Hulu: The Once and Future (?) IPO

Given the paucity of IPO activities in recent years, the buzz surrounding a possible IPO by Hulu has attracted particular interest since the summer. After all, Hulu, a joint venture of NBC Universal (General Electric/Vivendi), Fox Entertainment Group (News Corp) and ABC Inc. (The Walt Disney Company), with funding by Providence Equity Partners, has been one of the most ballyhooed online content distribution initiatives of recent years.

The initial notion of Hulu was to stream recent episodes of television programs, with income to be derived from advertising. The service at first was limited to the U.S. and its roll-out to other countries is proceeding at a snail's pace, apparently due to issues regarding the securing of streaming rights. More recently, at the urging of some of its owners, most notably News Corporation, it began to consider a subscription service as well, culminating in the launch last month of Hulu Plus, which offers access to full seasons of streamed program content, rather than merely the most recent episodes, plus delivery capability to portable devices such as the iPad and to internet-connected televisions. When the possibility of an IPO arose, one report suggested that the IPO would be at a valuation of $2 billion dollars.

Alas, there will not be any IPO, not for a $2 billion valuation, not for a $1 billion valuation, and not even a $1.00 dollar one. As reported in the Wall Street Journal on 21 December by Jessica Vascellaro and Sam Schneider ("Hulu Mulls More Pay Plans, Not an IPO") here, Hulu has apparently abandoned, at least for the moment, any current plans for an IPO. Instead, it seems, the company will consider seeking alternative sources of financing as well as strengthening its subscription services.

That said, I was particularly struck by one comment made in the Wall Street Journal report:

"The people familiar with the matter said that Hulu's lack of long-term rights to its owners' online-video programming was one reason the board and Hulu's management have decided not to proceed with an IPO."

I had to do a double take on this sentence. It says that a major reason that Hulu

pulled its IPO plans is because it is apparently unable to secure long-term rights to use the contents of its (!) owners. It is one thing to say, as the article points out, that Hulu is still trying to decide with what types of content it wants to be identified (i.e. how it wishes to brand itself), but it is quite another thing to acknowledge that you do not have, for whatever reason, long-term rights to your owners' online video programming.

Unfortunately, the Wall Street Journal article does not further elaborate on this spectacularly curious point. Further insights can be gleaned, nevertheless, from a brief report by Sean Portnoy ("Hulu yanks IPO, mulls other subscription plans") that appeared in the 23 December issue of ZDNet here. Portnoy writes as follows:

"However, Hulu is running up against a couple of major obstacles, one external and one internal. The outside factor is Netflix’s success with its streaming service, and while it offers little in the way of new TV episodes and movies, it does have an extensive catalog of titles that Hulu Plus lacks. A major reason for Hulu’s need for more cash is to obtain additional content that would make its subscription plan more attractive.

The company is also facing pressure from its content partners to come up with other pricing plans that provide more revenue to those partners. No details were reported about such plans. But those partners would need to open up their archives fully in order to justify new pricing, especially as Netflix aggressively pursues content for its service — even inking deals with Hulu’s partners" (emphasis by this Kat).

Portnoy's comments suggest that Hulu's own owners are hedging their bets, at least with respect to what platform(s) will be best positioned to monetize their video contents. This apparent bet-hedging by Hulu's owners comes on the heels of increasing penetration by both Netflix and YouTube into online access of television programming which, after all, has heretofore distinguished Hulu from other online content delivery platforms.

Behind all of this remains the continuing nagging question: how and who will be able to make money with respect to the provision of online contents? If the CEO of Hulu, Jason Kilar, stated in a recent interview that the company is on track to generate $260 million dollars for the year 2010. Revenues of $260 million dollars are not a small amount, but it certainly takes a number of multiples to reach even a $1 billion dollar valuation.