Hulu – Caveat emptor

Buying Hulu is fraught with risk.

• Hulu, the video site is up for sale once again but the price is unlikely to be better than the $2bn valuation at which Providence recently exited.
• Hulu has 4m customers paying $7.99 a month and generated 2012 revenues of $695m.
• As an over-the-top (OTT) provider of premium content, there is huge scope for growth of the subscriber base and of advertising revenues.
• Hence, Hulu is a great place to start for anyone wanting to become a force is delivering video / content over the internet or for a company needing to broaden its coverage of Digital Life.
• However, there is a catch: Hulu’s golden goose may soon vanish.
• Hulu has exclusive rights to transmit over the internet content from 3 out of 4 of the major US networks but how long will this last?
• Netflix has an audience of 30m implying that the networks could make a lot more money from their content on the internet if they were to make it more widely available.
• Furthermore, I suspect that a large part of the 4m subscribers are paying Hulu because they can’t get the content elsewhere.
• Should the exclusive be lost the impact on Hulu’s financials is unquantifiable.
• This is why private equity firms are to be found among the bidders and why the mooted price is not much higher.
• It seems inevitable to me that the exclusiveness will come to an end and then Hulu must stand on its own two feet.
• To do that, Hulu needs to become part of a wider Digital Life offering or to become the internet offering of one of the major broadcast networks.
• Hence, acquiring Hulu makes sense for Yahoo!, Facebook or even Microsoft at a stretch.
• These three are non-existent or weak in the provision of video content as part of Digital Life and I can see a strategic fit. 
• The other option is for Hulu to be taken by private equity, developed into a fully-fledged competitor to Netflix and then listed or sold.
• This is an incredibly risky proposition and therefore I suspect that the likes of Yahoo!, Facebook and Microsoft will be willing to pay a higher price for Hulu than private equity.
• Therefore I suspect that if Hulu is to be purchased, it will be an industry buyer that takes it.
• Yahoo!, Facebook or Microsoft would be my lead contenders to take Hulu but at what price?
• Looking at the inevitability of losing exclusive content, I would be expecting a sale price of around $1.5bn.