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Hulu’s Future: What Disney-Fox Deal Means for TV-Streaming Venture

Nothing will change immediately at Hulu in the wake of Disney’s $52 billion deal with 21st Century Fox.

But now that Disney has snapped up Fox’s 30% stake in Hulu — giving Disney majority control over the 10-year-old streaming-video company — the strategic direction for Hulu in the years ahead has been cast into uncertainty.

Industry observers have speculated that Disney could consolidate all its streaming businesses into Hulu — and turn it into a super-charged service to really challenge Netflix. Disney also could decide to try to grow Hulu, which today is confined to the U.S., into international markets.

Disney chief Bob Iger, on a call with analysts Thursday morning, said the plan for Hulu is to make it the outlet for more “adult-oriented product” from the Fox companies.

“There’s a lot of Fox intellectual property that fits extremely well into Disney-branded direct-to-consumer services,” Iger said on the call, citing Nat Geo and Marvel. “There’s a lot of product that we believe will be of great use to growing Hulu as it already is. Hulu is a more adult-oriented product [that will benefit from] Fox television production and FX.”

Under Disney’s current thinking, Hulu will serve as a complement to the Disney-branded SVOD service set for 2019 — including first-run movies, after Disney’s current licensing pact with Netflix in the U.S. expires — and the ESPN over-the-top service slated for spring 2018 launch.

But now there’s a new boardroom fight looming at Hulu. And whether Hulu remains on its current path as a hybrid subscription-VOD service — adult oriented or otherwise — with a live pay-TV add-on is in doubt.

The question is whether Disney will try to buy out the 30% stake of Comcast’s NBCUniversal and the 10% owned by Time Warner — and whether Comcast and AT&T/Time Warner will be willing sellers.

According to sources familiar with Hulu, each of its parents — Disney, Fox, NBCU and Time Warner — has sought to gain full control over the streamer in the last two years. Hulu’s owners also have been approached by multiple third parties, including a large wireless carrier, interested in buying a stake, sources said. Obviously, none of those progressed beyond exploratory phases.

The wrinkle here for Disney is that, under the terms of the JV agreement for Hulu, it won’t be able to make any major structural changes to Hulu without the agreement of Comcast/NBCU. For the last six years, the Peacock’s hands have been tied with respect to voting decisions about Hulu, under the consent decree Comcast agreed to with the U.S. government related to its NBCU takeover. Those restrictions expire in September 2018 — setting up a potential battle between Disney and Comcast/NBCU over Hulu’s future.

DISNEY-FOX: MEGA-MERGER
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Iger, in an interview with CNBC’s David Faber after the deal was announced, said “we think it’s going to provide Comcast with a more interesting opportunity, as well, as we seek to grow Hulu in even more compelling ways.” Iger added that he had not yet spoken to Comcast CEO Brian Roberts, but planned to, regarding Hulu’s future strategy.

Meanwhile, sources say Time Warner is interested in retaining its 10% share in Hulu; however, the media conglom is currently in the midst of being swallowed by AT&T — which is now fighting the Justice Department’s antitrust lawsuit over that deal. It’s possible Time Warner’s interest in Hulu will be subject to DOJ restrictions.

“Hulu’s ownership structure has been a mess since it was created and even with Disney acquiring Fox’s stake, its future may remain uncertain until one partner can attain full voting control,” BTIG Research analyst Rich Greenfield wrote in a research note Wednesday, ahead of the official Disney-Fox announcement.

Hulu has an estimated 16 million SVOD subscribers. While it’s miles behind Netflix, Hulu is a valuable asset that could accelerate Disney’s streaming-video strategy. Meanwhile, Hulu’s internet-delivered live TV service launched earlier this year had just 150,000 customers as of the third quarter of 2017, according to estimates by Guggenheim Securities.

Again, for now, it’s “business as usual” for Hulu, given that the Disney-Fox deal will take at least a year to close. The challenge for recently installed CEO Randy Freer, the former Fox Networks Group exec who took over in October after Mike Hopkins exited to join Sony Pictures Television, will be to stay focused on growing the business as Hulu’s parents sort out their control issues.

That’s bound to be tough sledding, given the numerous scenarios for Hulu’s future. Greenfield suggested Disney may at some point throw up its hands — and decide to quit Hulu. “[W]e believe it is possible that Disney becomes so frustrated with the joint ownership and growing losses at Hulu that it ultimately sells its Hulu stake to Comcast so Disney can focus on the launch of its own OTT services,” Greenfield wrote in his research note.

— Cynthia Littleton contributed to this report.

Pictured above: Hulu’s Emmy-winning original series “The Handmaid’s Tale”

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