Hulu, the streaming media company owned by Walt Disney (NYSE:DIS), Twenty-First Century Fox (NASDAQ:FOX), and Comcast (NASDAQ:CMCSA), has exactly one thing going for it: the ability to offer some network shows not long after they air on broadcast television.
Unlike rival Netflix (NASDAQ:NFLX), Hulu has not scored major hits with its original programming. The closest it can even claim to a hit original is The Mindy Project, a show it picked up after it was canceled by FOX. So even though it has a bunch of its own shows, the main draw for Hulu is that it offers programming from its owners on a same-season basis, often released just days (or even as little as a day) after they first air.
That service makes Hulu a must-have for cord-cutters and people who don't have a DVR. It's a differentiator that brings people to the brand when otherwise, Netflix, with its deep slate of original shows and movies, would be the clear winner in the space. Offering network shows in a same-season, timely fashion makes Hulu a player, but it also might make it easier for users to justify cutting the cord. That's why potential new partner Time Warner (NYSE:TWX.DL) wants the company to end the practice.
What does TWX want?
Time Warner, which owns HBO, TBS, and TNT, among other cable holdings, has been negotiating to take a 25% stake in Hulu, but has said it wants the service to stop offering same-season episodes of shows because it believes it encourages cord-cutting, The Wall Street Journal [subscription required] reported. It's a tricky dilemma for Hulu, because while it's a near certainty that TWX is correct, dropping it would eliminate the main reason most people sign up for Hulu.
"If everybody in the industry is worried about Netflix driving cord-cutting, shouldn't they be just as worried about Hulu?" Nomura Securities analyst Anthony DiClemente told the Journal, pointing out that Hulu offers many shows a day after they air.
This is not a new issue for Hulu. The agreement between its partners originally required that all shows that are network-owned, with limited exceptions, be made available to the streaming service on a same-season basis. That agreement is currently operating on a short-term exception, and it's clear that all of the players involved are considering how to make Hulu attractive without actively encouraging cord-cutting.
Does Hulu Need TWX?
Hulu and Time Warner are only talking and while the same-season content issue is a big one, it's not definitely a deal-breaker to the potential deal in whichTime Warner Cable would take a 25% stake in the streaming service at a value of about $5 billion, according to The Journal. This is a potential agreement where neither side needs it to happen, but both would benefit if it does.
In both cases, it comes down to cost certainty. One of the key advantages Hulu has is that its partners provide a lot of its content. That keeps it out of bidding wars, gives it an edge over Netflix, which must either create or license programming, and guarantees a steady-stream of well-known shows.
That's a two-way street for Comcast, Disney, and Fox as well, because it guarantees a streaming home for their shows as well as the associated licensing fees. Yes, a big hit might lose out because it could charge more in a competitive situation, but that is balanced by every program having a beyond-network streaming run.
Were Time Warner to become a partner, it would have the same advantage for shows from its vast cable portfolio. That may not be needed for its bigger hits, but lesser TNT and TBS fare would almost certainly benefit from a second life on Hulu -- especially because streaming, like syndication, sometimes boosts interest in first-run episodes of shows.
In addition, while Hulu does not exactly need the money, its partners have always shown a reluctance to spend more money on the project. TWX's investment could help meet some of the company's programming costs while also lessening its need for new content.
It's what Hulu is
There are some technology-driven ways to change Hulu, like only offering same-season shows to people with valid cable subscriptions, but that adds a layer of consumer confusion. The streaming service offers a product that takes the sting out of cutting the cord, and that's its prime value. Remove that, and more people might keep cable, or they might just opt for Netflix -- leaving the Hulu partners with none of the pie instead of a small piece.
This isn't a new problem for Hulu, nor should it be a surprising one. The company had to know that offering network content on a streaming service right after it airs would be a good enough solution for people looking to drop pay TV.
Of the three companies, Comcast is likely the most dependent upon cable subscribers as it's the leading cable company in the country. Disney benefits from there being more homes wired with cable, but its portfolio, which includes ESPN and The Disney Channel, is distinctive enough that it might ultimately thrive in a world where more people opt for a la carte options or cutting the cord. Fox is in a position closer to Comcast because while it does own some popular channels, none of them approach the popularity of the Disney portfolio, so it might suffer if cord-cutting expands.
Until Hulu either builds up its originals, or creates a library so impressive people simply have to have it (likely an impossible task), the service has to keep doing what it's doing. That might make the company an unattractive partner for Time Warner, but currently, it's the only thing that keeps the streaming service viable. It's hard to imagine Time Warner would want to spend around $1.25 billion for 25% of Hulu only to cripple it, but that's exactly what would happen if the streaming service lost this content.