What Can DirecTV Do With Hulu?

Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In an earlier article, I predicted DirecTV (NASDAQ: DTV) would be the likeliest winner of the most recent bidding war for Hulu. Through some crazy magic, or perhaps dumb luck, it appears as though I was right. Early reports are that DirecTV will acquire the video streaming platform by month’s end for just over $1 billion.

Hulu can definitely improve DirecTV’s offerings, and, perhaps more importantly, DirecTV can improve Hulu.

Online presence

Unlike other bidders, DirecTV has very little presence in the internet business, and, in case you haven’t heard, the internet is kind of a big deal. Time Warner Cable is one of the largest internet service providers in the U.S., bringing in $1.66 billion in revenue during the first quarter of 2013. Yahoo!, for its part, has a ‘small’ presence on the web.

DirecTV’s online presence is extremely lacking. The company has a nascent “TV Everywhere” service, but it’s not well publicized despite a great iPad app. Still, it pales in comparison to Dish Network’s (NASDAQ: DISH) Hopper, which has attracted the ire of numerous content publishers for its commercial skipping feature.

The Hopper is one of the reasons Dish Network has been able to add subscribers when so many pay-TV operators are losing them. The company added 36,000 net new subscribers in the first quarter on a base of 14 million. Comparatively, DirecTV added just 21,000 net new subscribers off of a 20 million U.S. subscriber base. Both companies are suffering from a high churn rate of about 1.45%.

Using the Hulu platform to expand its TV Everywhere service could help DirecTV reduce that churn rate. It also gives it a serious online presence outside of its own video subscribers. Hulu served 1 billion videos in the first quarter, 24 billion minutes worth, with an average session length of 45 minutes. With 4 million paying subscribers, having added 2 million in the last 12 months, it adds a growing revenue stream to make up for its slowed growth in video subscribers.

Content partners

When Hulu was up for auction a couple years ago it fetched bids in excess of $2 billion. Back then, Disney and NewsCorp were offering exclusive content packaged with the website. This time around, the acquirer will have to pony up for content deals on top of its bid for Hulu.

DirecTV, as a multichannel video programming distributor, already has content licensing agreements with a plethora of media companies. It can use its position to easily extend some of those licenses to online streaming through Hulu.

That means, under DirecTV, Hulu Plus may become a more compelling service for TV watchers as new content from popular media companies becomes available. DirecTV has the connections and the financial backing to build out the service, which will allow revenue and subscriber growth to continue climbing rapidly.

Currently, the service offers 70,000 full TV episodes and movies. A lot of that content isn’t very popular, and many of Hulu’s most popular content - shows from NBC, ABC, Fox - are losing their exclusive rights with the sale of Hulu. People will pay for convenience, however, and if DirecTV can curate more popular content, Hulu could eventually rival Netflix (NASDAQ: NFLX) and Amazon Prime.

Original content

In 2008. DirecTV made a deal with NBC to renew a show called Friday Night Lights. The show had low ratings, critical acclaim, and a cult following - not unlike a show recently revived after its development was arrested. Last year, the company produced its own original series, Rogue, which was recently renewed for a second season.

Original series is the new buzzword in online streaming platforms. Netflix had huge successes with House of Cards and Arrested Development. Amazon is starting production a several original series after testing numerous pilots. Hulu itself even has a slate of original programs with some big names like Seth Meyers and Eva Longoria.

DirecTV already has experience in producing original content. With the additional $20 billion it generates in revenue from its pay-TV service, it could easily afford to launch new series on par with Netflix’s $100 million endeavors. By comparison, Netflix is reliant on its subscribers as its only source of revenue, many of whom are resistant to price increases. As a result, the company generated just $3.6 billion last year.

But Netflix is growing fast, adding approximate 2 million net new subscribers per quarter. Most of its recent success is pinned on House of Cards and Arrested Development. It’s no doubt that compelling exclusive content is a catalyst for subscriber growth at these streaming platforms. DirecTV would be wise to beef up development at Hulu by supplementing its budget with pay-TV subscriber revenue.

Win-Win-Win

While it’s no done-deal, I believe the acquisition of Hulu is a rare win-win-win. NewsCorp and Disney get the property off their hands and can stop arguing about it. DirecTV gets an established online presence that it desperately needs in this age of cord-cutting. And DirecTV can improve Hulu’s content offering with its other revenue streams and content partnerships.

Overall, this looks like a very smart purchase for DirecTV.

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Adam Levy has no position in any stocks mentioned. The Motley Fool recommends DirecTV and Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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