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Alexis Banks

Captain's Blog: Hulu and Providence Equity Prove that Cord-Cutting is Real

Hulu's recent announcement that it would buy out investor Providence Equity for $200 million coincided with an announcement this past week that it would require viewers to prove that they have a Pay TV subscription to get Hulu content. This would block cord-cutters (people who have cancelled their cable TV subscriptions and instead get their TV and movie content through a combination of web-based delivery channels such as Netflix/YouTube/Amazon/iTunes and free over the air network TV received with a digital antenna) from getting Hulu content.

While not directly acknowledged by Hulu and Providence in any of these discussions, what's most interesting about these announcements is that they show not only how concerned Hulu's owners (major networks and cable companies) are about the possible negative effects that cord-cutting will have on their revenue streams going forward, but how disconnected these owners are from savvy investors such as Providence Equity who clearly see tremendous upside in pure-play web delivery of content.

To put this more clearly in perspective, Providence invested $100 million in Hulu in 2007 (almost exactly 5 years ago). So doubling their money to $200 million in 5 years is certainly not a bad thing (it actually works out to a roughly 15% internal rate of return on their investment), but it's nowhere near the type of return a private equity or venture firm would like to see on this type of investment. A 40% internal rate of return would be more like it from a private equity perspective (and a venture investor would have gone for a "10 bagger" and wanted back 10x their money after 5 years, or a 60% internal rate of return).

Providence clearly saw that Hulu was willing to potentially kill its own growth potential in order to protect traditional cable subscriptions and opted to get out as soon as possible to protect its investment gain. If Hulu does opt to restrict its viewing in this manner, it will only be good news for Netflix and Amazon and the millions who have cut the cord already will migrate to these services away from Hulu.

What this means for BIM's local broadcast clients is that free, over the air TV is a vital complement to online video delivery in the world of cord-cutting and it should be supported and promoted as such. Stations would do well to promote and their local channel guides as prominently as possible on their sites and over the air to ensure consumers are aware of this choice.