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DIRECTV to Takeover Hulu Soon

Zacks Equity Research

Growing saturation in the U.S. pay-TV market and increased competition from the low-cost online video streaming service providers are forcing established pay-TV operators to restructure their business models. Earlier this month, a Reuter report stated that DIRECTV (DTV), the largest satellite-TV operator in the U.S., offered $1 billion to acquire Hulu, the online video streaming service provider. Various industry sources declared that the deal is in the final stage and may be completed in the coming weeks.

Hulu is currently jointly owned by News Corp. (NWSA), Walt Disney Co. (DIS) and Comcast Corp. (CMCSA). However, Comcast has no management control over Hulu as it had been restricted by the Federal Communications Commission after its acquisition of NBC Universal. Reuter reported that seven firms have bidden for Hulu. Apart from DIRECTV, two other firms have also offered $1 billion.

The U.S. pay-TV market is extremely competitive. In addition to the traditional Cable TV and satellite TV operators, telecom giants are also offering fiber-based high-speed video services. In contrast, low-cost online video streaming services have also become very popular especially when the economy is still reeling under fluctuations.

In order to survive in this juncture, traditional pay-TV operators are diversifying in related fields. Comcast acquired content developer - NBC Universal - and deployed several innovative services such as X1, Streampix, and high-speed business services. Time Warner Cable is concentrating on high-speed residential and business services. DISH Network is desperately trying to deploy a nationwide wireless network.

Similarly, we believe that DIRECTV also needs to restructure its business model and the decision to bid for Hulu is one such step. Hulu commands over 4 million subscribers and generates revenues of about $700 million per annum through subscriptions and a free ad-supported service. Hulu will enable DIRECTV to offer low-cost online video in addition to the company’s expensive premium-brand pay-TV package.

In the U.S., DIRECTV had 20.105 million subscribers at the end of the first quarter of 2013. Although the company is still generating net new subscribers, the rate of growth has slowed down. In the last quarter, it added just 21,000 subscribers compared with 81,000 subscribers in the year-ago quarter.

DIRECTV also has a solid footing in the Latin American markets. However, even there, competitive pressure is gradually increasing due to high-speed 3G bundled services of voice, video and data offered by the large telecom operators.

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