we got here
Hulu began as a joint venture aimed at competing with Netflix (NASDAQ: NFLX) while providing a streaming home for content created by the studios owned by Hulu's founders, which included Disney. Hulu had certain advantages over Netflix, like the fact that subscribers could view episodes of shows from seasons in progress (Netflix tends to release whole seasons at once after they've completed the year's run).
Until recently, three companies -- Disney, Comcast (NASDAQ: CMCSA), and Twenty-First Century Fox -- each had a 30% stake in Hulu, and one company -- WarnerMedia -- had the last 10%. Then WarnerMedia got gobbled up by AT&T, and Disney acquired the vast majority of Twenty-First Century Fox in a huge merger deal. So Hulu is now under majority control by Disney regardless of whether the Disney-AT&T deal under discussion goes through.
Meanwhile, Netflix's original content strategy has taken the studio-streaming integration concept -- arguably pioneered by Hulu, since it was owned by content-producing studios -- to a whole new level. Netflix has been very aggressive about creating its own content in its own studios for its own streaming services, and other companies are following suit. As Netflix focuses more on its own studios, companies with studios are focusing on creating new streaming services, and those companies include Disney and AT&T.
Where AT&T stands
For AT&T, the decision to get out of Hulu might be a pretty easy one. AT&T wouldn't want to give the content that it owns through WarnerMedia to a streaming service that it has a mere 10% stake in. And it has a better option: its own planned WarnerMedia streaming service, which is slated to debut in 2019.
If AT&T wants out, Disney seems like the only logical buyer since Comcast is starting a streaming service, too -- albeit a less ambitious one than its peers are working on -- and could be planning a Hulu exit strategy of its own, though CEO Steve Burke has said it is not. It's easy to imagine Disney owning 100% of Hulu someday soon.
Where Disney stands
Thanks to its purchase of Twenty-First Century Fox assets, Disney will control the future of Hulu. It makes sense that Disney would want to wholly own its streaming services, because that kind of integration between streaming services and studios allows for lower expenses and higher profits. But Disney's Twenty-First Century Fox deal was done largely to set the stage for a different streaming service, Disney+.
With its combined catalog of Disney and Fox studio holdings, Disney has a lot of content to get Disney+ started off right. But the Fox-Disney deal has also effectively given Disney Hulu, and having two streaming services is not exactly efficient. It seems like Disney will want to push its biggest and best hits to Disney+, and it's not as if many other studios will be eager to help Disney shore up Hulu's content supply.
But Disney seems determined to try to make the two work together, and it is trying to position Hulu as a service for adults, while Disney+ aims at a younger demographic. Whether that works out remains to be seen. Hulu does have a live TV streaming service, which Disney+ will apparently not; but that live TV streaming service has a relatively low number of subscribers.
Hulu's future and Disney's dilemma
It's easy to see the logic for both parties here -- everyone wants to own the whole studio-to-home-streaming supply chain in order to keep their operations as efficient as possible. What will be interesting to see is how Disney juggles its extra streaming service. If Disney+ is a smash hit, balancing its portfolio may not matter. But if efficiency is the name of the game, it's fair to wonder how Disney might try to repurpose Hulu. At least Disney won't have to worry about anyone else using Hulu's infrastructure to compete with Disney+; Disney will be doing that to itself.