September 29, 2022

Banners are seen at the 2019 Hulu Reception for Deadline Contestants at the Paramount Theater at Paramount Studios Lot on April 7, 2019 in Hollywood, California.

Rachel Murray | Getty Images

Disney has a hulu problem.

In 2019, the entertainment giant entered into an unusual agreement with Comcast. Two months ago, Disney acquired Fox’s 33% stake in Hulu as part of a $71 billion acquisition, giving it a majority stake in the streaming service.

That put Comcast CEO Brian Roberts in a strange position. Comcast owns the other 33% of Hulu. Roberts believed that Hulu’s value would increase as the world shifted to video streaming, but he didn’t want or needed to own a passive stake.

Roberts and then-Disney CEO Bob Iger make a deal to temporarily save Disney billions after bragging about Fox while assuming operational control of Hulu. Comcast has agreed to keep its stake in Hulu until January 2024. After that, Comcast could force Disney to buy 33% of Hulu at a total valuation of at least $27.5 billion. Price could be higher based on Hulu’s fair market value in 2024 as determined by an independent third party.

At the time, Disney+ was being built. It will launch eight months later, in November 2019. Hulu looked like a very strategic asset as millions of Americans scrapped cable TV in favor of free and subscription streaming services.

Fast forward three years, reason to exist and the future Hulu is not clear to investors, analysts, media executives, and even Disney employees. Disney+ has become the live streaming offering for Disney subscriptions, with 138 million global subscribers as of April 2. Hulu is US only, with just over 41 million subscribers.

Disney is in trouble to pay billions of dollars for an asset that now looks like an embarrassing fit. There is little evidence of investor interest in Hulu’s quarterly results. In fact, the better Hulu performs, the more Disney will have to pay Comcast to buy the rest in 2024.

“Disney has never announced what its strategy for Hulu is,” said John Miller, who served on Hulu’s board of directors from 2009 to 2012. Is it a distributor of other products? SVOD [subscription video on demand] Services. Disney already has Disney+. Wall Street wants to know, “How many chips can you successfully afford on a board at any one time?”

This dynamic has led executives at both Disney and Comcast to at least evaluate alternatives. Roberts and Disney CEO Bob Chuckle attend the annual media conference in Sun Valley this week. The two executives haven’t spoken in about six months, according to a person familiar with the matter. But the conference, famous for its big media transaction discussions, could be a place for renewed conversations.

Lightshed media analyst Rich Greenfield floated the idea that Comcast could buy Hulu from Disney instead of the other way around.

“We see no reason why Disney+ could not be a large-scale entertainment service,” Greenfield Written in a note to clients. “Parental controls are now in place to prevent children from accessing more mature content. This raises the multibillion-dollar question of why Disney would even want to own Hulu?”

The strange saga of Hulu

Perhaps the most important strategic goal for Hulu is to support Disney+ subscriptions. It does this by being part of Disney package. Disney+ is Disney’s family and kids service, Hulu is its broad, Netflix-like shows, and ESPN+ is its sports service. Disney markets and sells all three together for $13.99 a month, which helps boost Disney+ subscribers and ease the turmoil.

Otherwise, Disney’s Hulu fit is sloppy. Hulu with Disney+ cannot be marketed globally because it is not an international product. Like Disney+, Hulu also has kids shows – Thousands of licensed watches movies, series, original programs, Like a reboot of the old Warner Bros. animated series. “Animaniacs. “Hulu serves as the home of ‘non-Disney’ content. This may be easy to understand for Disney executives deciding what appears on Disney+ versus Hulu, but it’s not necessarily direct to customers.

Adding to the confusion, Disney appears to be pushing the boundaries of the Disney+ audience, adding the popular reality competition show “Dancing with the Stars.” to its main service instead of Hulu. But not all family-friendly reality competitions are available on Disney+. “MasterChef Junior” by Chef Gordon Ramsay, for example, is only available on Hulu.

The four remaining pairs will dance this season and compete in the last two rounds of dances at the end of the live season where one of them will win the prestigious Mirrorball Trophy.

Eric McCandless | Disney general entertainment content | Getty Images

Hulu is also about to lose a significant portion of its popular programming to Comcast Removes TV shows for the current season, such as “Saturday Night Live” and “The Voice” later this year. Comcast puts programming on its flagship streaming service, Peacock.

Besides programming challenges, Hulu with Live TV is a completely separate product that combines Hulu subscription video on-demand with a range of digital cable networks for $69.99 per month. This show has more than 3 million subscribers and includes live sports and programming on linear networks.

Hulu’s messy positioning within Disney is largely due to the fact that it wasn’t meant to be a Disney-only service. It was launched in 2008, with the support of NBCUniversal, which was still owned by General Electric at the time, and News Corp., which owned Fox. A year later, Disney acquired a stake.

