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The Role of Hulu in Disney’s Acquisition of Fox

Since Disney’s announcement in December that it will acquire most of Fox’s assets, including majority control over Hulu, there has been some discussion about how that will change Hulu’s role within the industry. Will Hulu remain an independent platform that continues to license content from a variety of sources, or will it morph into an exclusive Disney platform? And how does Disney’s majority ownership of BAMTech fit into this strategy?

I have a few thoughts to add to the conversation.

Background
Until now, Hulu has been the primary platform by which TV broadcast and basic cable shows found their way into digital. It has also provided Disney, Fox, Comcast/NBCU, CBS, Viacom, and Time Warner a new and not-insignificant revenue stream. The co-ownership and co-dependence on Hulu among major industry players has historically led to challenges in governance and strategic direction, while also balancing competing interests during the early days of streaming. Those days are over. Time Warner is pulling many of its assets off of Hulu in favor of its own platforms, or potentially AT&T’s platforms if its vertical integration merger is ultimately approved.

Prior to the Fox announcement, Disney had already unveiled two key pillars of its future digital strategy: an ESPN-branded, sports-focused D2C service launching in 2018; and a Disney-branded, entertainment-focused direct-to-consumer (D2C) streaming service to launch in 2019 (when its Netflix licensing deal expires). The addition of Fox assets (Fox’s prolific movie and television studios, the FX and National Geographic cable networks, and 22 Regional Sports Networks) will bring much-needed content density (i.e., breadth and depth) to Disney’s future streaming products.

The Necessity of Vertical Integration
The long-term success of Disney will be driven by its ability to succeed as a standalone digital streaming platform. Put another way, Disney must become both content producer and distributor. Only owning half the equation, either just content or just distribution, is not a viable strategy for major players hoping to be around more than 10 years. This is a reality of today’s consumer video marketplace, as seen in the decisions by HBO, Showtime, CBS, and now Disney to launch their own D2C distribution platforms. Similarly, it is propelling major distribution platforms (Netflix, Amazon, Hulu, YouTube, Facebook, and Apple) to produce their own original content (with Spotify also moving in that direction with its original video series). Vertically integrating content and distribution is no longer merely an option for major brands: it is now a strategic imperative for long-term survival. This is the same force that is driving AT&T’s acquisition of Time Warner. Disney is also keenly aware of this truth, thus its prior announcements to launch two branded D2C services and take control of BAMTech, the digital platform that provides video streaming technology and mobile apps for MLB.tv, HBO Now, NHL, WatchESPN, the WWE Network, as well as the PlayStation Vue virtual-MVPD service.

As to BAMTech
BAMTech is a technology provider, not an audience platform. Because of this, I’ve always believed that Disney’s interest in BAMTech was necessary but by itself insufficient. Yes, having (better yet, owning) the right technology is critical but at best only half the battle. Creating a strong consumer brand, a compelling user experience, and a high-growth subscription engine is at least equally important. These are things that BAMTech, as a B2B service provider, has never needed to master. Hulu, on the other hand, is an audience platform, fluent in consumer branding, marketing, user experience, and subscription growth. With Hulu under its thumb, Disney’s new digital strategy will start with 13 million subscribers. With BAMTech alone, Disney would start with 0 subscribers. With both in place, Disney is setting up to compete head to head with established ‘new media’ brands like Netflix and Amazon.

As such, I believe Disney will need to focus on transitioning Hulu to become the digital home for all of Disney content. BAMTech does have unique technology assets and human talent, particularly in live sports streaming, which should to be contributed to this future Hulu. But Hulu should be the consumer-facing platform used to drive growth in Disney’s D2C services, not BAMTech.

What Hulu Ownership brings to Disney
A key to a thriving Hulu under Disney control will be for Disney to give Hulu full operational independence.  That will certainly be a challenge for Disney, given the many different corporate divisions that would feed into Hulu. But if they don’t, they risk losing the speed, nimbleness, and courage to make big bets, all of which are core to Hulu’s culture and DNA. These are also the corporate characteristics that have produced the mega-distribution platforms such as Amazon, Netflix, and Facebook… and exactly what Disney will need to grow its own thriving D2C distribution business. While Disney is famously consumer-first in its creative productions (movies and theme parks), its business practices have tended to be Disney-first: requiring every household in America to pay for ESPN, the most expensive channel by far, simply as the price of entry into cable. These types of heavy-handed business practices tend to backfire in the Consumer Internet. Hulu, with its culture left intact, will be able to help Disney navigate this.

Some in the industry, including Disney CEO Bob Iger, have suggested that with Hulu, Disney could also offer a third streaming service, one that is adult-oriented that leverages Hulu’s existing licensed and original content. This service would be distinct from its Disney-branded kids/youth-oriented service and its sports-oriented service.

There are a few problems with that strategy. First, it assumes the other media companies that license adult-oriented content to Hulu, namely Comcast/NBCU and CBS, would continue to do so after Disney assumes majority control. This is not likely, as Comcast will probably respond to Disney’s acquisition of Fox and Hulu by doing something similar: aggregate its own broadcast and cable assets, shop for new assets, and consolidate them all into a single digital platform that it fully controls. Holding on to a minority stake in Hulu that becomes fully controlled by its chief competitor would not make sense. I believe Comcast will divest its Hulu stake and focus on its own streaming future.

One Service to Rule Them All
One of the “secrets” to Netflix’s sustained growth was its bundling of kids content with adult-oriented content in the same subscription. When the adults didn’t have anything else to watch on Netflix (perhaps in between seasons of shows), they were still compelled to keep the subscription active because their kids depended on it. Kids content has proven to deliver reliable, sustained engagement for SVOD services and a key to minimizing churn.

Why, then, would Disney not do the same? Rather than offer one app for kids that is Disney-branded, and one for adults that is Hulu-branded, it might be more strategic to combine both into a broader general entertainment platform that takes full advantage of the adult-oriented Fox television and movie assets, such as This Is Us, Modern Family, The Simpson’s, American Horror Story, Homeland, and the Avatar franchise. It would also provide a more comfortable home for franchises such as Star Wars, which cross-over between kids and adults. On top of this generalized entertainment Disney+Fox platform, Disney could offer its premier sports assets (ESPN and Fox’s 22 regional sports networks) as a value-added tier (once the associated cable distribution agreements expire, of course). Talk about a powerful combination with immense content density! One Disney streaming service to rule them all!

This combined strength of Disney + Fox entertainment and sports content assets, with the integration of Hulu’s consumer subscription platform and BAMTech live sports streaming technology, would make this vertically-integrated, D2C platform one of the most compelling on the market, and secure Disney’s future in the future of TV and video.

Mike Berkley is a senior media and technology product leader. He has developed new businesses for companies like Spotify, Comcast, Viacom, as well as for several startups including two that he founded. He lives in the Hudson Valley of New York.