Just weeks after reports that Netflix was in talks with pay-TV providers like Comcast (NASDAQ:CMCS.A) to bring its service to set-top boxes, Hulu is reportedly in talks to do the same. Although I firmly believe Comcast, and other big pay-TV companies, are better off without Netflix, the idea of integrating Hulu -- a company which Comcast owns one-third of -- into its service is slightly more interesting. Still, Comcast has better options. Regardless of the outcome of either of these potential agreements, they have major implications for both consumers and Foolish investors.
The pay-TV industry is struggling to keep subscribers as streaming services, Hulu included, have begun to materially impact subscriber numbers. Last quarter, the industry lost an estimated 113,000 subscribers nationwide. Time Warner Cable (NYSE: TWC) led the way with 306,000 subscribers lost, which was partially offset by gains from telecom companies AT&T (NYSE:T) and Verizon.
So why not give people what they want? Hulu has over 4 million premium subscribers for its Hulu Plus service as of the end of the first quarter. Many of them are using the service as a supplement to their cable subscriptions. For them, Hulu Plus is a better alternative to many companies' Video on Demand, or VOD, service.
TV Everywhere, as it grows in popularity and importance, is still a fragmented industry. Most pay-TV companies rely on content owners to provide apps for its customers. This results in a less than pleasant user experience for mobile TV browsers. Hulu Plus service provides an all-in-one solution, reducing friction for VOD/TV Everywhere service.
But not Comcast
Comcast leads the industry in TV Everywhere and VOD technology and service. Its Xfinity X1 platform includes an app that allows subscribers to watch 35 channels live and tons of VOD content on demand without the need to install an app for every channel.
Partnering with Hulu or Netflix may actually detract from its service. Netflix is a competitor with Comcast's VOD platform. Putting the app directly on its set-top box would almost certainly detract from VOD viewer hours. Although Hulu is part-owned by Comcast, it too would take away from more valuable VOD revenue for Comcast if the service was integrated into subscribers' cable boxes.
The point is, Comcast's X1 platform is one of its biggest competitive advantages with streaming services. Why would it want to compromise it by allowing third-party platforms into its ecosystem?
What about licensing X1?
On its third-quarter conference call, Neil Smit, President and CEO of Comcast Cable, indicated that several MSOs are interested in licensing the X1 platform. This is an excellent opportunity for Comcast -- much better than growing Hulu.
Comcast has complete control over X1, and it can choose how it licenses it and to whom it grants access. That means competitors such as AT&T and Verizon, who are encroaching on Comcast's territory, may not have access to it, but other cable companies, desperately trying to reduce churn and cord-cutting, will.
AT&T has a strong TV Everywhere offering already. It's U-Verse app supports streaming 20 live channels while on the go and 100 channels while at home.
Moreover, AT&T is the fastest growing pay-TV provider in the country, on an absolute basis, as it aggressively expands its footprint. In the last year, AT&T added 1 million net video subscribers and expanded its U-Verse footprint to another 6 million customers by the end of 2015.
Suffice to say, AT&T is doing pretty well for itself, and is one of the biggest threats to Comcast. I wouldn't expect any sort of partnership between the two, not even bundling Hulu Plus with U-Verse.
Time Warner Cable, on the other hand, is way behind Comcast and even AT&T in technology. The company, in my opinion, needs to rethink its residential strategy in order to stop hemorrhaging customers, and that includes beefing up its TV Everywhere and VOD service. Licensing X1 technology would do it a lot of good in catching up without the huge time and cash investment.
Most importantly, Comcast has an opportunity to fully monetize its technology, and capitalize on the customer base outside of its footprint. Licensing allows it to overcome its physical limitations with minimal capital expenditures. In other words, licensing X1 provides maximum profit margin with minimal risk.
Comcast can't lose
I certainly believe Comcast is better off licensing its own X1 platform rather than integrating Hulu with some of its smaller competition. Yet, given that it doesn't control Hulu, it may find itself competing against itself if Hulu finds its way onto some companies' set-top boxes. That's a pretty enviable position. Either way, Comcast wins and makes it worthy of a closer look by Foolish investors looking to make a bet on the future on in-home entertainment.