One central theme in all of this pre-event hype is Apple's inevitable launch of its own Netflix-like subscription streaming video service -- will (or won't) it happen on Wednesday? I just published my own Apple v. Netflix 5-factor analysis in a head-to-head showdown when it does -- and, my headline was, "Maybe Apple Should Just Buy Netflix."
But, here's the thing -- Apple won't buy Netflix. But, Apple may buy Hulu (and it wouldn't be beyond the pale that Apple announces that on Wednesday).
Here are 5 reasons why an Apple/Hulu mega-deal would make sense -- and why Apple's not-too-distant acquisition of Beats on the music side is both consistent and highly instructive on this tantalizing possibility:
(1) Hulu gives Apple the immediate mass of content (and related rights) it needs. It is no secret that Apple has been challenged in its content negotiations with studios and broadcasters for the streaming rights it need (just like it was on the music side). That has delayed Apple's "Netflix Killer" over and over again. Hulu (like Beats Music) would solve that problem immediately at mass scale.
(2) Hulu gives Apple the immediate marquee differentiating content it needs. Hulu has been on bender lately buying up exclusive premium marquee video content and television rights at significant price-tags. Cases in point include South Park ($192 million for 5 years), Seinfeld ($160 million for 5 years), and last week's coup of stealing away Epix cable movie rights from Netflix. A new boldness at Hulu is in the air -- highly differentiated from its appetite in the past. Was this all simply part of plan to better position itself to Apple (and potential other mega-buyers)? Certainly, Hulu has actively flirted with the idea of being acquired for several years now (that has been big news in Hollywood for years). This may be the time. Previously, those who woo-d Hulu (including Yahoo! and several media behemoths) didn't step up to the plate to meet the bold demands of Hulu's media owners (Disney, Fox and NBCUniversal). Apple, with its mega-$200 million cash hoard certainly is in a position to be significantly more aggressive. It certainly was with Beats -- spending a cool $3 billion (which is significantly more than any purported Hulu offers previously).
(3) Hulu gives Apple the immediate core creative and production expertise it needs for its inevitable "Originals" strategy. The buzz about Hollywood this past week centered around Apple's reported newly-rejuvinated plans to develop its own premium original movies and series a la HBO, Netflix, Amazon ... and Hulu. I was interviewed this past week over and over again about this captivating rumor, underscoring how critical and fundamental an effective originals programming strategy is to differentiate any one service from the growing field of mega streaming competitors. Hulu -- which already features a deep slate of original programming -- has those chops (and the relationships that go with them). Let's not forget -- Apple still is first and foremost a technology company -- it critically needs that Hollywood expertise and those authentic relationships with the creative community. Hulu immediately solves that problem (just like Beats did on the music side with Jimmy Iovine and Dr. Dre -- critical creative and relationship elements to that deal). Apple should (and likely will) augment that expertise further by buying an innovative, connected premium marquee production house (and the talent that goes with it) in an effort to "out-marquee" all others.
(4) Hulu gives Apple an immediate widely-recognized video brand and immediate mass distribution. Yes, everyone knows (and uses) Netflix. But, everyone also knows Hulu. It is a widely-known -- and increasingly widely-respected -- brand (especially now as more and more exclusive compelling premium content is available on its platform). Hulu also -- importantly -- already is featured on most significant non-Apple distribution platforms. Yes, I know, Apple dropped the Beats brand when it recast that music streaming service as Apple Music. But, remember, Beats Music had launched only months before Apple's acquisition (and didn't yet build its own significant user base yet and the "goodwill" associated with it). And, let's also not forget that Apple DID retain the Beats brand for headphones -- its established business that had built up a significant customer base and goodwill. So, it certainly is no longer unprecedented for Apple to feature a different brand name. Hulu's brand is fundamentally different from the Beats Music service brand. It is an established premium video brand, as well as a respected video service with mass scale, goodwill and a generally applauded customer experience (an Apple hallmark). Hulu's "Swiss" non-Apple brand is beneficial to further expand the service beyond the Apple platform. And then, of course -- in the big inevitable shot across the bow to Netflix -- Hulu (in the hands of Apple) would also be the headline primary featured service on Apple TV and in the overall closed Apple eco-system. Others may still exist on that platform (as they do now), but they would be buried into relative obscurity. You can be sure of that. Membership has its privileges -- and Apple controls what we see on its platform (and in its retail stores). That, of course, significantly impacts what service we use (and the switching costs from Netflix to Apple are minimal in this subscription streaming game). Compelling.
(5) Hulu gives Apple a significantly more cost-effective way to enter the streaming video market at mass scale. Yes, Apple could afford to buy Netflix (as I pointed out in my recent blog post). But, Hulu would be massively more cost-effective (by a significant multiple). Again, Apple's Beats deal is highly instructive in this regard. Apple could have easily bought the market mega-leader in the streaming music space -- i.e., Spotify. But, that move would likely have carried a $10-$15 billion price-tag (since Spotify's last round valued the company at $8+ billion). Instead, Apple paid $3 billion for Beats (and got the lucrative headphone business to go with it). Apple likely could buy Hulu for something more in the $4-$6 billion range (previous reported Hulu M&A discussions indicated that a $2 billion-ish price likely would have closed the deal). Netflix, which trades at around a $42 billion market cap (as of this past Friday), likely would cost $60-$80 billion. And, although Apple holds $200 billion in cash, that massive differential (between Hulu and Netflix) matters -- especially if Apple gets many of the ingredients it needs via Hulu. Apple also could sweeten the pot to further entice Hulu's owners (i.e., the studios) to consent to the transfer of Hulu's content licenses to Apple by giving them some equity in the newly-acquired company to give them a piece of the action -- and to make Hollywood a bit more amenable to licensing its content to Hulu as a result in the future. Again, membership has its privileges.
So, will Tim Cook announce a Hulu deal on Wednesday? I absolutely believe he will make some kind of major strategic video content announcement as part of his Apple TV "main event." But, I peg odds of this intriguing Hulu possibility as being small ... for now.
However, that doesn't mean it's not a logical move. Nor does that mean that it won't eventually happen. Apple understands it needs to enter the streaming video service game now in a big, big way. There is no time to wait any longer. Netflix has simply gotten too big, too fast. It ultimately saw the same writing on the wall on the music side. Spotify had simply gotten too big, too fast. So, Apple finally made is long overdue move with Beats.
Apple will make a massive move on the video side too. That is inevitable. Hulu could be that move. And, when it does, its vastly different (and significantly more compelling) underlying business model from Netflix's will be a significant advantage (see point 5 in my recent blog post which discusses that oft-overlooked point).
Ladies and gentlemen, buckle your seat belts. It's going to be a bumpy ride.
But, an incredibly dramatic and exciting one as well ....
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