July 13 (Bloomberg) -- Hulu LLC’s owners are in talks to sell a stake in the streaming service to Time Warner Cable Inc. as they seek to create a stronger competitor to Netflix Inc., according to people with knowledge of the situation.
An agreement, while not imminent, could be reached in as little as two weeks, said the people, who sought anonymity because the talks are private. Time Warner Cable had previously sought to acquire a 25 percent stake, they said. Owners Walt Disney Co., 21st Century Fox Inc. and Comcast Corp.’s NBCUniversal yesterday called off plans to sell the service.
The talks coincide with a $750 million commitment from Hulu’s owners backing the online company’s drive to attract subscribers and take on industry leader Netflix, which has 34 million paying customers. The money will help Los Angeles-based Hulu buy programming, market its service, develop technology and attract employees, Disney Chairman and Chief Executive Officer Robert Iger said yesterday on Bloomberg Television.
“We ultimately concluded that, even though we had some very compelling offers on the table, the future of Hulu is bright,” Iger said at the Allen & Co. conference in Sun Valley, Idaho. “And if the future of Hulu is bright we should hold on to it.”
The moves underscore the popularity of services like Netflix and Hulu, which deliver films and TV shows to smartphones, tablets and computers, as well as living rooms. With their investment, the owners say they have settled differences over Hulu’s future. The service faced uncertainty and management turnover as the companies debated its direction.
Hulu attracted suitors including Time Warner Cable, DirecTV and Peter Chernin with AT&T Inc., people with knowledge of the matter have said. DirecTV, the biggest U.S. satellite TV service, and the Chernin-AT&T partnership each offered about $1 billion, people with knowledge of the bids said this week. Time Warner Cable, the second-biggest U.S. cable system, has wanted to invest with Hulu’s owners, they said.
Meredith Kendall, a spokeswoman for Los Angeles-based Hulu, declined to comment on the Time Warner Cable talks, as did Maureen Huff at Time Warner Cable. Reuters reported the talks earlier yesterday.
Time Warner Cable, with about 12 million video customers, would probably use Hulu Plus to promote its high-speed broadband product, Amy Yong, an analyst at Macquarie Securities in New York, said in June. The New York-based company could bundle a subscription to Hulu Plus to new Internet subscribers, she said.
Throughout the auction that started in March, Hulu’s owners continued to weigh the value of the service and its long-term potential, Iger said. During that process, Disney and Fox overcame disagreements about Hulu’s direction, he said.
Hearing people at Sun Valley talking about Hulu in the same the context as rival video services from Amazon.com, Apple Inc. and Netflix Inc. helped assure Iger that not selling was the right decision, he said.
“Hulu mentioned in the same breath, I mean that says something, doesn’t it?,” Iger said.
The company has grown to 30 million unique monthly visitors, with annual revenue that doubled to $690 million last year, and more than 4 million paying subscribers.
Hulu offers a free version on computers and an $8-a-month Hulu Plus with more content on more devices. Shows on both have commercials. The fresh capital puts it on better footing competing for content with Netflix and Amazon.com Inc.
“We also decided we would infuse it with the kind of capital necessary to grow it significantly and aggressively,” Iger said.
Netflix spends about 5 percent of its annual $2 billion programming budget on original shows, Ted Sarandos, chief content officer, said last month.
Deal talk at Sun Valley this week underscored the confidence media executives have in their future. Moguls arrived at the annual event with the 16-member Standard & Poor’s Media Index up more than 40 percent in the past year and $53 billion of mergers already announced in 2013.
Online players such as Netflix, Amazon and Hulu are creating new revenue streams for the owners of TV shows, while traditional sources, such as advertising, also increase, said David Zaslav, president and chief executive officer of cable-TV network Discovery Communications Inc.
“There’s never been a better time to be in the content business,” Zaslav said. “The markets recognize it.”
Liberty Media Corp. Chairman John Malone, already pressing for a merger of Time Warner Cable with Charter Communications Inc., suggested satellite TV providers Dish Network Corp. and DirecTV should also be consolidated. Liberty owns stakes in both Charter and in DirecTV.
“Scale economics in the media business drives down costs and makes it possible for larger investments,” Malone said. “In order to improve the service for the consumer, you need larger, I’m not saying monopoly players, but you need larger players.”
Programming executives also said they are in favor of consolidation.
“It makes everyone more efficient,” Time Warner Inc. Chairman and Chief Executive Officer Jeffrey Bewkes said in a late night scrum with reporters. He said he wasn’t concerned pay-TV providers would outmuscle him in content negotiations.
Hulu would have given a pay-television acquirer the ability to offer a lower-priced alternative to their own cable and satellite video subscriptions. Online services are popular with people who cancel or cut back on pay-TV services, along with younger viewers who have never subscribed to pay TV.
Robert Mercer, with El Segundo, California-based DirecTV, the largest U.S. satellite TV service, declined to comment, as did Charles Sipkins, a spokesman for Chernin.
“It’s a setback psychologically for DirecTV,” said Todd Lowenstein, portfolio manager with Highmark Capital Management in Los Angeles, which owns 91,325 shares. “Hulu represents a clear path to a future that makes DirecTV viable in a new, mobile media landscape. These are scarce assets. When that option is removed, the attractiveness of DirecTV in some investors’ eyes is diminished.”
Hulu’s free, ad-supported business is already profitable, a person familiar with the matter said last month. Hulu Plus, the paid product, loses money, the person said. Even though it generates monthly subscriber fees, the paid service has higher content costs. Hulu Plus could be profitable in 18 months depending on how it grows, the person said.
“Hulu has an incredible set of apps and distribution that the networks just can’t duplicate, it never made sense to sell to a distributor,” said Rich Greenfield, an analyst with BTIG LLC. “We are very pleased and advocated the owners hold onto Hulu from the very beginning.”
Disney, based in Burbank, California, rose 0.6 percent to $66.98 yesterday in New York. Comcast, based in Philadelphia, slid 0.5 percent to $44.68, while New York-based 21st Century Fox advanced 0.8 percent to $30.19.
Time Warner Cable, the second-largest U.S. cable TV company, fell 0.2 percent to $115.16. DirecTV gained 0.8 percent to $64.91, while AT&T, based in Dallas, retreated 0.2 percent to $35.81.
The canceled auction wasn’t the first time Hulu’s owners had a change of heart. They put the site up for sale in June 2011 and called it off in October. Hulu never advanced a planned share sale in 2010 that envisioned a $2 billion value.
The auction this time stemmed from disagreements over Hulu’s direction between Disney and Rupert Murdoch’s Fox, which control the company. Each had each considered buying the other out. Comcast is barred from an operational role because of conditions placed on its purchase of NBCUniversal, an original investor in Hulu.
“This thing could really turn out to be something big,” Iger said.
To contact the reporters on this story: Andy Fixmer in Los Angeles at firstname.lastname@example.org; Alex Sherman in New York at email@example.com; Christopher Palmeri in Los Angeles at firstname.lastname@example.org