In its infancy, Hulu was a free, ad-supported streaming service, primarily used as a means of watching episodes of broadcast TV shows. By 2016, Hulu . had Completely converted to a paid subscription, with ad pricing tiers and no ads. This shift coincided with huge money licensing deals for both movies and TV series, such as “Seinfeld,” and the move to original programming. Also that year, Comcast, which then acquired NBCUniversal from GE, Disney, and Fox, sold just over 3% of Hulu to Time Warner, increasing programming to Hulu.

In 2017, Hulu’s The Handmaid’s Tale First streaming show For a Primetime Emmy Award for Outstanding Drama Series.

Hulu’s role in the broadcast wars

When Disney acquired most of Fox in 2019, Disney became Hulu’s largest owner. Time Warner agreed to sell its stake in Hulu to Disney and Comcast, giving 66% of control to Disney and 33% to Comcast.

That same year, global media companies began shifting their business models to focus on video streaming. Instead of relying on Hulu, Disney launched Disney+. Comcast Peacock was unveiled in July 2020 after a three-month trial run.

Giving users access to nearly every Disney movie ever made at just $6.99 a month, Disney+ was an instant hit, Over 10 million subscribers in the first 24 hours. By the end of 2020, Disney had bumped its 2024 forecast for Disney+ to 230 million to 260 million global subscribers. Every quarter for the past two and a half years, Disney’s stock has moved significantly or lowered based on the number of subscriber additions the company reports.

Comcast CEO Brian Roberts arrives at the Allen & Company Sun Valley Conference on July 06, 2021 in Sun Valley, Idaho.

Kevin Deitch | Getty Images

Chapek has just signed a new contract with Disney to stay on as CEO until 2025. He will be judged based on whether Disney achieves its 2024 Disney+ goal. It’s safe to say that it won’t be judged based on the total number of Hulu subscribers.

As Hulu has become a metaphorical aperitif for Disney+, it has also seen leadership changes. Randy Freer served as Hulu’s CEO from 2017 to 2020. In February 2020, Kelly Campbell replaced Freer as Hulu’s president. Less than two years later, Campbell left Hulu for Peacock.

However, Hulu has doubled its total subscribers since 2018. The streaming service continues to produce critically acclaimed series, including “Pen15,“”Dopesick” and “The Dropout”.

“The irony with Hulu is that if they fail to program, it will be easier to solve this problem,” said Miller, a former Hulu board member.

Hulu’s future

Hulu has held the brand in high esteem for its 15 years of existence, especially compared to competitors who have largely been around for three years or less. It has a built-in ad business that will earn $2.7 billion this year, according to MoffettNathanson — more than any other streaming service.

Disney executives viewed Hulu as a way to keep Disney+’s value proposition clear. Some saw in Disney Netflix’s recent struggles as evidence that the world’s largest streaming platform is offering too much content at too high a price — a similar problem to what prompted millions to cancel cable TV, according to people familiar with the matter. If Hulu is integrated into Disney+, then when Disney inevitably raises the price, some executives have expressed concern that users will see Disney+ as a bloated product rather than a relatively inexpensive niche offering.

One of Chapek’s tasks at Disney is to make the company’s different divisions swim in the same direction. Part of that goal appears to be increasing Hulu’s integration with Disney+, especially as Disney prepares to launch ad-supported Disney+ later this year. Disney deploys Disney Streaming Services (formerly Bamtech) across all its streaming properties to better standardize technology. There are clear synergies to saving money from selling ads on Disney+ and Hulu with the same sales staff using a unified technology suite.

But if Hulu becomes just a piece within Disney+, similar to HBO within HBO Max, it’s fair to question the service’s long-term value. As Greenfield pointed out, Disney is already able to set parental controls around adult-themed content on Disney+.

That’s why Comcast makes more sense as the eventual owner of Hulu, Miller said.

“Disney has built one of the best global streaming platforms into Disney+,” Miller said. “Hulu could be Comcast’s answer.”

If Comcast acquires Hulu, it could use Peacock as a free ad-supported platform, similar to how Paramount Global paired Pluto with Paramount+, Miller said. Comcast can then transfer premium content spending to Hulu while also building it as an aggregate distribution platform.

“Hulu’s third-party distribution business is a better fit for Comcast,” Miller said. While Comcast has sold cable TV for decades, Disney is not inherently a distributor.

The problem is that Comcast will likely pay billions to Disney, and it remains unclear whether Hulu’s original programming as well as NBCUniversal content will be strong enough to compete with Netflix, Amazon, Apple and Disney around the world. If it can’t, Comcast will double its business potentially losing money.

Plus, Comcast already has what could be a $10 billion check, if not more, guaranteed from Disney, to spend on whatever it wants.

Hulu stuck in the middle.

No, not “stuck in the middle” Children’s TV series starring Gina Ortega. This is on Disney+.

Disclosure: CNBC is part of Comcast’s NBCUniversal.

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