Why Google should buy Hulu.


Who should own Hulu? This has long been a parlor game in Hollywood and Silicon Valley, where the online TV site has always been perceived as the offspring of two contradictory cultures. Since its launch in 2007, Hulu has won millions of viewers—and is supposedly on track to earn $500 million in sales this year —by offering an attractive, user-friendly way to watch the most popular shows on TV. But its start-up ethos has run up against the wishes of its owners—News Corp., Walt Disney, and Comcast—who see Hulu as a threat to their main sources of revenue: ads and monthly subscription fees on broadcast and cable television.

In the last few years, those owners (who are also the site’s main licensors of TV shows) pushed for Hulu to run more ads and to launch a subscription version, Hulu Plus. The negotiations about these restrictions have been tense. Last year, Hulu CEO Jason Kilar threatened to quit when executives rejected his plan to offer Hulu Plus for $5 a month rather than $10. That time, the two sides managed to compromise: Hulu Plus now sells for $8 a month. But Hulu, which has to fend off attacks on its business model from pretty much every giant in the tech industry, will never survive long-term if its plans are always getting second-guessed by hyper-cautious higher-ups.

Fortunately, both Hulu and its benefactors seem to have realized that their marriage is doomed. News broke this week that the company has hired a couple of investment bankers to begin putting together a sale of the firm. The question, now, is who would make the best use of its assets.

Early reports say that Yahoo has submitted an informal bid, but I’m guessing that Kilar and his team will politely decline. Yahoo has ruined every start-up it’s ever acquired; for Hulu, being owned by Yahoo would be the only option worse than the status quo. If Steve Jobs or Jeff Bezos come calling, I’d advise Kilar to turn them down, too. Yes, both Apple and Amazon have a formidable presence in the digital entertainment business, but neither has any expertise when it comes to the largest source of Hulu’s revenue: free, ad-supported videos. (Apple would surely want its content to be restricted to its proprietary platforms, which would be a disaster for Hulu.) Then, of course, there’s Netflix. Last year, I floated the idea that Netflix should buy Hulu, and while I still think that would be a good combination—Netflix’s already fantastic subscription plan would be even better if it offered access to Hulu’s lineup of current-run TV shows—the window for such a deal may have passed. Netflix’s subscriber numbers and profits are soaring. It doesn’t really need to spend a fortune on Hulu.

So who’s left? Hulu’s best option, and the one that could turn the service into a blockbuster, is Google.

I’m hoping that the search giant is aggressively pursuing Hulu and that Hulu and its owners are smart enough to realize that this is a can’t-lose matchup. Google has lots of money to spend on Hulu, and it has a clear spot in its product lineup for it, too. Google’s YouTube subsidiary is finally on the verge of turning a profit, but it has long wanted YouTube to be more than just a place for viral videos. The company has been pushing to produce more professional content in an effort to turn YouTube into a rival to TV. Buying Hulu and its portfolio of licensed shows would jump-start that process. And Hulu would help Google beyond YouTube, providing a much-needed source of content for Android phones and tablets as well as Google TV.

The move would be great for Hulu, too. Google alone has the resources and the expertise to turn Hulu into a formidable competitor to Netflix. As the largest Internet ad firm, Google would surely be able to milk revenue from Hulu’s free shows. But it’s Hulu’s subscription service that would most benefit from Google’s deep pockets. At the moment, Hulu Plus’ catalog of shows is too thin, and its monthly price is too high, to stand as a viable alternative to Netflix. But would you give Hulu Plus another look if Google lowered the price to $5 a month and spent a few hundred million dollars a year to buy up access to some of TV’s highest-profile shows? I bet you would. You might even ditch Netflix for it.

Google would have no problem pouring a lot of cash into Hulu in the near term in the hopes of long-term success. Remember, it spent $1.6 billion to buy YouTube and then let it lose hundreds of millions more per year in the hopes that it would one day make a killing. But that suggests the biggest hurdle to my dream deal: Why would Hulu’s owners and licensees want to sell to Google? Here’s a company that has shown no qualms about shaking up the media world. By selling Hulu to Google, wouldn’t these companies be signing their own death warrants?

Sure, they’d worry. But Google could offer a pretty good counter-argument to that fear: lots and lots of cash. Analysts expect Hulu to sell for at least $2 billion, but the search company can afford to pay a lot more than that—say $3 billion or $4 billion or more. But media companies wouldn’t have to fear that they’d be selling off their future earnings in return for a quick cash influx. Every smart person in the TV business knows that the industry can’t depend on cable fees and broadcast ads forever. As Kilar pointed out in a bomb-throwing blog post, viewers are increasingly shifting to media that offers fewer ads and more-flexible viewing choices than subscription TV can offer. As a result, advertising rates for broadcast and cable are declining. Meanwhile, even though Web versions of TV shows display fewer ads than their boob-tube counterparts, advertisers have been willing to pay higher rates for online commercials, because you can’t skip ads on the Web. As Kilar pointed out, Hulu’s per-viewer revenue has been growing, while the per-viewer numbers for cable and broadcast have been falling.

This rising tide of online viewership should be good news for content owners. In April, Netflix agreed to pay $100 million for the right to stream Mad Men. The deal was nonexclusive—meaning that Lions Gate, the show’s producers, can license the show to another streaming company—like, say, a Google-backed Hulu.

TV companies shouldn’t only look at the potential upside of a Google-Hulu deal. There’s also the downside of not doing this deal—the possibility that Netflix becomes unstoppable. In the absence of competitors, Netflix will continue to sign up more and more users, and at some point it will have enough of a subscriber base that it won’t need to pay $100 million for a TV series. It might offer $50 million, and the studios won’t have any option but to say yes.

That’s the choice that Hollywood’s facing. Cable and ad revenue is going to decline. There’s no way around that. Media companies’ best hope, now, is to set up a vibrant online marketplace for their content. Hello, Goolu.