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July 12, 2013

There Has to Be a Pony in Here Somewhere

By Gary Kim, Contributing Editor

There’s a story about a stable boy, mucking out stalls and whooping and hollering. When asked why he was so happy, the stable boy replied, “With all this manure in here, there has to be a pony somewhere!”

And maybe, in the end, that is what the owners of Hulu decided, after shopping the asset, with interest from multiple potential buyers, including AT&T, DirecTV (News - Alert) and a bid by Guggenheim Digital Media and private-equity firm KKR.

The three owners—21st Century Fox, NBCUniversal and The Walt Disney Company—decided not to sell, and instead will make a cash infusion of $750 million in Hulu (News - Alert).

Hulu launched its premium subscription service, Hulu Plus, in 2010, which has now surpassed four million subscribers after more than doubling in 2012. Hulu achieved record revenues of $690 million that same year.

But the subscription service is not yet profitable, and the ad-supported service, though profitable, isn’t growing very fast. Also, Disney (News - Alert) has favored an ad-supported approach, while 21st Century Fox has preferred a subscription model.

Whether those differences have been reconciled is not yet clear. But the scuttled auction is the second attempted sale in the last couple of years. Each time, after shopping Hulu, the owners decided to keep the asset.

It is unclear whether rights issues played a role in bidder valuations of Hulu, in the current sale effort or the attempted sale two years ago.

Hulu ownership might not convey extended content rights some potential buyers would have preferred, such as release windows. Disney, for example, pointed out that any new owner would lose release windows now offered on Hulu.

For example, Hulu now functions for many viewers as a digital video recorder service, offering next-day viewing of new TV series episodes that aired 24 hours ago. Those rights would not be available to any new owners, Disney has said.

Another possible complication is that Hulu owners might not have wanted an existing major video distributor (DirecTV, for example) to gain control.

Obviously, content owners benefit if a new buyer is created by the sale, much as content owners benefit when first satellite and now telcos buy programming for their rival video services.

Perhaps the Hulu ownership structure is essentially unworkable long term. Despite those hassles, Hulu's owners may believe there must be a pony in there somewhere.

Edited by Alisen Downey
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