Why Disney’s Hulu Dilemma Isn’t As Complicated As It Seems

Summary:

• Disney’s “Game of Bobs” has made things a little rockier than expected at the House of Mouse as of late and that’s called some future decisions into question.
• One sizeable decision is what to do with streaming service Hulu, which is currently a jointly owned platform between Disney (which holds the majority) and Comcast.
• Under the terms of the deal, Disney is expected to buy-out Comcast’s shares in 2024 – but while that was clearly Bob Chapek’s plan, Bob Iger has seemingly cast some doubt.
• Some see Iger’s statements as a bargaining tactic to allow cost-conscious Disney to re-negotiate for a lower price, but regardless the deal essentially has a “cold feet” clause.
• Disney and Comcast can each legally force the other to honor the agreement – but even if Disney wanted to opt out, it would be a mistake given Hulu’s overall value.

To heave-Hulu or not?

That is the surprising question facing Disney (NYSE:DIS) at the moment – even though that the decision doesn’t have to be made until 2024.

So why is this a problem, why is it coming up now and why is the debate around it the equivalent of a fool’s errand?

First as always, some background.

It has been rocky times for the Mouse House as of late, all stemming from their “Game of Bobs” which saw Bob Iger return to his topper role. The problems built up by his predecessor Bob Chapek were vast and the ripple effects will be felt for a while…largely because while Iger was known for holding things close to his vest, Chapek was not.

You knew what Chapek was feeling and his reactions to events around him – which created a new wrinkle in negotiations. What Iger now has to do is essentially re-write history and at a cost-savings centric price. In other words, it’s not (entirely) what Chapek was suggesting was wrong, but that it may have been too costly.

Hulu is a prime example.

As you may remember Hulu was started as a jointly owned venture with the multiple top linear broadcasters… eventually that became just ABC/Disney and NBC/Comcast (NASDAQ:CMCSA). Disney would take on the majority share with Comcast holding about a third of the business. Under terms of the deal – which Iger originally helped broker – Disney could buy that last bit from Comcast (at fair market price) in 2024.

Now the twist here is that the deal includes clauses from both sides that force the other to go through with the transaction. Think of it as a “cold feet clause” that prevents either company from trying to back out.

Last fall, Chapek told investors he saw a path where Disney would not only honor the agreement but potentially speed up the timeline and buy the remaining shares sooner. It was a sentiment that (at the time) was echoed by some of the more notorious activist investors in Disney.

The problem is that that minority share is not going to be cheap – we are talking billions here which for a company trying to make up financial ground creates problems. Iger, recognizing that, has been much more secretive and coy about his plans since re-taking his role and its creating a stalemate.

Of course, to Comcast that is of no consequence and the company has made clear its intentions to follow-through on the deal and sell the stake to Disney – unless a better offer comes along, which would be hard given the price tag.

So this begs the question to the investment community – what happens next?

What should Disney do with Hulu?

Take the legality aspect out of it for a second.

Yes, you can make the argument (and many have) that Disney should find a way to try to cut bait and ditch the deal or find another buyer that will cover the costs. Some have also suggested alternative barter solutions such as factoring ESPN into the deal and potentially selling ESPN to Comcast as part of the payment to off-set costs.

That’s the one I wanted to explore here because it is coming up more and more despite the fact Disney has rather emphatically closed the book on that conversation.

If it wasn’t clear before, it should be now – Disney is NOT interested in selling ESPN.

Iger may be cagey about some aspects of his plans, but he’s been very clear about that particular notion.

“ESPN is a differentiator for this company.” – Bob Iger

ESPN is too important to Disney’s overall strategy and brings in a lot of money through cable/satellite fees to seriously consider excising the network. Disney also just re-structured its entire company and made ESPN one of its three tentpoles – along with parks and entertainment.

This comes after Disney recently re-negotiated a number of ESPN’s sports licenses to have more favorable returns – including TWO Super Bowls that would air on ABC. It is that type of synergy that makes this important. Disney, through ESPN, is the only company of the big broadcast groups to have ties to all four of the major sports.

Sports are currently the biggest drawer of audiences on linear TV at the moment and Disney would be loathed to give up that type of value (and bragging rights to advertisers).

Although ESPN’s value extends further as ESPN+ is part of the Disney streaming bundle with Disney+… and yes, Hulu.

The bundle is a large reason why ESPN+ has been able to build its audience and why Disney as a whole has been able to grow so rapidly in the space. If you take Hulu out of the mix then the bundle loses value – as does the whole portfolio.

The appeal of the bundle is that it hits three different core audiences – families, sports fans and mainstream consumer. If you already have two of the services it just makes more financial sense to get the third and the overall discount that comes with it.

There’s also the value that Hulu brings on the prestige side – Emmy winning series Dopesick, Only Murder In The Building and The Handmaid’s Tale are just three of the network’s big hits. All three are also adult fare and that has always been part of the appeal of its 20^th Century Fox deal in general.

While Disney sees the financial value and appeal of all of those titles, it could never put them – or movies like Bohemian Rhapsody or Ford Vs. Ferrari – out under any of its banners because they are too adult. However, they can under Hulu or 20^th Century because while they may be under the same umbrella, they are known as adult brands.

In streaming it is all about giving subscribers the most variety and value… keeping that bundle (and its components) intact achieves that goal. Beyond that, for Disney that goal was also to compete with Netflix, Amazon and the other major streamers.

And it’s largley worked.

Of course Iger isn’t just going to come out and acknowledge any of this anytime soon…largely because he can’t, even if he knows the truth.

Let’s call a spade a spade… Iger knows the landscape.

He is one of the most decorated and beloved leaders in Disney’s history, you don’t achieve that status by sticking your head in the sand or being blissfully unaware of the optics of your choices.

He’s doing what he was brought back to do – course correct the overall strategy.

In this case, it may take a little bit longer to get there, but the end result will likely be the same... that is unless Iger pulls another Marvel or Star Wars sized rabbit out of his hat.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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