Hulu's failed auction and the future of online video M&A

Josh Wein

This month, another auction for Hulu ended in a familiar result: Its owners decided to keep it. They reportedly turned away bids said to have exceeded $1 billion from some of the country's top pay-TV distributors and private equity investors.

The episode is the latest evidence to support the thesis that major transactions involving online video distributors will be scarce for the foreseeable future. What's holding online video distribution back, particularly at a time when other elements of the media sector appear to be hot takeover targets?

A few things are at play.

First, there are relatively few large operators today. Beyond Amazon Prime (Nasdaq: AMZN), Netflix (Nasdaq: NFLX), Apple (Nasdaq: AAPL) and Hulu, few online video players boast a substantial paying user base. Others are certainly trying--Aereo's CEO Chet Kanojia said he hopes 25 percent of Americans will be using his service within the decade--but so far they have not succeeded. On the ad-supported side, there's essentially YouTube and then there's everyone else. In other words, there aren't many assets available.

Second, the barriers to entry remain low. The amount of capital needed to create an online video service is relatively low compared to, say, the amount of capital needed to build a cable system or launch a satellite into geosynchronous orbit. This low barrier to entry means that when a company is deciding whether to buy or build its way into online video, the risk-reward calculations may point to "build."

Moreover, making a big bet on an existing player could backfire. "When you buy, you have to pay a premium, and it might be the wrong answer," Laura Martin, a Needham & Co. analyst, said in a recent interview. "It might not be a survivor."

The opposite could be said of would-be sellers. The industry is still young enough that companies don't want to risk walking away from something that could turn into a huge success.

"The over-the-top video space is worth fighting for because it's still very early," Gary Delfiner, president of digital distribution at Screen Media Ventures, which owns Popcornflix, said in a recent interview.

Another question that may be holding back dealmaking is that of "What is the asset?" In the case of Hulu, that's never been clear. Is it the brand, the technology or the company's agreements with media companies allowing it to license their programming? If buyers and sellers decide it's the latter, then don't expect many transactions to occur anytime soon. That asset is too easy to replicate.

But just because online video distributors might not be interested in buying each other, it doesn't mean other players in the media and entertainment industry will remain on the sidelines. Most of the major bidders in the Hulu auction were traditional pay-TV distributors or had strong ties to one of them. That signals that the pay-TV industry sees a need it may be able to fill through acquisitions. Samsung recently purchased Boxee. And with Apple, Google (Nasdaq: GOOG) and Intel (Nasdaq: INTC) all exploring new video services, it's a good bet other consumer electronics manufacturers are monitoring the sector closely.

All this is good for content producers and content owners. More active distributors in the marketplace should make it easier for content owners to find distribution at a decent price.

--Josh | +Josh Wein | @JoshWein