Then there were two. CNBC reported Wednesday that a partnership between Guggenheim Digital Media and KKR (KKR) had pulled out of the bidding war for subscription video streaming service Hulu. Guggenheim's departure leaves DirecTV (DTV) and a partnership between AT&T (T) and Peter Chernin as the last two bidders for all of Hulu, and Time Warner Cable (TWC) waiting in the wings with a long-shot offer for fractional ownership.
While everyone loves a billion dollar bidding war it's still unclear what exactly an acquirer would do with the company. To many it seems like paying $8 a month just to watch shows with commercials seems absurd. Brian Sozzi of Belus Capital Advisors says that may be true for old timers but his generation is receptive to what Hulu has to offer.
"I'm a millennial," Sozzi proudly announces in the attached video. "My generation has realized that unlike dad, we don't need 999 TV channels. We want live TV on demand and we don't necessarily want to pay for it."
Sozzi boasting about a target audience that refuses to spend what little cash it has on content illustrates the questionable strategic nature of a Hulu bid. Hulu was created as a bastard love child of Disney (DIS), 21st Century Fox (FOX) and Comcast's (CMCSA) NBC Universal division. The idea was for the companies to be able to monetize their own content. None of the remaining players in the auction process have a meaningful amount of proprietary content and streaming services are a dime a dozen.
The bidder for whom Hulu makes the most sense is clearly DirecTV. Unlike the cable companies, DTV has a national footprint. That geographically expansive potential market gives DTV the ability to extract value from Hulu without neccessarily having to market the service as a low-rent alternative to Netflix (NFLX). Instead DTV could offer Hulu as part of its existing subscription service, fulfilling the MSO's long-held dream of offering viewers a true "TV Anywhere" service.
From a game theory perspective the cable companies may just stay in the bidding war to drive up the price for DTV. The reality is Hulu is simply more valuable to the satellite kingpins than it would to be to its cable competition. That means DirecTV is the company most likely to win the battle but at a steep price. Sozzi sees Hulu going for somewhere between $1 and $1.5 billion.
Not bad for a money losing also-ran with 10% market share.
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