Disney (NYSE: DIS) acquired a lot of valuable things in its massive Twenty-First Century Fox deal. Much of that was the media that has equipped Disney to be Netflix's (NASDAQ: NFLX) most important challenger. But Disney also acquired a chunk of Netflix's original competition: Hulu. Once Disney had acquired Twenty-First Century Fox's 30% share, Disney owned a controlling stake in the streaming service it already owned part of.
Hulu was founded as a joint venture and, after the Disney-Fox deal, was owned by Disney, Comcast (NASDAQ: CMCSA), and AT&T (NYSE: T). After AT&T sold new subsidiary WarnerMedia's 10% Hulu share back to Hulu LLC, what was already likely became inevitable: Disney would acquire Comcast's share of Hulu.
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Disney had made no secret of its desire to get full control of Hulu, and now Comcast and Disney have reached a deal. Comcast hasn't sold just yet, but the terms of the deal lock both sides into an eventual sale.
Why Disney wants the whole Hulu
For Disney, owning all of Hulu makes a whole lot more sense than owning just a part of it. After all, the major thing we've learned about streaming over the past few years is how cost-effective it is to control the entire content pipeline, from the studios that make the content to the streaming service that airs it.
Netflix has found that it can save money over the long term by producing its own content and thereby becoming less reliant on pricey — and temporary — content licensing deals. On the flip side, media companies with enough content have recognized that they could cut outside streaming services out of the deal and do the streaming themselves. That's what Disney is doing with Disney+.
When Disney owned all of Disney+ and merely a part of Hulu, things were a little messy. Prior to the deals with AT&T and Comcast that gave it control of Hulu, it seemed obvious that Disney would rather send its biggest properties to its wholly owned streaming service, while Hulu's other owners would presumably not have been thrilled to send their own properties to Disney's less-favored streaming service going forward. This mess led many (including yours truly) to fret about Hulu's content future.
With Disney in full control of Hulu, this problem more or less disappears. That appears to have been Disney's strategy — which meshes with Disney's public reassurances that it will keep supplying Hulu with prime content from Disney-owned studios.
Of course, for all of this to work, Comcast needed to play ball. Let's talk about why that was probably inevitable.
Why Comcast’s exit makes sense
Comcast is on the record as being reluctant to part with its stake in Hulu. But there were plenty of ways in which cashing out of Hulu made sense for Comcast.
Comcast's NBC has some of the biggest media properties around, including the American version of The Office. And we've seen that companies with valuable content will create streaming services, and Comcast is going by that playbook. It plans to release its own streaming service in 2020.
Comcast doesn't want to supply its content to streaming competitors like Netflix or a Hulu that Disney owns the majority of.
On top of all of this, Comcast has had a uniquely frustrating time as a Hulu co-owner. When Comcast acquired NBC in 2011, it got a stake in Hulu but also signed a consent agreement that barred it from having any say in Hulu's direction for seven years. Only in 2018 did Comcast regain its voice — and then Disney took a controlling interest.
Let’s make a deal
Comcast didn't have to bail out, of course. It could hold on and keep making money, especially if Disney's collective streaming offerings prove to be our first real "Netflix killer." And Comcast would be wise to hold if it thinks Hulu's valuation will go up.
But Hulu's valuation did go up ahead of the Comcast-Disney deal: The deal that sent AT&T's 10% back to Hulu LLC pegged the company's value at $15 billion, up from the $9.6 billion Disney listed in an SEC filing in November 2018. Perhaps that's why talks between Comcast and Disney moved so fast afterward.
And there's one aspect of the deal that I didn't predict: Comcast isn't selling right away. The framework of the Disney-Comcast deal buys Comcast some time to (Comcast hopes) see its Hulu stake grow in value. If things work out, Comcast could be getting a nice price on a valuable Hulu stake and exiting just in time to enjoy the fruits of its own fully owned streaming service. Time will tell.
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