On Friday (6/14), proprietary market intelligence firm StreetAccount reported that TiVo shares were up on “follow-through from speculation on a Hulu acquisition.” A rising tide lifts all boats? Or the first whiff of TiVo as a potential acquirer? Although TiVo has never been mentioned as a suitor, the company declined to comment on this note and reports indicate multiple firms have submitted bids for Hulu – with at least 3 exceeding $1 billion.
Mergers and acquisitions take various forms and a Hulu M&A will be no different. While we believe a TiVo-Hulu tie up is unlikely, by entertaining the notion we could imagine a scenario with TiVo sharing primary billing with some of Hulu’s current backers, perhaps Comcast and/or Disney, maintaining a small ownership interest to lower their cost while buying some say in future direction. The big unknown, irrespective of who ultimately lands Hulu, is what sort of content guarantees an acquirer would receive from the current owners.
TiVo recently settled with Google, Time Warner Cable, and Cisco for $490 million, swelling its balance sheet to over $1 billion. With limited debt, TiVo’s finances would conceivably provide comfort to Hulu’s owners as it is possible that they could maintain some sort of partial interest in a combined company. Hulu’s existing owners would appreciate TiVo’s neutrality, as the “Switzerland of the cable industry” – having partnered with many top US MSOs.
Hulu could be a great fit for TiVo for a number of reasons as long as the long-term operational expenses of Hulu are manageable. Pandodaily published an article on June 13th highlighting sources that indicate DirecTV will acquire Hulu by month’s end. Many of the reasons a DirecTV acquisition makes sense also are applicable to TiVo – along with a myriad of other synergies. An acquisition could reinforce TiVo’s advanced television services leadership and fast-forward the company to relevance in the rapidly evolving media delivery world.
An entire generation of consumers are demanding “TV everywhere” services. The biggest hurdle TiVo faces in delivering this content is keeping up with the the quantity of mobile and home device platforms that desire the TiVo (and Hulu) experience. Hulu is far ahead of TiVo in this respect with access to Hulu Plus content available on over 320 million devices. A bundling of TiVo and Hulu leveraging Hulu’s software and services framework would rapidly accelerate the availability of TiVo TV Everywhere on millions of devices.
Hulu offers TiVo a brand that consumers associate with premium video streaming which is very complementary to its own premium advanced television offering. It is difficult to build a brand and to change consumer behavior. Today, when people think of TiVo, they think of legacy DVRs – not online or mobile video. The same is true, to varying extents, of all of TiVo’s competitors. A TiVo Hulu combination might change that perception.
TiVo and Hulu have quite a few synergies related to the underlying technology platform used to deliver their service. Both services rely on Adobe Flash. Both companies are moving rapidly to support a myriad of mobile and home devices. In this case, Hulu is way ahead of TiVo with streaming video support for Windows Phone 8, Wii U, Apple TV, Xbox 360, Sony PS3, Roku, Wii, Android Phones & Tablets, Amazon Kindle Fire, Nook, and Nintendo 3DS. Hulu recently released their next generation user experiences across the web, on gaming consoles, and on Android tablets and phones. In addition, a tie-up of the two companies could be efficient for TiVo to leverage the software talent at Hulu and potentially reuse a large portion of their intellectual property and software code base.
Retail & Advertising
Another reason TiVo might want Hulu is TiVo-Owned / Retail whose subscription base is essentially flat year-over-year, compared to Hulu’s rapidly growing its subscription base. Hulu’s $8 per month subscription fee is very much in-line with TiVo retail average revenue per user. The ability for TiVo Research & Analytics (TRA) to focus its audience research, measurement, and advertising on an additional 4 million customers might rapidly increase the value and earnings of TRA.
Content & partnerships
Right now TiVo is a service platform for advanced television relying solely on 3rd parties for content for its retail customers and MSO partners. We know that Hulu aggressively grew their Hulu and Hulu Plus title offerings by over 40% in 2012. This is likely the reason for their rapid growth since the value proposition for viewers and advertisers increased as well. Hulu now has more than 430 content partners, providing over 60,000 TV episodes, 2,300 TV series, and 50,000 hours of video on Hulu and Hulu Plus. Since the launch of Hulu in October 2007, they have generated over $1 billion in revenue for their content partners. Will TiVo be able to get Hulu Plus content on their US MSO partners boxes? That’s uncertain because of licensing restrictions however the bigger growth area for cable and telco partnerships may be international. If they figure out a way to bring Hulu content to MSO boxes, this could be a potential boon for MSOs who want to participate in streaming content services. This might take the sting out of their customer time currently offloaded to Netflix and Amazon even if it means eating a bit of their own non-premium VOD pie at the same time while still benefiting from a shared advertising and measurement arrangement with TiVo. In other words, TiVo would maintain Switzerland status but would be able to feature a co-branded TiVo/Hulu experience with TiVo’s MSO partners sharing in the revenue.
Hulu’s subscription service in Japan continues to ramp. Hulu’s content offering has quadrupled over the past 12 months. Hulu Japan is now accessible from more than 50 million Internet connected devices in Japan (not counting laptops or desktop computers), thanks to releases on Apple TV, Nintendo Wii, Wii U, and over 40 Android mobile phones and tablets in 2012. As a result of the above inputs, Hulu is attracting paying subscribers to the Hulu service in Japan at a volume that is more than triple their December 2011 levels. TiVo is growing rapidly internationally with 1.5 million subs with Virgin Media in the UK, accelerating growth with ONO in Spain, and Com Hem in Sweden about to launch an IPTV version of the TiVo service. International is a key focus area for both companies and the combination could accelerate that growth.
It appears that Hulu’s culture would be a huge benefit to TiVo. Anecodatal reports on glassdoor.com indicate that Hulu employees are more satisfied than TiVo employees. Both companies are headquartered in California. One employee on April 8, 2013 describes Hulu’s culture as, “unique and amazing. A tiny version of a silicon valley company in the heart of LA.” A quick comparison of the two companies job sites could lead to the conclusion that a Hulu acquisition might be an upgrade for TiVo from a culture perspective.
A TiVo acquisition of Hulu with a combination stock and cash deal is a high-risk, high-reward proposition for TiVo. This acquisition could lead to an acceleration in subscriber growth. The acquisition benefits TiVo’s retail customers, domestic and international partners, and potentially spurs new growth internationally. It seems to be very complementary to the TRA business. As JPM’s Paul Coster points out when asked about the potential TiVo strategic move, “they would be positive on a Hulu deal if the operational expense side of the business was manageable. If Hulu gets TiVo to profitability sooner, it’s a home run and definitely better than sitting on cash. This was not a partnership they had thought about, but they are very intrigued by the idea.” The devil is indeed in the details which we can’t see since Hulu is a private company. We suspect that it is an extreme long shot that TiVo will prevail among so many bidders.
There are major shifts happening in the world of video consumption. TiVo has already been adapting to these shifts but a Hulu acquisition could rapidly accelerate that move and might once again make TiVo’s offerings relevant to a whole new generation of customers.
Sam Biller is a TiVo stockholder and long on the company. This post represents his personal opinion and he has no business relationships with any company mentioned above. Sam can be found on Twitter, Investor Discussion Board, and Seeking Alpha.