What Is Hulu Really Worth?

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Hulu is on the block again, as its corporate parents (and content partners) are taking bids for the streaming video site. According to multiple reports, there are now seven bidders for Hulu, including pay TV operators DirecTV and Time Warner Cable; private equity firms KKR, Guggenheim Digital, The Chernin Group, and Silverlake Partners (along with talent agency William Morris Endeavor); and, coming in at the last minute is media-tech company Yahoo.

This, of course, isn’t the first time that Hulu’s owners have looked for a new owner. A couple of years ago, Hulu parents News Corp and Disney — along with then-investor Providence Equity Partners — took bids for the streaming video site. (NBC Universal, which also owns a stake in Hulu, doesn’t have a say due to regulatory concessions Comcast agreed to back when it took a majority stake in NBCU.)

Back in 2011, Hulu attracted interest from companies like Dish, Amazon, Google, and, of course, Yahoo — with most bids reportedly in the range of around $1.5 billion to $2 billion. Google reportedly bid a lot more, but it was looking for major assurances in terms of Hulu’s content licenses, something that News Corp and Disney were unwilling to give.

Back then, there were serious questions around what Hulu’s bidders were actually getting for all that cash. That’s one of the reasons that they couldn’t find a satisfactory fit, and why ultimately they decided to take Hulu off the block. But many of those same questions remain, and are even more problematic as another round of bids go forward.

Rights issues

One of the biggest questions that any bidder will face as it considers buying Hulu is what content rights the company will have and for how long. Since its founding, Hulu has famously had exclusive access to content from three of the four major broadcast networks. But it’s become increasingly clear that exclusivity is probably not in the best interests of Fox, ABC, or NBC.

At the end of the day, Hulu generates a fairly small amount of incremental revenue for the networks, compared to the amount that they make from advertising on TV. And making Hulu the exclusive home of broadcast TV online is likely costing the networks additional incremental money that they could be making if those rights were freed up for bids from competing services such as Netflix, Amazon Prime Instant Video, or even YouTube.

The new owners, of course, will likely want as much exclusive content for as long as possible. But the content owners themselves will want maximum flexibility in being able to license that same content to other services. This will be the biggest sticking point as the two sides sit down to discuss bids.

The Hulu Brain Drain

At the same time that Hulu is going up for sale, many of the people who made Hulu what it is are looking to check out. Longtime Hulu CEO Jason Kilar left earlier this year, along with CTO Richard Tom. Lately we’ve heard other high-ranking personnel have left as well — such as VP of Product Robert Wong, who recently joined SideCar.

Those departures are partly a result of the liquidity event triggered by Providence Equity Partners selling its stake in Hulu last fall. As a result, all employees with shares in the company also received payouts… Meaning that they’re just employees now, no longer shareholders.

And, just as there are departures at any company that’s acquired or has an IPO once shares are no longer locked up, you’re going to see even more Hulu employees thinking about what comes next and joining new companies. That process is likely to be accelerated by the burgeoning L.A. startup scene, where seemingly everyone is looking for talented engineers.

Hulu’s real value

The recent sale of Providence’s stake valued the company at around $2 billion — about double what it was when the company was formed several years ago. The company did almost $700 million in revenues in 2012, and now has more than 4 million Hulu Plus subscribers paying to watch its content online and on a wide range of devices.

But as noted above, Hulu’s real value all comes down to what rights the new owners will have. A good portion of its viewers pay to watch because Hulu is the only place where they can stream broadcast content online or on a mobile device or connected TV. And they might not pay if they can find their favorite shows elsewhere.

It’s telling that former News Corp President Peter Chernin reportedly offered $500 million for the site earlier this year. That might seem like a lowball offer, especially in light of the bids put forth just two years ago, and considering Hulu’s implied valuation after Providence’s stake was bought out.

It’s also telling that the majority of those in the running for Hulu this time around are private equity firms, which typically make investments in undervalued assets, rather than media or technology companies that see major strategic value in owning the online rights to broadcast shows.

It might look like the bidding for Hulu is “heating up,” just based on the number of possible acquirers. At the same time, it seems unlikely that whomever Hulu’s parents sell to will do better than the $2 billion it was offered two years ago. With ever more uncertainty around Hulu’s talent and content, any buyer will face a number of challenges in making that money back.