Why Time Warner's $583 Million Stake in Hulu Fits a Trend

NEWS ANALYSIS: Established content providers are reacting to continuous growth of OTT (over the top) content available on web channels.

time warner deal

Several well-established cable and telecommunications companies, despite their huge number of employees and powerful data centers, cannot come up with their own innovation, so they're forced to look outside and buy new IP to remain relevant.

Nothing wrong with that; companies do this all the time, but it's indicative of a clear trend in this business.

AT&T last year bought DirectTV for $48.5 billion to plug a major hole in its service. Comcast bought two upstart companies, iControl Networks and StickyADs in May and June, respectively.

On July 25, Verizon bought Yahoo's core internet businesses for $4.8 billion to extend its own multi-channel reach.

Deal Values Hulu at Whopping $5.83 Billion

Only nine days after the Verizon deal, Time Warner Inc. revealed Aug. 3 that it will pay $583 million for a 10 percent stake in new-gen video service Hulu. The transaction values Hulu at about $5.8 billion, a valuation that is triple what Hulu was worth in 2012, according to a Wall Street Journal source.

All these moves are related in that they are a reaction to millennials and Gen-Xers who increasingly realize that they're paying too much for video entertainment on commercial channels that they can watch on PCs, tablets and smartphones for little or no cost. So the content distributors aren't going to argue; they're going to give the customers whatever they want to remain customers.

One of the main incentives for Time Warner's big investment for a relatively small portion of Hulu is that the service is about to launch a new online pay-TV service. Along with Netflix, Amazon Prime and Apple TV, Hulu stands right with them as a key member of the new generation of television and video providers.

The new service will enable subscribers to stream their own feeds of major broadcast and cable-TV channels. This eventually could designate Hulu as a game-changer in the cutthroat competition between digital streaming platforms and traditional cable-TV providers.

HBO Having Some Ratings Issues

Time Warner has another reason to stay ahead of the curve by buying new content: It is seeing slowing revenue growth in its popular HBO cable channel, which, despite earning dozens of Emmy awards during the last few years, is facing huge competition from online networks like those noted above and not getting the ratings it did a few years ago.

The company said Aug. 3 that its cable channels—the largest of which are CNN, TNT, TBS, Cartoon Network and Turner Classic Movies—will be made available both live and on-demand on Hulu's new cable-style online video service, which is expected to launch next year.

The new Hulu service, announced two months ago, would be much cheaper than traditional cable providers at about $40 per month. In contrast, a full Comcast or AT&T cablevision package can cost up to $200 per month, depending upon options.

"The investment in Hulu will increase our company's exposure to the secular growth in over-the-top internet TV," Time Warner CEO Jeff Bewkes said on a call with analysts.

"It will also give Hulu more resources to invest in programming and will help foster competition and innovation among streaming services and traditional cable TV distributors."

He's got that right.

Chris Preimesberger

Chris J. Preimesberger

Chris J. Preimesberger is Editor-in-Chief of eWEEK and responsible for all the publication's coverage. In his 15 years and more than 4,000 articles at eWEEK, he has distinguished himself in reporting...