Networks may acquire additional 10% stake in Hulu

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    Providence Equity Partners, which holds 10 percent of online video aggregator Hulu, is reportedly close to selling its stake to at least two of Hulu’s co-owners, Walt Disney and News Corp (Fox), for $200 million. A third owner, NBCUniversal, appears to be on the sidelines of this deal, given restrictions linked to Comcast’s purchase of the network last year.

    Those three networks, which not only co-own the service but also supply it with content, have overshadowed Providence, a purely financial investor in the five-year old venture. In 2010, Hulu floated and cancelled plans for an initial public offering. Last year it canceled a proposed auction sale. Rumors about disagreements among the co-owners have persisted.

    Bloomberg reporter Cristina Alesci, who co-wrote the story that broke this news, said in a follow-up interview that the impending sale raises the question about whether “these content providers (can) get on the same page.” Disney, NBCU and Fox drive significant traffic to what is essentially a catch-up TV service and share on the advertising revenue. But they strike separate deals.

    Last summer, for instance, Fox shifted away from next-day access of TV shows on Hulu and established an eight-day waiting period. Fox has also used Hulu’s inventory for “make goods,” i.e. to compensate advertisers for ratings shortfalls on broadcast television.

    Bloomberg’s Alesci wondered, on the other hand, whether Hulu’s corporate governance could improve if Providence sells. “Maybe it makes it easier for this company to set its strategy, since it doesn’t have this outlier (Providence), that isn’t really a strategic buyer,” speculated Alesci.

    A larger question about Hulu’s corporate strategy is encapsulated in the title of a recent Bernstein Research report: “Can Hulu’s Parents Afford to Let it Grow Up?” Or to paraphrase, how much and what kind of growth is affordable? The answer hinges on the extent to which Hulu “cannibalizes” TV viewing on its owners’ broadcast platforms.

    If more than 33 percent of Hulu viewing substitutes for traditional viewing, according to Bernstein Senior Analyst Todd Juenger, then Hulu is costing the networks money. But seeing less than 33 percent of Hulu viewing as “cannibalistic,” Juenger concludes that Hulu is “adding positive contributions to the networks.”

    Maintaining some control over Hulu’s growth may be motivating the networks to buy out Providence at a premium, as suggested in this LA Times story. In that case, Hulu would be valued at something less than $2 billion, the figure derived from the reported $200 million for Providence’s 10 percent equity equity stake. Providence invested $100 million in Hulu in 2007. The kind of control networks may be looking for in the long term could involve a switch toward an authentication model, as suggested in this New York Post article.

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