Why Disney CEO Bob Iger Has Done a 180 on Buying Hulu | Analysis

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For months, Wall Street has been consumed with one key question about Disney’s streaming strategy: What about Hulu?

Disney CEO Bob Iger has been dropping strong hints lately that he wants to keep the streaming service, in a major turnabout from the ambivalent attitude he showed toward Hulu and the general entertainment it carries earlier this year, when he declared that “everything was on the table” with respect to Disney’s two-thirds stake in the service.

“There seems to be real value in having general entertainment combined with Disney+,” Iger told analysts last week during the company’s second-quarter earnings call. “And if, ultimately, Hulu is that solution… we’re bullish about that.”

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The most concrete step Iger took was announcing a plan to combine the Disney+ and Hulu apps, a move that took many by surprise. That effective merger of the two streaming services would be harder to untangle compared to the company’s current strategy of selling them as a bundle.

Yet observers still aren’t sure what game Iger is playing. Is he committed to buying the rest of Hulu — or merely seeking to extract maximum value in a sale by portraying it as more, not less, valuable to Disney? And what does his shift in views on general entertainment mean for the company’s overall strategy?

“My take is that it’s a negotiating ploy, and a very sophisticated one at that,” Fitz-Gerald Group founder and principal analyst Keith Fitz-Gerald told TheWrap. “By announcing the integration, he’s effectively telling Comcast that they’ll have to pay up or shut up. I think it’s a super smart move on Iger’s part. Worst case, he keeps it and begins however gradually to salvage whatever value he can.”

The public volley between Disney and Comcast

While both Disney and Comcast chief execs have been cagey about revealing their hands in the past, their latest comments on a Hulu sell have become much more aligned.

“I’ve had another three months to really study this carefully and figure out what is the best path for us to grow the business and it’s clear that a combination of the content that is on Disney+ with general entertainment is a very strong combination from a subscriber perspective, from a subscriber acquisition, subscriber retention perspective and also from an advertiser’s perspective,” Iger told analysts and investors.

He continued, “So where we are headed is for one experience that would have general entertainment and Disney+ content together. How that ultimately unfolds is to some extent in the hands of Comcast and in the hands of basically a conversation or a negotiation that we have with them. I don’t want to be in any way predictive in terms of when or how that ends up.”

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So Iger tossed the ball back to Comcast and the company seems ready to play.

Brian Roberts, CEO of the cable and media giant, said at MoffettNathanson’s Technology, Media and Telecom Conference in New York on Tuesday that it’s “more likely than not” that Disney would buy out his company’s stake.

According to Iger, talks between Disney and Comcast about the Hulu stake have been “cordial.” Under a 2019 agreement, either Disney or Comcast can force the sale of the stake to Disney for a minimum value of $9 billion.

Roberts added that it’s “no surprise” Iger talked about being interested in general entertainment during Disney’s earnings call. “We have a very valuable position,” he said.

The wins for both companies

Unloading Hulu would create a multi-billion-dollar cash infusion for Comcast, which would offset losses it took on in building its own streaming service, Peacock.

“I think that, ultimately, that would be good for our shareholders,” Roberts said of selling Hulu. “If there was anything different than that outcome that would be because it’s even better for us. In our judgment, I think that’s a pretty high bar.”

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For Disney, it’s a practical move. Combining Hulu and Disney+ makes the company’s streaming business easier from both a marketing and content strategy perspective, Third Bridge analyst Jamie Lumley told TheWrap, especially as it faces continued pressure to cut costs.

“Ultimately, this could have a considerable impact as Disney looks to continue trimming costs within its streaming business,” he added. “While it remains unclear whether Disney will want to pay the high price for Hulu, the platform’s ongoing growth and strong ad-tier model may raise the likelihood that Disney will want to own it outright.”

Wells Fargo analyst Steve Cahall wrote in a note to clients that the combined app will “improve user experience, ad sales and quash the debate that [Disney] is a seller.”

Cahall added that the entertainment giant could afford to pay for the Hulu stake out of the estimated $10 billion in free cash flow he expects Disney to generate next year.

“Iger seems to have made a 180 on the issue,” said Gerber Kawasaki managing partner Hatem Dhiab. “Perhaps the deal terms are too stringent and he can’t get out or he really believes the value of the bundle can be much higher than just Disney+.”

He added that he wished Disney didn’t have to pay the contractual minimum of $9 billion for the stake “with so much debt already on its balance sheet.”

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The Disney+/Hulu move comes amid a broader restructuring designed to rein in spending and generate $5.5 billion in annual cost savings, including the loss of 7,000 jobs.

UBS analyst John Hodulik wrote in a note to clients that combining Hulu and Disney+ could lead to even more cost savings — as much as $2 billion a year. Disney might also consider winding down Hulu’s Live TV product for cord cutters as interest in traditional pay-TV bundles continues to wane, Hodulik said.

Dhiab thought the discussions between Disney and Comcast could even yield “some content deals between the two companies.” Media companies generally have shown more interest in licensing out their libraries and less insistence on reserving titles for in-house streamers.

Heritage Capital founder Paul Schatz says there is “little chance” that Comcast remains a minority, passive investor in Hulu. “Something will give, whether [Disney] buys the stake back or another investor takes out Comcast,” he told TheWrap.

He argued that the merger is “another attempt to help a flailing industry and a broken model.”

Yet Disney+ seems to be turning a corner. Subscribers fell by 4 million from December to March, but average revenue per user leapt 20%, showing that an emphasis on per-customer profitability is bearing fruit. Executives anticipate Disney+ will reach profitability by the end of fiscal year 2024. MoffettNathanson analysts predicted that a combination of Disney+ and Hulu could have margins of at least 20%.

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Happily ever after Iger

One intriguing viewpoint on the shift came from LightShed Partners analyst Rich Greenfield, who thought it reflected Iger’s succession plans (Iger only signed on to the job for two years). In a blog post, Greenfield speculated that the move could signal a “likelihood that Dana Walden is [the] next CEO with her background in general entertainment.” Iger made Walden, an executive he had favored with promotions during his last run as CEO, a co-head of Disney Entertainment in a February reorganization.

Comcast might be hoping for more than the $9 billion floor price for its stake, but Morningstar analyst Neil Macker doesn’t think Roberts should hold his breath.

“We don’t believe the integration of Hulu means that Disney would be willing to pay any price for the Comcast stake,” he wrote in a note to clients.

Disney shares closed Wednesday at $92.77, down about 8% in the week since Iger announced the Disney+/Hulu tie-up.

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