Finding the Right Fit for Hulu

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

The bidding war for Hulu is starting to take shape, with Reuters reporting that the video site's price tag has topped $1 billion. That seems like a princely sum for the site, but for a select list of bidders, it might be well worth the expense.

Hulu vs. Netflix

Hulu was the media industry's response to Netflix. Netflix's streaming video service was catching on quickly with customers and the traditional television content companies felt they needed to get involved. It was the right decision.

However, Hulu's focus was about getting new content online without interfering with the television distribution model. So new content is delayed until after its traditional broadcast and even paying Hulu customers are forced to watch advertisements. Netflix, unhindered by the television model, has focused on letting customers watch what they want, when they want, and how they want.

This makes some potential Hulu buyers more appropriate than others.

Itching to get video

Yahoo! (NASDAQ: YHOO) is one of the rumored bidders. The company has plenty of cash to make a billion dollar bid after selling half of its take in Alibaba for around $7 billion. While it has been using that cash to make small acquisitions, it also just inked a billion dollar deal to buy Tumblr.

Tumblr, a photo and media focused blog site, is a much better fit than Hulu would be. Not only does Yahoo! already have experience in the photo space, but the service doesn't come with legacy baggage. While new CEO Marissa Mayer has been deftly using acquisitions to further her turnaround effort, Hulu would pull the company off on a tangent. And the content providers who currently own Hulu would likely balk if she tried to turn the service into a more modern product by killing ads, increasing content, or trying to make content more timely.

Yahoo! is increasingly looking like it has long-term appeal again, which is why the shares have been heading higher. It's a good option for aggressive investors looking for a turnaround play. That said, the company's top line has yet to turn higher, though it has appeared to stabilize to some degree. Caution is still warranted.

The addition of Tumblr, which notably increases the company's ad network, should be a big help. While investors might cheer a Hulu purchase, it has too much baggage for an easy integration.

Better fits

Two other rumored bidders would be solid fits. Time Warner Cable (NYSE: TWC) and DirecTV (NASDAQ: DTV) both live within the same media world as Hulu. And each company is a distribution partner to the content companies that own Hulu, like Disney. So there wouldn't be any need to change how Hulu is run, advertising and program delays and all.

Satellite access

DirecTV would likely see the bigger benefit from Hulu. The company is the largest satellite television provider in the United States and has notable operations in Latin America. Buying Hulu would give it a well established brand on the internet through which it could grow its customer base. More importantly, it would allow it to attract customers that would never even consider a satellite deal -- like cable customers.

DirecTV's top line has been growing solidly for a decade. Since the end of the 2007 to 2009 recession, earnings have gone from just under a dollar a share to over $4 last year. It has a notable debt load, but could easily handle a Hulu deal. If DirecTV wins the bidding war, growth investors should be pleased.

Cable deal

The ability to take over a substantial video subscription site would also be a boon to Time Warner Cable. It would allow the giant cable company to draw customers in areas that it doesn't serve. The physical limitations of cable are the biggest obstacle to adding new customers. Hulu's web-based service wouldn't face that challenge. The risk, however, is creating an arms race on the web between cable companies.

Time Warner Cable's top line has been heading higher and earnings have more than doubled over the last three years to nearly $7 a share. The shares have been on a steady climb since the end of the recession. Without a Hulu-like deal, however, investors should focus on the company's customer growth. Any weakness could lead investors to sour on the company's prospects. A Hulu deal, however, could be an important catalyst to even higher share prices.

The right fit

As with any acquisition, finding the right fit is important. Yahoo! understandably wants to be in video, but Hulu would be a hard purchase to integrate. DirecTV and Time Warner Cable, however, could both make a deal work relatively easily. And either one would likely see an uptick in customer growth as a result.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends DirecTV. 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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