Hulu: Here we go again

You may recall that in June of last year, Hulu put itself up for sale, in part because of strategic disagreements between joint venture partners Disney and News Corp. (NBCUniversal, the third partner in Hulu, is prevented from taking an active management role as part of the terms of Comcast's deal to acquire NBCUniversal.) In October, Hulu's owners cancelled the sale because of "disappointingly low offers." That didn't solve the strategic differences between the partners, however. Today, All Things Digital reported that Guggenheim Partners, Yahoo and Amazon, possibly among others, are considering making offers to acquire Hulu--even though the partners haven't announced that it's for sale. The smell of blood in the water is just too strong.

I'll keep this brief: The reason that the offers for Hulu were disappointingly low last year was that the partners were unwilling to offer Hulu's buyers long-term access to their content. Exactly the same issue will arise if Hulu is put up for sale again. Hulu is effectively worthless without its content. With the exception of Guggenheim Partners, all of the potential bidders already have their own video infrastructure, players and apps. There was a time when Hulu's player was head and shoulders above anyone else's, but that's simply not the case anymore.

The purchase price of Hulu will have to include three to five years' of the partners' content, along with assurances that their content will continue to be available after that time at a price that Hulu's buyer can afford. If the content isn't there, any potential deal will fall apart.

This could turn into the Mergers & Acquisitions equivalent of Lucy pulling the football away from Charlie Brown at the last minute every year. Fox Sports could broadcast "Who Wants To Buy Hulu?"--just put Cleatus the robot into an Armani pinstripe suit, give the play-by-play to Fox Business, and you're all set. For now, all we can do is sit back and watch the action.

Consolidation in the market research business

According to PaidContent UK, iSuppli, a well-known U.S.-based technology research company, has acquired Screen Digest, a UK-based market research company that tracks media markets. Three years ago, Screen Digest acquired Adams Media Research, one of the top researchers following the home video market in the U.S. Now, all three companies will be under one roof. The acquisition is intended to raise iSuppli into the ranks of companies like Forrester, which acquired Jupiter Research two years ago.

The multiyear recession has taken its toll on market research and industry analysis companies. Budget cuts by large clients have made them much more selective as to which research they buy. Some clients have gone out of business, and others have gone away through mergers and acquisitions. For example, the market research firm I worked for a few years ago had Nortel, Tandberg and Ericsson as clients, among others. Nortel has since gone bankrupt, and Ericsson acquired Tandberg. This same scenario is playing out for research firms in a variety of industries. It's hard to replace customers of that size, especially in a recession.

Small market research and market analysis firms are in a particularly bad spot, in that their values lie in the heads of their researchers and analysts. Unless they're highly specialized, their customer accounts are usually of little value to an acquirer that often serves the same customers and has superior sales capabilities.

The acquisition trend is likely to continue, with the following outcomes:

• Individual researchers and analysts (one-person firms) will hold on, because they tend to be more cost-effective and more flexible than the big firms.
• The small (2 to 10-person) research firms will have the biggest problems, because they're too small to be of interest to the big acquirers and most likely to be cut when customers whittle down their market research contracts.
• The medium- and large-size research firms will merge to get into new areas of practice and penetrate new customer bases. These mergers will result in consolidation of back office operations, with resulting layoffs.

Comcast/NBC Universal: It's Not AOL Time Warner

Comcast's acquisition of 51% of NBC Universal from GE has been derided by some observers as the second coming of the AOL-Time Warner deal--two big media companies merging with few real synergies. On the contrary, I think that it's a very good deal for both companies--but it's not without risks.

AOL was "circling the drain" before the merger with Time Warner--subscriptions rates were flattening out, churn was increasing, as were subscriber acquisition costs. The company was hard-pressed to find growth, so it instead engineered one of the dumbest mergers in U.S. history, getting one of the biggest media companies in the world to essentially give itself to AOL. (Let's be clear...the merger was dumb for Time Warner but brilliant for AOL.)

By contrast, NBC Universal is in far better shape than AOL was. NBC's broadcast network is a mess, and the Universal movie studio is questionable (as it's been ever since MCA was acquired by Panasonic years ago), but its cable networks are generally strong, well-run and profitable. It's the cable networks that formed the primary reason for Comcast's interest.

The FCC is almost certainly going to require Comcast to either divest NBC's owned-and-operated television stations in markets where Comcast has cable systems (in Chicago, Philadelphia and Washington, D.C., among other cities) or its cable systems in those same markets. I suspect that it's the television stations rather than the cable systems that will be sold off.

Antitrust arguments against the merger are going to be a lot harder to make; for years, Time Warner owned Time Warner Cable (the second-largest cable operator), a movie studio and a collection of cable networks at least as powerful as those of the Comcast/NBC Universal combination without running afoul of antitrust regulators. Comcast has already pledged to make NBC Universal's cable networks available to competitors. The deal is likely to get done without major concessions beyond those required by the FCC.

The NBC television network can be fixed; it fell from first to fourth place in little more than a year, and one or two years of strong program development could turn things around. (To do so, however, Comcast will have to get Jeff Zucker and his cronies away from the network and install a new programming team.) Universal is a bigger problem, in that Comcast will be its sixth owner in less than 20 years, and no one in that time has figured out how to return the studio to success. The solution may be to sell off Universal in parts, keeping its library and selling off the ongoing studio operations.

NBC Universal's digital assets have been called a key reason for the deal, but I think that they're clearly the tail in this deal, not the dog. The most important digital asset is Hulu, but NBC Universal is a minority owner. Comcast will get a seat at the table, and Hulu will get to play in the TV Everywhere initiative, but it's not going to negate News Corporation's and Disney's interests.

I've learned from my own sources is that Comcast is working on its own low-cost, Roku-style set-top box to make its Xfinity service available on television sets without having to replace millions of existing set-top boxes. This could become the "official" mechanism through which Hulu will get to television sets.

In short, this deal makes sense for both Comcast and GE: Comcast gets control of a treasure trove of content, decreases its costs for distributing some of the most popular cable channels (they become internal transfer costs instead of outright expenses) and gets partial ownership of the Internet video distributor that poses the biggest risk to cable operators. GE gets out of the entertainment business without taking a financial bath, and can focus on industrial, medical and financial areas. The merger will almost certainly go through.