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Hulu could play a key role in Disney's plan to take on Netflix

Hulu could play a key role in Disney's plan to take on Netflix
The critically acclaimed "The Handmaid's Tale" won Hulu's first batch of Emmy Awards in September. (George Kraychyk / Hulu)

In the burgeoning business of streaming television shows, Hulu has long been viewed as the distant runner-up to Netflix.

But with Walt Disney Co. poised to take a controlling stake in Hulu, the little 10-year-old streaming service once known solely for airing reruns of broadcast shows online could eventually become a credible threat to Netflix's dominance.

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Burbank-based Disney will own 60% of Hulu if its proposed $52.4-billion purchase of 21st Century Fox is approved by regulators. Hulu is currently equally owned by Fox, Disney and Comcast, which each have 30% stakes. (Fellow media giant Time Warner owns the other 10%.)

If Disney's acquisition of Fox closes in 2019, Santa Monica-based Hulu is expected to become a pillar of Disney Chief Executive Bob Iger's strategy to take on streaming video insurgents that are disrupting the traditional media industry.

The deal could give Disney a leg up in its plans to introduce its own portfolio of streaming services. Disney is planning to launch two streaming services in the next two years — one for sports content, and another Disney-branded offering powered by Disney-owned brands such as Marvel, Pixar and Lucasfilm.

Hulu would be another important part of the strategy to compete for consumers who are cutting the cord. In a business driven by the volume of quality content, Disney could boost the service's standing with more shows. Hulu, which only operates in the U.S. and Japan, could also expand internationally under Disney's watch and benefit from the company's marketing clout.

"Hulu is a major asset that could propel Disney's streaming machine," Daniel Ives, an analyst for GBH Insights, said in a research report. "The acquisition of the Fox entertainment assets and a controlling stake of Hulu would make Disney a much more formidable and dangerous competitor down the road on streaming."

Iger signaled his ambitions for Hulu on Thursday. ​In a call with analysts, he said Hulu would serve as the destination for more grown-up shows and movies that would be misfits on a more family oriented Disney service.

As part of the Fox sale, Disney would control the 20th Century Fox movie and television studio, which produces a bevy of material at odds with the Mouse House's squeaky clean reputation. Fox makes such movies as "Logan," "Deadpool" and "Alien: Covenant," plus TV shows including "Family Guy" and "The Simpsons." Disney would also take over FX Productions, known for "Archer" and "Fargo." Another boon for Hulu could be prestigious indie movies from Fox Searchlight.

"What we envisioned is actually taking Hulu and making it basically the home of adult programming where the ABC product would go, where the FX product would go, where the output of the studios that was not branded Disney, Marvel, Pixar, et cetera would go," Iger told analysts.

For now, Netflix is the undisputed champion of streaming TV. Subscribers spend more than 140 million hours a day on the platform, which boasts wildly successful shows, including "Stranger Things" and "House of Cards." The company had nearly 110 million subscribers worldwide as of Sept. 30. Hulu says it has 47 million viewers, but does not break out the number of subscriptions.

Netflix is currently outspending both Hulu and Amazon, which has also been making its own push into the content business. Netflix is expected to spend as much as $8 billion on content next year, dwarfing the $2.5-billion Hulu invested in 2017. Amazon had an estimated $4.5-billion content budget this year.

Yet, Hulu has been garnering more buzzworthy success after years of playing catch-up to its two bigger rivals. The joint venture has received critical praise for some of its original shows, such as "The Handmaid's Tale," which this year became the first streaming show to win the Emmy for best drama.

Hulu has recently beefed up its content lineup with shows such as teen superhero show "Marvel's Runaways" and sci-fi comedy "Future Man," both of which premiered on the service last month.

"Hulu is a distant third but it has established itself as a significant player with great offerings," said Peter Csathy, founder of advisory firm Creatv Media.

However, Hulu's rise has not been a smooth one. The traditional media companies launched Hulu as a joint venture in 2007, but have rarely agreed on how to court digital audiences.

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Hulu changed its leadership in October, even amid signs it was gaining traction. The company hired high-level Fox television executive Randy Freer as its chief executive to replace Mike Hopkins, who moved to Sony Pictures Entertainment.

A key question is whether Disney will have the appetite to weather the financial losses at Hulu. It has invested heavily in programming in recent years to better position it to take on Netflixamounts of red ink. Hulu has been losing hundreds of millions annually as it ramps up its original programming and also buys rights to multiple seasons of hit network shows such as "This is Us," people familiar with the matter said. Hulu lost $560 million in the first nine months of this year, according to an estimate by BTIG Research media analyst Richard Greenfield.

Also unclear is whether Hulu will be able to renew its critically important programming agreements with the various broadcast networks, including NBC which is owned by Comcast, in the run-up to a Disney takeover. Those agreements -- in which the broadcast network partners allow Hulu to stream their current season episodes -- run another year or two, which means they would be up for renegotiation about the time that Disney would take over the service.

Netflix said it was too soon to tell whether Disney and Hulu would pose a serious challenge.

"It's early days," a spokesperson said in an e-mailed statement. "There is a lot still to understand about this deal and its implications for consumers."

Comcast, Hulu and Fox declined to comment. Disney did not respond to a request for comment.

But consolidating Hulu might not be a slam dunk for the Disney deal, which will face a grueling regulatory review before it is consummated.

Analysts say ownership of Hulu would be one of the most problematic aspects of the deal from an antitrust perspective. U.S. Justice Department antitrust regulators have become increasingly concerned about protecting the growth of streaming, known in the industry as "over-the-top" services, because they bring content into homes outside the traditional conduit for pay-TV -- the so-called cable box.

Given the importance of streaming in the entertainment equation, the Justice Department might ask Disney to divest Hulu.

"Any form of content exclusivity which limits competition is likely to be looked at closely by regulators," Kannan Venkateshwar, a media analyst with Barclays, said in a note to clients.

Hulu became a key concern as the Federal Communications Commission and the Department of Justice were weighing whether to allow the nation's largest cable provider, Comcast, to buy NBCUniversal seven years ago. NBCUniversal was a founding partner of Hulu and regulators were worried that Comcast would use its muscle to thwart the development of the streaming service because it competes with Comcast's existing business.

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In order to get its NBC deal approved, Comcast in 2011 had to agree to be silent partners in the Hulu pay-TV service for seven years. That means Comcast-NBC has been forced to sit on the sidelines as the streaming market has swelled.

However, beginning next summer, the handcuffs will be removed from Comcast, and the Philadelphia pay-TV giant will be allowed to influence decisions at Hulu.

Comcast's active participation is expected to complicate an already messy situation because the companies have never been able to agree on a cohesive strategy for Hulu. Comcast, according to several analysts, would have little incentive to be helpful to Disney's strategy.

"We see no reason why Comcast would want to enable Disney to have a more successful streaming service that hampers the legacy bundle that is vital to Comcast," Greenfield said in a note to clients.

Fox and Disney executives said Thursday that having one major investor rather than the current setup of three equal partners should solve those longstanding Hulu management issues. Disney would be calling the shots -- but Comcast's continued involvement could cause friction.

"Hulu's ownership structure has been a mess since it was created," Greenfield said. "And even with Disney acquiring Fox, its future may remain uncertain."

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UPDATES:

4:45 p.m.: This article was updated to include more details about Hulu's business.

1:10 p.m.: This article was updated to describe Hulu's leadership team.

This article was originally published at 10:55 a.m.

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