Hulu Agonistes

Hulu has been for sale — on and off — for the better part of three years. But with the latest round of bids now in, it’s not clear that the company is any closer to being sold than it was in October 2011 when its owners terminated the sale process the last time around without a deal.

Seven preliminary bids have been received this time around. And the jockeying for position in the semi-final round began this week with reports that AT&T is considering partnering with the Chernin Group to goose its low-ball bid. But as Disney-ABC Television Group president Anne Sweeney reminded everyone at the D11 conference last week, just because the owners are soliciting bids for Hulu doesn’t mean they necessarily intend to sell it.

The problem, as Sweeney noted, is that Hulu was always more of an idea than a company, notwithstanding the valiant efforts of former CEO Jason Kilar and his team to build a business around it. And may be an idea whose time has come — and now gone.

News Corp. and NBC Universal launched Hulu in 2008 (Disney joined later) largely out of frustration with how much of their content was showing up illegally on YouTube. The networks wanted some place to put their content online where it could compete legally with YouTube and other sites (not for nothing was it dubbed “ScrewTube” and “MeTooTube” by wags before being officially christened “Hulu”).

Almost from the start, however, the owners were ambivalent both about Hulu itself and their own involvement in it, and became more so over time as the online video business has expanded. The networks’ strategic interest, as with any rights owner, is to license their content as non-exclusively as possible to as many different buyers as possible for as much money as possible. Their ownership interest in Hulu, however, created an incentive for them to aggregate all their content under one roof. Ideally, then, they would love to disaggregate those rights as part of any divestment of Hulu.

The problem is that without those aggregated rights Hulu really isn’t worth very much.

The company has done an admirable job of establishing its brand within the online video space. But most of the equity in that brand is tied to rights it controls. It generated $695 million in revenue last year, and may get close to $1 billion this year, but it also has $350 million in debt. It has some nifty ad technology and a nice UI, but neither of those things are irreplaceable and no one is likely to pay a premium for them. It has 4 million subscribers paying $7.99 a month for its premium tier, but half of that revenue flows back to the rights owners, which would make those subs largely unprofitable to a buyer under the current terms.

About the only immediately leveragable asset Hulu has apart from content rights is its embedded presence on a large number of connected devices, giving it a solid addressable base on which to build a distribution business. That addressable base of subscribers is no doubt part of what makes Hulu attractive to DirecTV, Time Warner Cable and AT&T. But even there, the ability to grow that base of devices is contingent on the content that a Hulu app makes accessible.

Another problem for the sellers is that the downside of selling to the wrong buyer is greater than the downside to doing nothing. Selling Hulu to a pay-TV service provider with its current rights package in place could greatly complicate the networks’ business relationships with competing service providers.

I don’t think Sweeney was speaking idly last week. The latest solicitation of bids may well turn out to have been merely exploratory: a chance to see if someone would offer enough money for Hulu to let the owners bury their ambivalence over the whole thing under a pile of cash.

Hulu has succeeded at its main mission. It proved that a legal streaming business can be built that competes with free. Unless the bids come up substantially from where they are now, Hulu’s owners may just decide to hang a Mission Accomplished banner over its offices and call it a day.