Yahoo! Inc. (YHOO), AT&T Inc. (T), Netflix, Inc. (NFLX): It’s a Terrible Idea to Buy Hulu

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It’s like siblings trying to decide what to do with the last piece of candy. Comcast Corporation (NASDAQ:CMCSA) doesn’t care.The Walt Disney Company (NYSE:DIS) and News Corp (NASDAQ:NWS) can’t agree. So no one gets it. They put it up for sale. The only problem is: which bid to take?

Can’t they just get along?

Due to regulatory restrictions, Comcast Corporation (NASDAQ:CMCSA) is a nonvoting owner of Hulu through NBC Universal. Comcast Corporation (NASDAQ:CMCSA)’s core focus isn’t providing entertainment content. Comcast provides bundled cable packages, which involve walking a fine line between raising rates and keeping customers. NBC Universal, Comcast Corporation (NASDAQ:CMCSA)’s entertainment division, has its own first quarter struggles with drooping broadcast TV performance. Divesting Hulu may be a good idea so Comcast and NBC Universal can focus on profitability. But Comcast Corporation (NASDAQ:CMCSA) isn’t the owner causing the trouble here.

Hulu is up for grabs because the other two owners can’t resolve their differences over Hulu’s profit model.

The Walt Disney Company (NYSE:DIS) wants to continue offering free content to viewers, reaping profits from advertisements on the site. News Corp (NASDAQ:NWS). prefers to use a paid subscription service. Both have legitimate profit model ideas for Hulu, but neither has managed to persuade the other. And of course no one will compromise. They figured selling Hulu would solve their problems. One owner could buy out the other’s share, or a third-party buyer could make the tough call. But they have to hurry.

We don’t have all day

Hulu is a small player in the video streaming world, compared to competitors Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX). Netflix has almost 29.2 million monthly subscribers--Hulu has only 4 million. But perhaps more importantly, Netflix, Inc. (NASDAQ:NFLX) already figured out its profit model. Netflix, Inc. (NASDAQ:NFLX) spends loads of money ($5 billion over the next few years) on the rights to movies and TV shows. It then sells viewers a monthly subscription to stream content and to rent DVDs.

By contrast, Hulu suffers from a schizophrenic profit model. It offers free content with advertisements and a paid service, Hulu Plus. In 2012, Hulu spent only $500 million to acquire more content. Hulu needs to choose one profit model ASAP. Waffling between two business models means that Hulu isn’t maximizing the profits from either one. With less money to spend, and its profit model in limbo, Hulu will never be able to catch up to Netflix, Inc. (NASDAQ:NFLX)’s huge content.

Yahoo, you don’t want this

Yahoo icon

Yahoo! Inc. (NASDAQ:YHOO) just made headlines last month with its $1.1 billion acquisition of Tumblr. Apparently, CEO Marissa Mayer is trying to make the company hip. Yahoo’s Q1 earnings report specifically highlighted company's moves toward mobile and personalized technology. So here they are at the M&A table again, bidding for Hulu.

True, Hulu would add mobile streaming to Yahoo! Inc. (NASDAQ:YHOO)’s product offerings. And Yahoo! could combine Hulu with its Yahoo! Screen service (I had no idea that existed until I read the earnings report).

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