Hulu Has Plenty Of Programming Momentum But Faces An Uncertain Future

Hulu is at a fortuitous (albeit semi-precarious) spot in its 10-year trajectory as a streaming service and as a business. It’s not a “best of times, worst of times” situation so much as it is a “best of times, I’m sure we can figure this out without fighting” situation.

The fortuitous part is that Hulu has been the second-fastest-growing U.S. streaming service (after Netflix, obviously) over the last 18 months. By one estimate, the company has quintupled from a $5.2 billion valuation when Time Warner bought a 10 percent stake in late 2016 to $25 billion by one analyst’s estimate in late 2017.

The precarious part is that the companies who own Hulu are beginning to see their objectives diverge in ways that could bring them into conflict later this year. Disney, 21st Century Fox and Comcast each own 30 percent shares of the company, and Time Warner owns the remaining 10 percent, and their relationships are getting increasingly complicated.

The Handmaid’s Juggernaut

The massive success of The Handmaid’s Tale has put a big red target — or maybe a big red cape — on Hulu. The series won the Emmys for Outstanding Drama and a slew of other awards in the fall and just did the same at the Golden Globes.

The new trailer for Handmaid’s Season 2 racked up 5 million YouTube views within a week after it posted on January 22, and the show’s immediately identifiable costumes have become a fixture at anti-Trump rallies — like the women’s marches this past weekend — and have generated lots and lots and lots of recent Handmaid’s media and social-media coverage.

With another season of the series coming in the next few months — followed by think pieces, news discussion Emmy discussion, etc. — Hulu and Handmaid’s will be under the media eye for most of the year.

Everybody’s Got Problems

Each of the four Hulu owners have issues that may affect their business interests in positive (owning Hulu) and negative (wanting others to not own Hulu) ways that neither Wall Street nor the companies themselves are yet in a position to fully understand:

• Disney announced a $52.4 billion acquisition of 21st Century Fox’s entertainment assets in December that would include the Fox film and TV studios, the FX and NatGeo cable channels, and Fox’s 30 percent stake in Hulu. That deal is pending regulatory approval and may not be approved until late 2018 or into 2019.
• The U.S. Department of Justice has filed suit to stop AT&T’s $85 billion acquisition of Time Warner that the companies announced more than a year ago. The lawsuit with the Justice Department and subsequent appeals could tie that outcome up until late 2018 or into 2019.
• Comcast, which owns NBCUniversal and its 30 percent stake in Hulu, is subject to a consent decree left over from its acquisition of NBCUniversal that says the company “shall not read, receive, obtain, or attempt to obtain any confidential or competitively sensitive information concerning Hulu or influence, interfere, or attempt to influence or interfere in the management or operation of Hulu.” That consent decree expires in September 2018, which is a looooong time from now in internet-business years.

Those three things — the Disney-Fox merger, the AT&T-Time Warner merger and the Comcast consent decree — are all operating independently of one another and on their own timelines. Most analysts believe the Disney-Fox merger will be completed, but the eventuality and timing of that are far from certain. The AT&T-Time Warner merger is a surer bet under the usual antitrust rules but has become entangled with presidential politics because of President Trump’s professed dislike of Time Warner’s CNN.

Nobody Knows Anything

Regulatory or legal approval of either of the mergers could come with with its own conditions or consent decree that could, for example, require Disney, Fox or Time Warner to sell off certain assets, which could include their respective shares in Hulu. Comcast’s regulatory handcuffs appear to restrict the company from even exploring the sale of its share of Hulu or the purchase of its three partners’ shares of Hulu until the consent decree expires in September.

With all the regulatory uncertainty, Wall Street analysts have been especially circumspect about what they think the likeliest outcome for Hulu will be. “At this point, we just don’t know,” MoffettNathanson senior analyst Michael Nathanson told Decider. “It’s all uncertain until you get a regulatory view.”

Given that the Disney-Fox merger would give Disney control of Hulu and given Disney’s aggressive efforts over the last year to ready an ESPN streaming service this year and a Disney service in 2019, Wall Street analysts may come to believe later this year that Comcast must make a play for Hulu. BTIG media analyst Rich Greenfield is already there. “We believe Comcast would be keen to acquire Disney and Fox’s share of Hulu, giving them full voting control of Hulu,” Greenfield wrote in a recent research note.

The Market Won’t Wait

Despite all the regulatory uncertainty that could wind through 2018 and into 2019, the streaming world is not going to wait around to see what happens. On Monday, Netflix announced in its earnings report that it added 8 million subscribers worldwide — easily beating Wall Street expectations — during the last three months of 2017. The longer Hulu is stuck in business neutral, the harder it is going to be for the company to shift into business forward.

Hulu grew its subscriber base by a whopping 40 percent over the last 18 months — from 12 million in May 2016 to 17 million in December 2017 — and added a streaming-bundle tier to its service for watching live and on-demand TV on the major broadcast and cable channels. While Hulu was adding 5 million subscribers, though, Netflix was adding 7.6 million — even as its growth was slowing and it was approaching 50 percent penetration of U.S. broadband homes. And with 55 million U.S. households to Hulu’s 17 million, Netflix can afford a bigger and more diverse lineup of original and licensed programming.

With three of its four partners tied up in mergers and a fourth legally barred from even saying hi at the vending machine, Hulu is essentially frozen into its current course for the foreseeable future. The partners are unlikely to agree to an IPO that could set Hulu free and challenge them on their own digital turf, and the company will have difficulty otherwise raising the capital to try and keep up with Netflix — and Amazon, HBO and others — by expanding into international markets.

There’s also an unmistakable whiff of merger fever in the air with CBS, Viacom, Discovery Communications — and more recently Lionsgate — potentially pairing off with each other or getting acquired by Verizon, AT&T or Amazon. Hulu and all of its its owner companies except Comcast will essentially have to sit those discussions out while they digest their own mergers. And Comcast is already so large that an acquisition could complicate buying the Disney-Fox interests in the company as approval and a timetable for approval of that deal become more certain.

Although the two big media mergers were set in motion before 2018, one of both of them could still be in limbo six months, nine months or a year from now. Hulu hangs in the balance.

Scott Porch writes about the TV business for Decider, is a contributing writer for Playboy, and hosts a weekly podcast about new digital content called Consumed with Scott Porch. You can follow him on Twitter @ScottPorch.

Stream The Handmaid's Tale on Hulu