Online Video Streaming: The Future of Media
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AT&T and the Chernin Group have made a last minute bid to acquire video streaming service Hulu. Other companies bidding are DirecTV, and Time Warner Cable. Estimates are that DirecTV has set the bar at $1 billion.
Information about this bid was made available by sources who communicated with Bloomberg. People in the decision-making process have declined to comment on the acquiring of this video streaming service at this time.
Advantages of Hulu
Hulu is an online video service founded in 2007 that streams movies, clips and TV shows. Two versions are available - a free version and Hulu Plus (a premium service). The advantage of the premium service is you are able to view a variety of TV shows as soon as they are released, this service also eliminates paying cable subscription fees thus saving the consumer money. A Hulu Plus membership cost $7.99 per month and all you need is a cable or DSL connection. Hulu generated $700 million in revenue for 2012 - not a small sum by any means.
The financial advantage of the company that acquires Hulu has enormous financial implications for its balance sheet. As stated Hulu Plus charges members $7.99 per month, Hulu has just over 4 million subscribers to date. Membership generates $31.96 million per month, this adds up to a gross profit revenue of $383.52 million per year, not a small number for a company that has been around less than a decade.
DirecTV (NASDAQ: DTV) is the largest provider of DTH digital television services and the second largest provider in the multi-channel video programming distribution according to their company profile. As of March 31 the company had 20.11 million subscribers with an average revenue per unit, or ARPU, of $96.05.
DirecTV reported net revenue of $7.58 billion in the first quarter. Subscribers rent equipment for $10.00 per month plus the channel package costs. These days increasingly consumers want to save money and watch video on their smartphones, notebooks or computers. The built in infrastructure of Hulu allows complete portability and affordability.
DirecTV spent $6.03 billion in property plant and equipment for 2012 an increase of $815 million above 2011 expenses of $5.2 billion. Transitioning to streaming video services would free up more cash flow leading to higher net profits.
The end of satellite for DirecTV compared to the future of online subscriptions is what long term investors should be forecasting.
Time Warner (NYSE: TWC) is one of the bidders, but it is only looking for a stake in Hulu rather than complete ownership, according to media sources. The first quarter of 2013 was not good for Time Warner Cable. The company lost 119,000 video and 35,000 voice subscribers after customers discontinued service after new subscriber promotions ended.
To remain competitive Time Warner has to get into the online streaming race to compete with companies like Netflix if it wants to retain subscribers. If Time Warner acquires a stake in Hulu, it get access to Disney and NBC programming, this would add to the content library for Time Warner.
Hulu Plus could be bundled with high speed broadband products, Time Warner already has 12 million video customers. Increasing market share could see Time Warner's 52-week high of $119.46 increase higher as the second largest cable company in the U.S. with a solid online subscriber base.
AT&T (NYSE: T) had 4.3 million U-verse subscribers as of the third quarter of 2012. The addition of Hulu's select film and TV library would only add to AT&T's quarterly gross income statements. Additional operating expense to secure a larger subscription base would not be necessary. AT&T would inherit 4 million additional customers who would be exposed to the companies products and discounts.
Net income increased by $33.2 billion from December 2011 to December 2012. The addition of Hulu would bring in almost $500 million in net revenue if a bid is accepted. The assets of this company would add significantly to the balance sheet of an already established company. Earnings per share would also increase positively based on increased net income on existing shares outstanding.
From the fourth quarter of 2012 to the first quarter of 2013, Hulu grew by an additional 1 million customers, if this growth continues into 2014, subscriptions would increase to 5 million for a total of $479.32 billion per year.
The P/E ratio for DirecTV is 13.24 with a market cap of $34.86 billion. The U.S. direct satellite provider has 35.56 million subscribers. There is a growing trend in the U.S. to "cut the cord." This means slashing costs to traditional cable that may cost $70 to $100 per month. For a company like DirecTV to survive and keep their investors happy they have to diversify and invest in the online world of media and entertainment.
Time Warner reported revenue of $6.9 billion in the first quarter, down 1% from 2012. The reason for the decrease was sluggish sales in its movie division. Offering new release video streaming programs and movies could offset the movie industries lag in sales.
If AT&T's partnership with Chernin is successful, it is very possible its share price would increase if it acquires Hulu. AT&T's share price has fluctuated from $32.71 to $39.00 over a 52-week trading range. AT&T offers the U-verse with their DVR rental starting at $59.00 per month. U-verse represented 61% of AT&T's $5.5 billion residential wireline revenue for the fourth quarter of 2012. However, Hulu wins hands down in the pricing department. Not every consumer wants to purchase bundle services that are not viewable on mobile devices.
Online video trends
According to ComScore, 89 million people in the United States will watch 1.2 billion online videos in a day. Online video users are expected to increase to 1.5 billion in 2016 according to Cisco. Online video accounts for 50 percent of all mobile traffic driven by consumers. Whatever company purchases Hulu will only see their future revenue growth increase, the online video trend continues to increase exponentially as all research indicates.
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Robert Palmer 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!