How Hulu’s Success Could Prove Costly for Disney

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Disney is on the hook to buy out Comcast’s stake in the streamer, which is only getting more valuable as it enters profitability ahead of schedule

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Illustration by TheWrap

Most of the ink (including on these online pages) regarding Disney’s streaming ambitions is spilled on Disney+, but the entertainment goliath’s other streaming service has actually been key to its bottom line.

That would be Hulu. Despite a subscriber base that’s less than half the size of Disney+, Hulu posted a surprising profit during Disney’s most recent quarterly earnings (though the company didn’t disclose how big it was). And the surprise profit, on the backs of original hits like “The Handmaid’s Tale” and “Little Fires Everywhere,” came roughly two years ahead of schedule.

Now here’s the bad news: Hulu’s success will probably end up costing Disney, which is on the hook to buy out Comcast’s increasingly valuable stake in the 14-year-old streamer.

“The value of Hulu is rising quickly with the rapid shift of consumer behavior toward streaming, which means the cost of buying out Comcast is stepping higher everyday,” LightShed Partners analyst Rich Greenfield wrote in a research note last week the morning before Disney’s earnings report.

Hulu has always been a curious streaming service. It began in 2007 as a joint venture for three of the four broadcast networks (ABC, NBC, Fox) to dump their linear programming to allow viewers to catch up. For a brief moment, Disney, NBCUniversal and Fox (which each had a 30% stake) and Time Warner (which had 10%) thought about launching an IPO, and later an outright sale, before pulling back in 2011.

Disney acquired Fox’s 30% as part of its $71 billion acquisition of that studio’s film and TV assets, a deal completed last year. Then it quickly bought out the 10% from WarnerMedia (part of AT&T’s purchase of Time Warner). Finally, Disney gained complete control from NBCUniversal parent Comcast later in 2019 with an agreement that stipulates the cable giant can force Disney to buy out its share as early as 2024. That’s also the earliest Disney can force Comcast to sell its share, per the terms of their agreement.

That 2019 deal valued Hulu at $27.5 billion (Comcast’s stake would be about $9.2 billion). But that is essentially the floor for the valuation. As Hulu keeps growing, and its profit margins grow, Comcast’s stake is likely to become much more expensive to buy out.

The value of Hulu has been hotly debated this year between Disney and Comcast. According to report earlier this year in The Information, the two companies are in arbitration over just how much Hulu is worth, stemming from Comcast’s unhappiness with Disney’s decision to pull back on its planned international rollout of Hulu in favor of launching a streaming service under the brand name Star, another asset acquired in the Fox deal.

Disney’s decision to rollout Star has led to additional complications, particularly in Latin America. In most international territories, Star is folded into Disney+ as a content hub, much like Pixar, Marvel and Lucasfilm. In Latin American territories, however, Disney planned to break out Star into a separate streaming service called Star+. But Lionsgate’s Starz has temporarily blocked Disney from launching its streaming service in Brazil after filing trademark infringement lawsuits in June against Disney in Mexico, Brazil and Argentina. Lionsgate argues that the Star+ name is too similar to Starz and its own streaming service StarzPlay, which has been available in Latin America since 2019.

Comcast has accused Disney of making moves like that to depreciate the value of Hulu and stop funding Hulu’s operations (which could lower Comcast’s ownership stake), according to The Information. For its part, Disney has argued that it chose the Star name overseas due to complicated licensing agreements and the lack of brand recognition for Hulu outside the U.S.

When the time comes for Disney to pay up, independent experts will set the valuation of Hulu in the buyout, based on its fair market value.

Reps for Disney and Comcast did not respond to requests for comment by TheWrap, including whether or not Disney or Comcast has the ability to cash out before 2024.

Analysts like Greenfield argue that Disney should do everything it can to buy out Comcast’s stake right now. “Why is buying out Comcast immediately not your top priority, given that Disney has already been forced into arbitration over the Star launch (essentially launching Hulu overseas with a different brand), the Star lawsuit (due to confusion with Starz), the coming Disney/Comcast affiliation/retrans renewal and the need to consolidate Disney+ and Hulu into a single streaming service?” he asked.

During the earnings call, Disney executives spoke about how Hulu is driving much of the company’s streaming revenues, particularly in advertising (Disney+ is an ad-free subscription service, while Hulu has both ad-supported and ad-free options; ESPN+ is ad-supported as well).

Of all its streaming services, Hulu generates the highest average revenue per subscriber at $13.15 for its regular on-demand service and $84.09 for those who buy its Live TV option. Disney+, which retails for $8 a month, generates barely over $4 per subscriber, alluding to the fact that many of its 116 million subscribers are not paying full price (the streamer’s integration with India’s Hotstar is driving most of its growth).

Disney now gets roughly the same amount of advertising dollars from streaming ($2.5 billion the quarter) as it does from broadcast TV ($2.6 billion) and cable TV ($2.8 billion). However, streaming ad dollars grew 50% from the year-ago quarter, while its linear TV networks are mostly stable with just a 2% rise from last year.

“The advertising sales team, if they had more inventory, they could certainly sell it. There’s that much demand for it,” Disney CFO Christine McCarthy said on the call. “We came out of a very strong upfront but we had about 40% of the total upfront dollars into streaming and digital. And a lot of that is not only across Hulu, but also across our other entertainment and sports platforms. So I think that just shows that the kind of advertising that’s going through Hulu is certainly a growth driver.”


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