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What's next for Hulu?

June 23, 2011 |  2:13 pm

Jason kilar

News Corp., Walt Disney Co. and NBCUniversal have been wrestling for more than a year over what to do with their unruly online progeny Hulu.

The answer emerged this week: sell the popular and problematic Internet video site.

But why now?

Analysts said the media owners couldn't help but notice Wall Street's enthusiasm for the initial stock offerings of social media site LinkedIn and the anticipated public offerings of Facebook and couponing service Groupon.

“The capital markets are wide open, there is asset value in Hulu today, and it will last as long as the distribution rights are extended," said Jordan Rohan, a media analyst with Stifel Nicolaus & Co.  In addition, he noted, "Yahoo and other major companies have discovered that the high-end online video space is incredibly valuable, and it always will be."

There could be another explanation too.  For months, Hulu's chief architect, Chief Executive Jason Kilar, has been lobbying for greater autonomy to operate Hulu as a fast-moving Internet venture, independent of the entertainment conglomerates that are beholden to their traditional businesses.

The media companies' priority has been to preserve their lucrative relationships with cable, satellite and telecommunications companies, which pay $30 billion annually for the right to distribute TV shows to subscribers. That sum dwarfs the $500 million in revenue that Hulu is projecting to bring in this year.

In addition, Providence Equity Partners, which initially contributed $100 million to seed Hulu, probably is looking for a way to recoup its investment.

The key question is whether the three media companies that created Hulu will agree to extend the exclusive programming rights to their shows, which has helped the site attract 28 million monthy users.

One of the partners, News Corp., has reached a tentative agreement with Hulu to extend the rights to the Fox television programs it owns, said a person close to the matter.

 “Any potential acquirer is going to be interested in the exclusive long-term online distribution rights for those programs.  That’s by far the main Hulu asset,” said Will Richmond, editor and publisher of the industry publication VideoNuze.

Alternatively, Hulu's owners may decide to turn the service into another online distributor on par with Amazon.com and Netflix.  In that case, the owners would extend their programming agreements with Hulu -- but on a non-exclusive basis.

That would help determine the valuation of Hulu.

“If the rights conveyed are not exclusive, then [Hulu] would not be nearly as valuable," Richmond said.

The networks have been advocating one proposal that would require users to prove that they subscribe to a pay TV service before they could watch the previous night's episode of a popular show.  This is known in the industry as "authentication," and is the cornerstone of HBO's new online feature HBO Go.

Under this scenario, Hulu users who do not already subscribe to cable, satellite or a telcommunications TV service would have to wait eight days after the initial broadcast to watch episodes from the current season.

This lag time would be designed to protect the status quo -- preserving the business that pays for the high cost of producing television shows -- advertising revenue and cable subscriber fees.  Cable companies recognize that Hulu has become incredibly popular, in large part because the service makes it so easy to catch up on a missed episode of "Glee," "Modern Family" and "Parks and Recreation."

The pay TV operators also realize that they must do a better job to match those features in a way that's equally easy to use.

Hulu declined to comment and declined to say whether Kilar has committed to remain with the Santa Monica company. The outcome of the sale may determine whether Kilar stays or goes.

-- Dawn C. Chmielewski and Meg James

RELATED:

Yahoo approaches Hulu about possible acquisition

Hulu's IPO on hold (for now)

Hulu is popular, but that wasn't the goal

Photo: Hulu CEO Jason Kilar in his West Los Angeles offices. Credit: Gary Friedman / Los Angeles Times

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