Should Disney Keep or Sell Its Majority Stake in Hulu? | Analysis

·7-min read

Changing times at Disney and the streaming landscape in general has created questions around Hulu and its place as part of the entertainment giant’s business. Should it keep or sell its majority stake in Hulu?

Disney has been sending mixed signals in recent years about its plans for the platform — in which it holds a 67% stake, while Comcast holds 33% (which it has agreed to sell to Disney by January 2024 at a still-to-be-negotiated price). On the one hand, a planned international rollout for the service was scrapped in 2020. “Hulu has not been a top company priority since it has been in the Disney ecosystem,” a former Hulu staffer told TheWrap.

On the other hand, Disney has been investing more in Hulu content recently and has raised the price for its live TV plans, suggesting confidence in the product even if it raises the platform’s value (and the price it will have to pay to Comcast for its minority stake). The conflicting approaches can make it difficult to discern where Hulu stands in Disney’s long-term plans. (Reps for Disney, Hulu and Comcast did not respond to requests for comment for this story.)

So, should Disney wave the proverbial white flag on its Hulu experiment and sell its majority ownership stake? Or, should it tighten its grasp and wring every last drop of value the streamer has to offer? With minority owner Comcast’s NBCUniversal reclaiming its content from Hulu for its own Peacock streaming service later this year and Disney aggressively attempting to craft a juicy subscriber growth narrative to sell to shareholders, now is the time to examine the benefits and pitfalls of both approaches.

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Why Disney would sell Hulu

Hulu added just 300,000 new subscribers last quarter, its smallest quarterly growth since Q1 in 2019. As we’ve seen with Netflix, the domestic subscription video on demand (SVOD) market may very well be reaching a saturation point. Amid a potential deceleration of subscriber growth, the looming loss of NBCU content, and rising costs across programming, production, marketing and technology, one could see why Disney might want to punt on the service and refocus on its core brands.

“It would be a load off of their balance sheet in terms of debt commitments,” Paul Erickson, research director at Park Associates, told TheWrap. “It would eliminate the need to try and commit resources, time and human capital to evolving the service long-term.”

The loss of NBCU content and the end of next-day streaming for many of its broadcast hits will put significant pressure on Hulu’s content pipelines. The streamer will have to increase production on originals, which requires more upfront cash. It will also need to seek out new licensing agreements with other studios in a competitive market with much higher prices than the last time the company went shopping.

Even as Hulu leads Disney+ and ESPN+ in average revenue per user (ARPU) by a wide margin, the platform historically lost upwards of $1 billion per year prior to Disney assuming operational control three years ago. Plus, Disney is on the hook to buy out Comcast’s share of Hulu for a minimum of $5.8 billion by January 2024 if it hangs on to the streamer. At a time when Disney’s share price has dropped roughly 30% since February, getting out now may look appealing.

On a programming level, Disney historically utilized Hulu to house its more mature programming — a strategy that former CEO Bob Iger pressed to maintain the Disney brand as a family-friendly one. But now that new CEO Bob Chapek has extended Disney+ to include R-rated and TVMA titles, the company may not need Hulu for that purpose anymore.

And who would buy Hulu? Comcast’s NBCU remains the most logical acquirer given its existing stake in the streamer, which could be merged with the fledgling Peacock platform. Fellow legacy media companies such as Warner Bros. Discovery (HBO Max and Discovery+) and what remains of Fox (Tubi) are focused on their own direct-to-consumer efforts and likely don’t want the financial anchor of such a move. Netflix may be interested in Hulu’s existing advertising infrastructure, but is reportedly sniffing around Roku instead. Apple and Amazon don’t appear interested in major entertainment acquisitions at the moment.

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Why Disney would keep Hulu

While Hulu’s planned international rollout is dead for now, the streamer’s content is integrated into international versions of Disney+ under the Star brand. In Europe, it’s incorporated into Disney+ while in Latin America, Star+ (which carries Hulu content) is available as a standalone streamer.

“Although the Hulu name is not expanding internationally, the learnings and data from Hulu are critical to Disney+’s growth going forward,” Omdia analyst Sarah Henschel told TheWrap.

Disney+ benefited from the effects of the pandemic as consumers relied far more on at-home entertainment, which spurred rapid subscriber growth. Since the service scaled much more quickly than anticipated, the company is pivoting its emphasis to profitability. (Apparently, Wall Street has remembered that tangible money is a good thing). One key strategy here is to move into advertising-based video on demand (AVOD) with an ad-supported tier planned for Disney+ by the end of this year.

“Hulu is the shining star that has excelled in this category in the U.S. and has had success with advertising for years,” Henschel said. “The learnings from having AVOD as a successful part of the service make Hulu an important asset.”

vMVPDs are seeing better churn rates than OTT services. (Park Associates)
vMVPDs are seeing better churn rates than OTT services. (Park Associates)

While 4.2 million Hulu+ Live TV subscribers account for just 9% of the streamer’s total customer base, that service continues to add customers over several quarters. These kinds of virtual multichannel video programming distributors (vMVPDs) have seen steady growth, according to Park Associates, while the rest of the over-the-top (OTT) market has seen rising churn as customers subscribe and then cancel.

Disney has also seen lower churn rates among bundle subscribers (paying for live TV service as well as the streaming platform) compared to standalone customers. Selling Hulu could jeopardize these bundled customers and put a percentage of Disney+ subs at risk, particularly as Disney faces the possibility of a major subscriber loss in India after losing streaming rights to cricket’s Indian Premier League.

“One of the larger market forces we see with consumers is that they are overloaded, so they are gravitating towards aggregation and bundles,” Erickson said. “They want solutions that offer simplicity and Hulu + Live TV and the Disney bundle offer that.”

At the end of the day, it’s more helpful to have an existing subscriber base who you can cross-sell one or both of the other services that exist in the bundle. Selling Hulu may free up much-needed resources, but it threatens future direct-to-consumer initiatives.

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Hulu’s future

Subscriber acquisition, much like bragging rights, will always be a Hollywood priority. But engagement and retention will soon become the more important metrics. It’s all about that sweet, sweet recurring revenue and how long a streamer is able to keep you as a paying customer. While Hulu will help Disney try to reach its stated goals of 230 million-260 million streaming subscribers by 2024, it won’t ever be the Magic Kingdom’s highest priority.

“A lot of the growth Disney needs to reach this subscriber goal will be through international adoption and country launches versus domestic growth,” Henschel said. “Hulu makes Disney+ a great bundle in the U.S., but the U.S. is only one piece of the puzzle.”

It’s possible that Disney could merge Hulu into Disney+ if the former really begins to struggle, but its recent performance hardly warrants such drastic measures yet. Wall Street understands that streamers can’t achieve the kind of direct-to-consumer market growth we saw from 2019-2021 (sorry, Netflix). And while that reframes Hulu in a less than flattering light, it doesn’t mean Disney should cut and run.

“Larger forces are affecting all streamers in the business and Hulu is not immune,” Erickson said. “But, the picture is not nearly as negative as the headlines may have painted it.”

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