A few weeks ago, the joint owners of online streaming service Hulu — Disney, Fox, and NBCUniversal — looked to add another big media player to its ranks.
Hulu LLC, the streaming service owned by three media companies, is in talks to add Time Warner Inc. as a fourth investor, according to people with knowledge of the situation.
A deal could value Hulu at more than $5 billion, according to the people, who asked not to be identified discussing a private matter. The talks aren’t advanced, and there’s no guarantee of an agreement, one of the people said.
Time Warner’s stake could equal those of Hulu’s current investors, 21st Century Fox Inc., Walt Disney Co. and Comcast Corp.’s NBCUniversal, the people said. The service has taken on added significance for its owners as they put more movies and TV shows online. The rise of competing services like Netflix Inc. has coincided with a decline in live TV.
Bringing Time Warner into the fold would presumably give Hulu access to original content on the Time Warner-owner Turner Broadcasting channels, TNT and TBS. It could also allow Hulu to sell HBO as an add-on package, which the streaming service currently does with Showtime. All of these things would bring extra value to Hulu and make it not only a more viable competitor with Netflix — which has more than 43 million U.S. subscribers to Hulu’s 9 million — but also a more attractive option for cord cutters.
It’s that last part that likely will prevent Time Warner from joining Hulu for a while. Time Warner CEO Jeff Bewkes recently suggested that despite the launch of HBO Now, his company is still very invested in the traditional cable bundle.
In Time Warner’s recent earnings call Bewkes spoke about moving his company away from deals that make its content available to cord cutters and non-subscribers quickly. He made it clear that he is a strong supporter of on-demand options for paying customers, but believes in protecting the traditional cable bundle.
“We’re evaluating whether to retain our rights for a longer period of time and forego or delay certain content licensing,” the CEO said. “This would effectively push the SVOD window for content on our networks to a multiyear period more consistent with traditional syndication.”
Of course, this is about far more than keeping first-run episodes of Rizzoli & Isles off streaming services for a while.
Lest we forget, Turner Sports has committed somewhere between $10 billion and $11 billion to the NBA for TV rights through 2025. It has also committed $400 to $500 million a year for co-ownership of the rights to the NCAA Men’s Basketball Tournament through 2022 and $350 million a year for a piece of Major League Baseball rights through 2021.
Unlike Disney, Fox, and Comcast-owned NBCU, however, Turner does not own a dedicated sports network in the cable bundle*. Instead, Turner’s strategy has been to show all of its major sports properties on TNT and TBS. That increases the perceived value of those networks, thus inflating the carriage fees that customers pay for them. Yes, Turner could cover nearly all of its sports rights deals through advertising revenue, but if carriage fees cover the deals, the ad money becomes pure profit, and that keeps the shareholders happy.
Thus, any move that would help accelerate cord cutting would cut into Time Warner’s ability to profit from Turner’s sports rights deals. Turner is already starting to lose ground; according to Nielsen, TNT lost 6 million pay TV subscribers from October 2013 to October 2015, and TBS lost roughly 5.89 million in that same time span. That said, both channels are still in more than 93 million homes and look likely to collect well more than $2.5 billion combined in carriage fees over the next fiscal year. The amount of milk left in this cash cow doesn’t justify making burgers for Time Warner just yet.
Of course, Time Warner is dipping its toes in online video. HBO Now reportedly had close to 2 million subscribers as of last July, and TNT and TBS are part of the $20 Sling TV bundle. (For cord-cutting basketball junkies, Sling TV is actually a pretty decent bargain.) Jumping onto Hulu’s bandwagon now, however, appears to be one move too many for Time Warner.
Could that change in the future? That depends on what Hulu’s endgame is.
It’s possible that Hulu’s big-owners are positioning the service to be the future replacement for cable TV. This would allow them to eliminate pay TV carriers as middlemen and sell their programming directly to customers. Hulu is already selling Showtime as an add-on package within Hulu, and future add-ons seem likely.
One of those add-ons could be a sports pass. Disney, Fox, and NBCU all own sports networks that have streaming apps on multiple platforms. Those apps currently require a pay TV login for access. Imagine Hulu offering an add-on that provided such a login for those sports apps. This model would be similar to the Sky TV model in the UK, which offers a basic bundle for £20 a month and lets you add sports channels for another £25.
Which brings us back to Time Warner’s dilemma — they don’t have a dedicated sports channel and don’t seem eager to create one. The only way Time Warner would have a dedicated sports channel is by being bought out by Fox, which Bewkes rejected last year, or merging with CBS, which already shares both the NCAA Tournament rights and the CW network with Time Warner. That much-discussed merger, however, won’t happen so long as CBS Inc. chairman Sumner Redstone is drawing breath.
So we’ll have to wait a while to see if Hulu truly is destined to be the online service that replaces traditional cable TV and keeps the money flowing into big media. Steve Jobs said it best when he said, “If you don’t cannibalize yourself, someone else will.” In this case, Netflix appears to be that someone else. However, Netflix has shown no interest in live streaming, and its content delivery network is optimized for on-demand video. Perhaps access to sports will be the key to Hulu’s owners toppling Netflix — but not until traditional pay TV sheds a lot more customers than it already has.
(* – Turner does operate NBA TV, but that network is owned by the NBA.)