Last month, DirecTV (DTV +0.00%) placed a final bid for the streaming service Hulu. The bid was one of three final offers given to the company by interested parties. DirecTV reportedly offered over $1 billion to Hulu, and was widely considered the frontrunner to purchase Hulu, but at the last moment Hulu opted to remain a private company. Since the announcement DirecTV is down 10%. Why? Because DirecTV needs Hulu.
TV's change
Baseball may come close, but watching TV is still America's favorite past time. On average, a person will watch nearly 5 hours of television per day, yet increasingly, Americans are watching on different platforms. According to Nielsen, an analytics company, Americans aged 12-34 are spending less time in front of the TV than those 35 and older. This is bad news for all cable providers, but especially for DirecTV.
In recent years, DirecTV's top competitors have diversified their businesses. Comcast began offering its Xfinity brand featuring residential telephone, Internet, and home security. Today this business has grown to account for nearly 40% of its revenue. Likewise, competitor Time Warner Cable (NYSE: TWC) began offering additional services. Its home phone division is the 5th largest landline provider in the U.S, and its Road Runner Internet service provides 8.7 million subscribers with web access. The once-exclusively cable company now makes nearly half its revenue from these services. Many companies have expanded their businesses, and with their growth, higher revenues should follow.
While other cable providers were busy diversifying their services, DirecTV focused on its core business: television. Offering new exclusive shows and content, in 2005 DirecTV rolled out the crown jewel of its private offerings: NFL Sunday Ticket. Today, 2 million of its subscribers use the service. Focusing on its home television watchers has paid off so far, but demographic changes are slowly taking place. Last quarter, DirecTV lost 84,000 subscribers. Analysts expect its market share of the home television market to remain around 19%, but the size of this market is slowly receding. DirecTV needs to respond to the demographic change in order to survive. How can they do it? Just ask Best Buy.
DirecTV's Best Buy
Last year, Best Buy (BBY +2.48%) faced a similar demographic dilemma. As younger generations looked to buy electronics, they realized they could purchase them more cheaply online. Sales fell dramatically, and the company began hemorrhaging cash. In order to refocus, CEO Hubert Joly enacted the "renew blue" initiative. The company began to cut costs, match lower prices, and offer competitive deals on its redesigned website. The results speak for themselves: net income has grown from $12 million a year ago to $266 million this quarter, a 2000% increase.
Best Buy saw where customers were going, and went there with them. It's abundantly clear to DirecTV that customers are moving to mobile devices and tablets. Hulu could have made this transition a breeze.
The better buy
Hulu is one of the "big three" online video streaming companies. Dwarfed by Netflix and Amazon, Hulu's 3 million paying subscribers may seem small in number, but they translate into a growing $700 million in revenues. More importantly, Hulu is accessible on more than 40 devices, including Android phones, iPad minis, and even the WiiU. If it has a screen, there's a good chance you can watch one of Hulu's thousands of TV shows, movies, and behind-the-scenes features on it.
Hulu sounds like a match made in heaven for DirecTV, but since the company rejected DirecTV's bid in July, its options going forward appear limited. DirecTV could attempt to purchase another online video streaming company, but it would quickly find that no suitable alternatives exist. My recommendation: place another bid for Hulu, and not just any bid. A bid so large, it won't be turned it down a second time.
The company's previous bid was not enough to persuade ownership. A higher bid is in order, and with $2.3 billion in cash, as well as record low interest rates, DirecTV has ample funds at its disposal. In an industry that is rapidly evolving, the acquisition of Hulu is a necessity. One DirecTV can't afford to miss.
The final cut
Younger consumers are moving away from in-home televisions. DirecTV's competitors have diversified into other income streams and can rely on them as the market for in-home cable slowly declines. DirecTV needs Hulu to align itself with the growing demographic change. It can absorb Hulu's paying subscribers, as well as leverage its streaming network to better distribute its channels. DirecTV may be able to acquire a smaller streaming service at a lower cost, but there's little doubt that Hulu was, and still is, DirecTV's best buy.
