Hulu Can Capture Two-Thirds of Cable Audience at a Compelling Price - Guggenheim

Guggenheim analyst, Michael Morris, believes that Network cost analysis implies that Hulu should be able to establish a compelling, competitive product at a rational price for the consumer. The product will not include “everything” as defined by the most traditional pay-TV bundles. However, by minimizing the distributor mark-up, the product should provide more flexibility and leverage for its owners and participants without negative economic consequences.

Industry discussions indicate that the Hulu “cable TV-style online service,” currently slated for a 1Q17 launch remains on track. The push for service development from within its ownership base remains strong, as highlighted most recently by Disney CEO Bob Iger “…I also think the new entrants will keep the legacy entrants more honest when it comes to not just what they're paying us but the user interface we talked about.”

The analyst believes that a $40 Hulu linear product could capture 65% of current live-plus-three-day primetime commercial viewing at a 17% gross margin.

Hulu brings better gross margin economics to the channels. The analyst sees Hulu as an agent to transfer economic value from third-party pay-TV distributors (currently realized in the form of video gross margins) back to the Networks. As they have highlighted in the past, they believe that the two-step payment process (consumer to distributor, distributor to network) remains a significant inefficiency for legacy networks relative to new entrants. The proposed Hulu structure appears to partially mitigate that inefficiency, bringing greater economics back to the channels owners that are also owners and/or participants in Hulu.

Related Stocks:

AMC Networks (NASDAQ: AMCX)
Amazon.com (NASDAQ: AMZN)
CBS Corp. (NYSE: CBS)
Comcast (NASDAQ: CMCSA)
Disney (NYSE: DIS)
Discovery Communications (NASDAQ: DISCA)
21st Century Fox (NASDAQ: FOXA)
Netflix (NASDAQ: NFLX)
Scripps Networks (NASDAQ: SNI)
Time Warner Cable (NYSE: TWC)
Viacom (NASDAQ: VIAB)

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