It’s a Terrible Idea to Buy Hulu

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It’s like siblings trying to decide what to do with the last piece of candy. Comcast (NASDAQ: CMCSA) doesn’t care. Disney and News Corp. can’t agree. So no one gets it. They put it up for sale. The only problem is: which bid to take?

Can’t they just get along?

Due to regulatory restrictions, Comcast is a nonvoting owner of Hulu through NBC Universal. Comcast’s core focus isn’t providing entertainment content. Comcast provides bundled cable packages, which involve walking a fine line between raising rates and keeping customers. NBC Universal, Comcast’s entertainment division, has its own first quarter struggles with drooping broadcast TV performance. Divesting Hulu may be a good idea so Comcast and NBC Universal can focus on profitability. But Comcast isn’t the owner causing the trouble here.

Hulu is up for grabs because the other two owners can’t resolve their differences over Hulu’s profit model.

Disney wants to continue offering free content to viewers, reaping profits from advertisements on the site. News Corp. prefers to use a paid subscription service. Both have legitimate profit model ideas for Hulu, but neither has managed to persuade the other. And of course no one will compromise. They figured selling Hulu would solve their problems. One owner could buy out the other’s share, or a third-party buyer could make the tough call. But they have to hurry.

We don’t have all day

Hulu is a small player in the video streaming world, compared to competitors Amazon and Netflix (NASDAQ: NFLX). Netflix has almost 29.2 million monthly subscribers--Hulu has only 4 million. But perhaps more importantly, Netflix already figured out its profit model. Netflix spends loads of money ($5 billion over the next few years) on the rights to movies and TV shows. It then sells viewers a monthly subscription to stream content and to rent DVDs.

By contrast, Hulu suffers from a schizophrenic profit model. It offers free content with advertisements and a paid service, Hulu Plus. In 2012, Hulu spent only $500 million to acquire more content. Hulu needs to choose one profit model ASAP. Waffling between two business models means that Hulu isn’t maximizing the profits from either one. With less money to spend, and its profit model in limbo, Hulu will never be able to catch up to Netflix’s huge content.

Yahoo, you don’t want this

Yahoo! (NASDAQ: YHOO) just made headlines last month with its $1.1 billion acquisition of Tumblr. Apparently, CEO Marissa Mayer is trying to make the company hip. Yahoo’s Q1 earnings report specifically highlighted company's moves toward mobile and personalized technology. So here they are at the M&A table again, bidding for Hulu.

True, Hulu would add mobile streaming to Yahoo!’s product offerings. And Yahoo! could combine Hulu with its Yahoo! Screen service (I had no idea that existed until I read the earnings report).

But we don’t even know if Tumblr will make money for Yahoo!. Is it really a good idea to lay out another few billion – first to acquire Hulu, and then to acquire content for Hulu? Yahoo! only has $1.174 billion in cash sitting on its balance sheet.  It better use that cash to ensure that Tumblr has a working profit model.

AT&T? Really?

This one surprised me. First, let me make it clear that AT&T (NYSE: T) hasn’t actually put in a bid yet. But AT&T has been talking with the Chernin group, a media investment company bidding for Hulu. Chernin’s bid was too low. AT&T has cash – $3.875 billion, to be exact. Sounds like a match made in heaven, right?  But hold on.

AT&T could offer Hulu along with U-verse. U-verse is AT&T’s fiber optic package that combines digital TV, high-speed internet, and digital home phone service. Hulu would make U-verse more attractive because customers could stream shows and movies along with their digital TV subscription. But AT&T’s specialty is telecommunication services, not entertainment. If AT&T gets any management stake in Hulu, I seriously doubt it would competitively navigate the process of securing video content.

According to a Forbes.com article, one analyst suggested AT&T just wants to keep Hulu from competitors like Verizon FiOS or DirectTV. It’s not worth it. I think AT&T could more effectively use the money to get new customers and improve its network reliability.

Stop fighting, kids

Just like a kid eating too much candy, Hulu looks attractive, but it comes with its share of problems. The ideal buyer will have a media/entertainment focus, plenty of cash, and a clear strategy for Hulu. Yahoo! and AT&T: this one’s not for you.

Who do you think is the best buyer for Hulu? Tell me in the comments.

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This article was written by Nathan Adamo and edited by Chris Marasco. Chris Marasco is Head Editor of ADifferentAngle. Neither has a position in any stocks mentioned. The Motley Fool recommends 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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