While Yahoo! remains the best positioned digital media company around, Wall Street remains unconvinced.
Yahoo!’s revenues are not growing as fast as other online media companies (GOOG, AMZN, Facebook, etc). Moreover, between Facebook’s grip on display ad inventory and DSPs changing the way advertisers buy inventory, Yahoo’s core business (display, reach) is under threat.
If that weren’t enough, the Alibaba/Alipay situation illustrates that it’s only a matter of time before investors, analysts and the media force Yahoo! to shed its Asian assets. Once the company unloads those assets, the cash on its balance sheet will soar, but its enterprise value (market cap + debt – cash) will plummet.
Block and Tackle, but Look for Hail Marry as Well
As Yahoo! plays catch up investing in video . . . it might realize that it needs to make some tuck-in acquisitions and consider throwing a hail marry, too.
Post Asian asset sales, Yahoo! will find itself with:
- lots of cash on its balance sheet
- a lower enterprise valu
- tepid revenues
- growing threats
- an opportunity to grow in video.
Yahoo! will be able to use some of the cash on its books to acquire Hulu to compete with Netflix, Google/YouTube and Amazon more effectively. Otherwise, the status quo means a company that will become gobbled by one of the larger companies out there. Not a bad fate in of itself, but not a fate it needs to back itself into either. Yahoo! can also be taken out by a private equity firm, something that I’ve long argued would have its share of benefits.
Content is a Woman, Distribution is a Man
I’ve cut hundreds of deals with distribution companies. The conclusion I’ve reached is that—for lack of a better analogy—Content is a woman, Distribution is a man. In other words, historically distribution companies
- make no commitments,
- never make any promises,
- have no-strings-attached offerings,
- rarely seek exclusivity, and
- when they do, it’s usually too good to be true.
Content owners, meanwhile,
- enter distribution deals with expectations,
- believe the promises they hear,
- expect a commitment, and
- want a guarantee.
As a man, I can’t help but admit that in the end, women prevail and men have to come around if we want to play along.
As a content owner, it’s reassuring to know that.
Is Hulu a Content or Distribution Company?
In case you’re asking: is Hulu a content or distribution company, well, it’s a hybrid. Technically it’s a distribution company but its pedigree is content (via its owners). If someone buys them and gets exclusive rights, it becomes more of a content play than a distribution or tech play. The reality is that to most buyers its traffic and technology are worth less than its content rights, especially if those rights become exclusive.
Welcome to an Era of Exclusivity
Meanwhile, I expect Facebook to move away from being a pure-play platform and move further into becoming a media company striking content deals, including exclusive content rights and content acquisition deals (learning from Google/YouTube’s early missteps and trying to jump some steps and save time to justify its $70 billion market cap despite relatively low revenue figures).
Lost in the recent “will Hulu sell?” talk is “why would Hulu’s owners want to sell?” Its owners are of course some of the largest traditional media companies (TMCs) including News Corp., Disney and Comcast (via NBC Universal).
Hulu raised $100 million at a $1 billion valuation. It’s unclear if the consortium of media companies and the private equity firm Providence share a vision for the exit, or end game. Even if Hulu’s value has risen since that deal, the increased value on the TMCs’ balance sheets means little to media companies. Moreover, Providence realizes that without the rights to the content, no buyer would take a stab at Hulu.
The Mother of All Pivots?
So a company like Yahoo! will be tempted to “pivot” its plodding aircraft carrier and acquire Hulu and then use the cash left from the Asian assets (net of the $1-2B rumored to buy Hulu) to then fork over licensing fees to the media companies as a carrot to lock in rights—dare we say exclusive rights—for years to come.
As much as some pushed the “non-exclusive” and “hyper-distribution” mantra, those are dead in the water. The web will “regress to the mean” of media and advertising and see more and more exclusive deals. Those are the kind of deals that make television a $70 billion advertising industry and $250 billion ecosystem including other revenue streams.
Hulu’s Strategic Options
This begs the question: what about an IPO? If Hulu goes public at a valuation of $1-2B and sells 10-50% to the public it will only generate a few hundred million dollars; not nearly enough to be used to pay off the big media companies that now own Hulu in licensing fees. Combined with Hulu’s low margins, this means an IPO won’t maximize Hulu’s value, which means the big media companies won’t have an incentive to pursue the IPO path.
Of course, Hulu’s current investors could sell some shares in the IPO, or hold onto their stakes and sell later in a secondary offering in the hopes that the valuation goes higher if they continue to improve the content they give Hulu and/or increase revenue. But, let’s be realistic here, media companies are risk-averse and realize that if they can sell Hulu, give up some exclusive content in the process and concurrently lock in a decent annuity that is more than a positive outcome for what was once labeled Clown Corp. by an influential blog a few years ago. This is all even more pertinent considering that the cloud overhanging Hulu’s content licensing terms and profit margins will remain risk factors in its prospectus.
However, Hulu in the hands of someone like MSFT/YHOO/GOOG would be able to pay the TMCs hundreds of millions of dollars per year in licensing fees. While a ballooning value on paper and increasing goodwill on their balance sheet does little to move the needle for the TMCs, hundreds of millions of dollars in annuities on their income statement will.
Combine this with the facts that:
- Google/YouTube is eager to use $100 million (if not much more over time) to offer Fortune 500 marketers the kind of content they’re used to advertising alongside,
- Facebook is armed to the teeth with hundreds of millions in cash from operations and the sale of stock to DST, Goldman, etc., and increasingly eyeing content,
- Netflix is opening its wallet to TMCs for content,
then you can imagine that Yahoo! realizes it needs a new playbook and the TMCs want to create more competition for their content.
As it turns out, Sumner Redstone was dead right: with new distribution channels the value of content rises. While content and distribution are equally important and one without the other is worthless, suddenly content companies will find themselves in a landscape of heightened competition which will see the value of their content rise.
Disclaimer: YouTube, Hulu, Yahoo! are all WatchMojo’s distribution partners.
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