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Google Inc. in preliminary talks to buy Hulu

July 1, 2011 |  9:40 am

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Google Inc. is in preliminary talks to buy online video pioneer Hulu, people familiar with the situation said.

Hulu has begun meeting with potential buyers including Google, Microsoft Corp. and Yahoo Inc. to drum up interest in a sale, said these people, who requested anonymity because the discussions are confidential.

The presentations to the potential suitors are a first step as Hulu's owners weigh whether to sell the site after having received an overture from Yahoo.

Hulu's financial advisors, Morgan Stanley and Guggenheim Partners, set up the meetings with media, technology and communications companies.

The technology heavyweights are seeking to capitalize on the widespread popularity of online video and position themselves to reach the growing number of viewers who watch television shows, movies and short videos on computers, mobile devices and Internet-connected television sets.

Hulu's rights to the current season’s TV shows have drawn interest from Google and Yahoo, in part because these popular programs have attracted more than 600 advertisers -- including such major brands as McDonald's, Johnson & Johnson and Toyota. Indeed, the site expects to bring in $500 million in revenue this year from advertising and proceeds from its Hulu Plus subscription service.

Google, which has had a testy relationship with Hollywood, is making a major push to add professionally produced content to its mix of user-created videos on YouTube. It has hired industry veterans to help the Internet search giant make inroads and strike deals.

Yahoo is crafting its own strategy of bringing more premium content to its popular portal. Microsoft has had success offering access to movie subscription service Netflix Inc., dominant sports cable channel ESPN and the Hulu Plus paid offering to users of its Xbox game consoles.

Key to all three potential suitors are Hulu's licensing deals for popular TV shows such as “Glee,” "Modern Family" and Comedy Central's "The Daily Show with Jon Stewart." The lure of these top-rated programs quickly vaulted the 3-year-old service to among the top destinations for online video, with some 28 million monthly viewers, according to the measurement firm comScore.

Two of the media companies behind the online video service, Walt Disney Co. and News Corp., recently renewed licensing agreements to make Hulu more attractive for a sale. Comcast agreed to give up NBCUniversal’s management control in the venture to get approval for its acquisition of a majority stake in the media conglomerate. Comcast is required to provide programming to Hulu on the same terms as the other owners.

But the new agreements may include provisions that would require users to prove they're paying cable or satellite TV subscribers before they can watch current episodes of shows one day after their initial airing. Otherwise, they would be forced to wait.  The agreements would remain intact if Hulu is sold.

A Hulu spokeswoman declined to comment. A Microsoft spokeswoman could not provide immediate comment. Google and Yahoo could not immediately be reached for comment.

A sale would allow Hulu's media owners to make a graceful exit from a service whose success nonetheless created friction with traditional business partners. Cable and satellite distributors complained about paying for the right to carry programs that Hulu offered free online. A transaction would also enable owner Providence Equity Partners, which put $100 million in the venture, to see returns from its its investment.

Janney Capital Markets analyst Tony Wible said he expects Hulu’s owners to seek the same valuation for Hulu that Netflix commands from investors, about $2 billion. Hulu earlier scrapped an initial public offering that some investment bankers said could have valued the company at more than $2 billion.

Technology companies may be willing to pay a premium to get the kind of original content that draws advertising from major brands, said Andy Hargreaves, an analyst with Pacific Crest Securities.

But Arash Amel, research director for digital media for IHS Screen Digest, says he isn’t sure how much of a premium. Google, Microsoft and Yahoo are not buying Hulu’s technology, so they would risk paying through the nose for shows when content deals expire, he said.

“If you had those deals for 10 years, OK, you have time to build a business,” Amel said. “But look at what they are trying to do to Netflix. They help you until you are successful then they want most of what you make or they try to kill you.”

-- Jessica Guynn and Dawn C. Chmielewski

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Comcast has to sit on its hands while Hulu drama plays out

What's next for Hulu

 Yahoo approaches Hulu about possible acquisition

Hulu is popular, but that wasn't the goal

Photo: Hulu screenshot showing Stephen Colbert of Comedy Central's "The Colbert Report." Credit: Hulu

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