Should Yahoo Buy Into Hulu?

Just as Yahoo weighs Wall Street advice to buy a significant stake in online video site Hulu, SNL Kagan reported the first-ever subscriber decline for the U.S. TV multichannel industry. This week's figures -- showing the worst combined subscriber performance of cable, satellite TV and telecom video providers since SNL Kagan started tracking data in the 1980s -- suggest the timing is right for the Web titan to make a major bet on consumers canceling their pay TV subscriptions in favor of online TV offers. Cable suffered its worst video loss, shedding 711,000 video subscribers in the second quarter, as six of the eight biggest cable firms reported their most dismal three-month period. Overall, cable, satellite TV and telecom providers shed 216,000 video customers in Q2 compared with a 378,000 gain in the same period a year earlier.SNL Kagan estimates that almost 3 million U.S. households will use Hulu and other Web TV options as their primary video solution by the end of the year, up from 1.5 million in 2009. For 2011, the company expects that figure to hit 4.3 million. (There are about 115 million TV households in the States.)"We particularly see continued declines for the cable industry," SNL Kagan analyst Ian Olgeirson told THR. Seasonal factors were key to the weak Q2, according to Sanford C. Bernstein analyst Craig Moffet, who predicted that multichannel TV operators will grow subscribers for the full year despite the second-quarter weakness. "Now, if we were to see weakness persist through the fourth quarter, then Houston, we'd have a problem," he said.The second quarter is always the weakest for TV providers, but the report also highlighted economic factors -- such as high unemployment and the weak housing market -- as well as the onetime effect of cancellations by those who had signed up for a TV service a year earlier amid deep discounts tied to the nation's digital TV transition.With media giants planning more Web TV offers that require a cable or satellite TV subscription -- part of their TV Everywhere initiative -- "this will cramp some of the flow" to Internet-only, but there still is "plenty of content" available online that will tempt more people to stop paying cable or other TV bills, Olgeirson added.Given that such attitudes play into Web video sites' hands, many on the Street argue that the acquisition of a major stake in Hulu by Yahoo would be pricey (given a reported $2 billion target valuation in a possible IPO this year) but could help super-charge Yahoo's efforts to provide more content.Similarly, Janco Partners analyst Martin Pyykkonen said Yahoo is the most natural buyer as the firm "should be more of a content play, because they have really lost the search game." Analyst Jordan Rohan said as much in a Friday report that kicked off the debate."While an investment in Hulu doesn't solve Yahoo's long-term relevancy problems single-handedly, it could reinforce Yahoo's position as a core entertainment destination," he said."On a revenue per thousand streams basis, we estimate Hulu generates $14, six times higher than Google-owned YouTube. Perhaps more importantly, Hulu brings with it a clear must-buy status among brand advertisers, something that we believe Yahoo is at risk of losing over time." Asked why he only urged Yahoo to buy a stake in rather than all of Hulu, Rohan told THR that the price would be high and that "the existing studio partners should be expected to keep some skin in the game." Other experts reiterated that keeping the current entertainment giants around as shareholders would ensure they have a say in Hulu's future and an incentive to make their content available.But digital media analyst Dan Rayburn at Frost & Sullivan argued tech players are not what Hulu needs. "Hulu ... would not benefit from having a tech company control them as Hulu is not lacking technology features of their service, they lack content," he said. Whoever owns Hulu down the line may have to shell out money on content deals, Pyykkonen said. "Netflix put a line in the sand with its Epix deal, which had a pretty significant price tag," he said in reference to the nearly $1 billion content deal announced this month.As Starz's deal -- covering Sony and Disney films -- with Netflix ends next year, Hulu could look to add movies to its TV-heavy content offers. "They have to be in the movie business somehow," Pyykkonen said.Some experts Monday also mentioned that other potential Web or tech giants could benefit from owning a major stake in Hulu, including Microsoft, AOL or maybe even a cable operator given SNL Kagan's expectations for weaker basic cable-user momentum."Given that Microsoft is cooperating with Yahoo in search, maybe those two companies would consider investing together," Rohan said. AOL, while focused on growing its content offers, has concentrated on below-$100 million deals. Yahoo and the other companies mentioned declined to comment.Meanwhile, Rohan said, "Google wouldn't be an effective bidder due to its ownership of YouTube and the antitrust scrutiny already on the search behemoth."

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Should Yahoo Buy Into Hulu?

Georg Szalai, The Hollywood Reporter

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Georg Szalai, The Hollywood Reporter