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For my final mailing of 2023, I sent out my Top Essays of 2023 and revisited my Predictions for 2023.
[Author's Note: Comcast President Mike Cavanagh confirmed that Comcast "collected an $8.5 billion check on Friday [December 1st] at the UBS Global TMT Conference last month. I regret the error and have updated the essay below.]
One prediction I purposefully avoided making is what will happen to Hulu in 2023. I previously made one prediction in “Disney's Hulu Dilemma After Netflix's ‘What We Watched’”: If we believe Netflix’s report was a signal from the market leader that streaming’s value to consumers is about to flatten, then Disney’s bets on both the BAMTech (powering Disney+ and Star) and the Hulu platforms for streaming, Disney’s streaming strategy seems destined for more challenges.
It also has been a challenge to wrap one’s head around what’s going to happen to Hulu in 2024 given the flurry of events surrounding Hulu in Q4 2023:
In early October, Disney and Comcast hired investment banks to appraise Hulu before November 1st, when either can trigger their option in the remaining 33% of the business.
In late October, former Hulu CEO Jason Kilar argued in Variety that “Hulu presents a rare situation where Hollywood companies could in theory quickly and productively align on a product and economic vision that could delight customers and work well for themselves…and get to market swiftly”.
In November, Disney announced it was purchasing Comcast's minority stake in the service Hulu for at least $8.61 billion, which it paid to Comcast on December 1st, according Comcast President Mike Cavanagh at the UBS Global TMT Conference last month. .
In early December, Disney launched the beta version of its integration of Hulu into Disney+, suggesting Hulu’s future as a solo platform may be short-lived.
In late December, Disney’s President of Global Advertising Rita Ferro went on a public relations push to sell its programmatic advertising back-end for ad-supported streaming across Hulu and Disney+.
Hulu has a multiple defined paths ahead within Disney but Disney’s cash balance situation has a less clear path.
Key Takeaway
The fragmentation of a technology platform within a media conglomerate like Disney—which has a market capitalization of $167 billion—is a challenge of execution across fiefdoms. It's hard to imagine Hulu thriving after the giant cash hit Disney will take to buy out Comcast's share of the platform.
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But wait, there’s more uncertainty! On January 3rd, T-Mobile announced Hulu is joining its suite of complimentary streaming services, suggesting that Hulu does indeed have a future outside of Disney. That will offer Hulu to 117.9 million subscribers (as of its FY Q3 2023) as a free add-on, an enormous opportunity to continue to scale the platform,
So now, in 2024, Disney faces two looming uncertainties:
Where does Hulu fit within Disney’s corporate and technological infrastructure?
How much cash will Disney have to sacrifice for Hulu despite its uncertain future within the organization?
On top of all that, it faces an ongoing proxy battle with activist investor Nelson Peltz and Trian Advisors, who question Disney's acquisition of Hulu in the first place.
The good news for Disney at the end of Q4 is that it had $14.18 in cash and cash equivalents on its balance sheet, an increase of $2.57 billion. An $8.61 billion hit is still about 61% of remaining cash, but less than the 75% that was at risk as of Q3.
Another challenge is that estimates have Disney owing Comcast an additional $4 billion, at least, or 71% of the cash that should remain after the $8.61 billion payment. If that number is greater than $4 billion, Disney will have bigger problems on its hands given the $42 billion of net debt on its balance sheet.
Solving For Uncertainties
Disney needs to protect its cash given its long-term debt obligations. any implication that it will be unable to do so will be fodder for the activist investors. The actual inability to do so will set Disney on the same painful, cash-flow-negative path in streaming as Paramount Global (though with additional assets like its Experiences (Parks) and Sports division producing around 60% of its operating income).
Right now, Hulu sits on three paths:
First, it will be an advertising technology platform across all of Disney streaming and TV buying.
Second, it will be both a source of library content and a new option for Disney+ users. Ferro told a LinkedIn fireside chat last week that Hulu on Disney+ “has far exceeded every metric we had planned for it in the short period of time that we’ve had it.” Specifically, it had proven engagement.
But, third, Hulu as a platform now faces an opportunity to scale beyond 43.9 million subscribers (and turn the tide of its loss of subscribers in FY Q4 2023, the first reported loss in years).
The fragmentation of a technology platform within a media conglomerate like Disney—which has a market capitalization of $167 billion—is a challenge of execution across fiefdoms. It is the difference between the theory of a great operational culture—whose focus on the subscription model Netflix Executive Chairman and Co-founder Reed Hastings wrote about in “No Rules Rules” —and a culture driven by the great man theory—which CEO Robert Iger wrote in “The Ride Of A Lifetime” was why Disney succeeded under him despite its multiple and varied business line items and cultures (e.g., Parks as a retail model versus its linear business as a wholesale model).
In this light, fragmenting a technology platform within Disney’s operational culture —one which relies heavily on the Parks and Sports business, and recently (and incorrectly) putsched a new CEO within 18 months of his appointment after he (correctly) pushed for a retail-first- consumer-first model—and assuming the culture will figure it out under a "great man" (Iger) seems like a misguided bet. At the conceptual root of Peltz’s activist campaign is that Iger’s great man theory led to excessive spending, including the acquisition of Hulu.
For that reason, it is worth keeping an eye on Disney’s cash flow situation after the Comcast deal. Fragmentation of Hulu makes conceptual sense. The bets could indeed move the needle for Disney+ and Disney’s ad business, as advertisers already like buying from Hulu. But, in practice, that seems unusually difficult to pull off within an organization that derives its cash flow from two other divisions that produce 92% of the operating income. Management’s operational and financial priorities now inevitably lie elsewhere, and that bodes ominously for both Hulu’s future and Disney’s ability to derive ROI from the payment to Comcast.