Could Disney (Finally) Make Hulu a Netflix Killer?

NEWS ANALYSIS – With the Walt Disney Co.’s path to acquiring select 21st  Century Fox assets apparently cleared after Comcast dropped a competing bid, the Mickey Mouse company becomes the majority stake holder in Hulu.

The SVOD platform launched in 2007 has more than 17 million subscribers but remains an ongoing runner-up to Netflix and Amazon Prime Video in the United States.

With Disney in command, that could change. Disney has made no secret it believes direct-to-consumer distribution of entertainment is the future. It is planning to launch a branded SVOD service in 2019 after spending billions acquiring technical subsidiary BAMTech.

But why reinvent the wheel when Hulu already has brand recognition, and more importantly, could benefit from having exclusive access to Disney content, including Marvel, Pixar and Lucasfilm titles?

To be sure, such a move would incrementally benefit Hulu minority owners Comcast and WarnerMedia, but a collective approach featuring Disney’s coveted movies would appear to be requisite to any serious attempt to bridge the Netflix divide.

“Disney has already announced its plans to pull much of its content away from Netflix in 2019 and launch a competing service, and we suspect that the rollout of a Disney-led platform can be accelerated if the company uses Hulu as its base,” Michael Pachter, media analyst with Wedbush Securities in Los Angeles, wrote in a note.

Pachter contends that by setting up a competitive service and outbidding Netflix for content created by the owners of that service, i.e. Disney/Fox, Comcast and Warner, Disney/Hulu should be able to capture a portion of the $160 billion in enterprise value Netflix commands.

“A reconstituted Hulu could successfully compete with Netflix if its owners sell content to Hulu exclusively,” wrote Pachter. “A re-imagined Hulu could compete successfully with Netflix in attracting new subscribers.”

It could also help mitigate losses on the bottom line.

Disney in February disclosed it expects more than $250 million in equity losses on Hulu in 2018 — up from a previously disclosed loss of $100 million.

As a stake holder, Disney expects to recoup the loss through Disney-ABC Television Group content sales as well as various affiliate network revenue.

Regardless, it is on the hook for about $450 million in capital contributions to Hulu this year, according to a regulatory filing.

While regulators might raise concern over Disney having too much control of Hulu (an issue back when Comcast acquired NBC Universal), the OTT video landscape has changed significantly since then.

Netflix finished the second quarter (ended June 30) with more than 57 million domestic subscribers. But its subscriber growth in the U.S. is waning, which means there’s opportunity for a strong third-party competitor not named Amazon.

Indeed, Netflix has been transitioning to proprietary content in recent years in an effort to minimize the impact of rival services from its content providers.

“That was a bet we’d made a long time ago when we got into original programming,” CCO Ted Sarandos said on the July 16 webcast. “And every year since that, we’ve been doing less and less off-net business with Disney and Fox. And our bet is that is long term, that they’ll want all of their content on their service.”

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