What if no one buys Hulu?

Chief Mouseketeer Bob Iger insisted Wednesday that Hulu’s owners are committed to selling the video streaming service.  But what if no one is committed to buying?

Of the half-dozen companies known so far to have been invited in to kick the tires by Hulu’s bankers, only one, Amazon, strikes me as a plausible buyer. The rest seem to have been chosen simply because they have deep pockets (Google, Microsoft, AT&T, Verizon), or, in the case of Yahoo, because it has already expressed interest.

Google: Hulu is owned by the same networks that blocked Google TV from accessing their online content and have largely refused to license their content to YouTube. Given that history, I’m skeptical they would now agree to let Google buy Hulu. Google has also been attracting increased scrutiny from regulators, including the FTC’s current anti-trust investigation of Google’s handling of search results. That could make a sale to Google a tough, or at least time-consuming deal to close, which I can’t image Hulu’s owners wanting to get into. I suspect Google is in there as a stalking horse to try to spur higher bids from the rest of the field.

Microsoft: Why? Microsoft’s strategic strengths in the online video space are as a platform provider, via Xbox Live, where Hulu is already available, and in voice- and gesture-based TV navigation (Kinect/Bing). How would buying a programming service like Hulu add value for Microsoft? The object of owning a platform is to commoditize content so that more of the value in the ecosystem flows to the platform provider. You don’t commoditize content by buying it at a premium. CEO Steve Ballmer might be tempted to do a deal just to change the subject from having major shareholders calling for his head, but that wouldn’t make it a good move for Microsoft.

AT&T, Verizon: As major broadband service providers, buying a programming service like Hulu would be a red flag for regulators. Especially when that programming service competes directly with Netflix, the poster child for net neutrality. The FCC’s net neutrality rules could ultimately get tossed by the courts, or overturned by Congress, but in the meantime any deal involving a broadband provider and a programming service will face regulatory overhang, adding uncertainty to the valuation. Why would Hulu’s owners want to go there?

Yahoo: Yahoo started this process by making some sort of unsolicited overture to Hulu’s owners, so it’s obviously interested. And of course, Yahoo needs to do something to give its own beleaguered shareholders a reason to believe. A deal with Yahoo would also come with none of the regulatory baggage that some of the other candidates bring. But if Hulu’s owners had wanted to sell to Yahoo they could have done so when it first approached them. The fact they didn’t suggests Yahoo is not their first choice. Perhaps they’re hoping to spark a bidding war to get a better price out of Yahoo, but Yahoo was already the bidder most likely to overpay.

Amazon: The most plausible of the known candidates. It recently started its own subscription streaming service to compete with Netflix and adding Hulu’s current user base and content deals would give Amazon’s fledgling service an immediate boost. Hulu CEO Jason Kilar is a former Amazon exec so there would be a familiarity factor that could ease the integration of Hulu into Amazon. But if Hulu’s current owners are concerned about the power of Netflix — and these days who isn’t? — they should prefer to have as many viable Netflix competitors (and buyers) in the marketplace as possible. Why let Amazon take one off the table by buying Hulu?

DirectTV and Dish (two of my picks based on strategic fit and need) apparently are not in serious contention (too rich for them?) at least at this point. But that still leaves open the possibility of Hulu becoming a standalone entity, either via IPO or perhaps some sort of management-led private equity spinout (my pick).

That raises the question of valuation, of course. And Hulu’s bankers (and current owners) apparently are convinced they can get a better price for the company by conducting a private auction instead of a public offering. Perhaps so, but the pool of potential buyers may not be as deep as they think.

Here’s what a buyer of Hulu would actually be getting: Non-exclusive rights to current season TV shows that will likely need to be renewed in 18 to 24 months; a large but not particularly loyal base of users of your free service; a small but growing base of paying subscribers; a virtual distribution channel via the Hulu embedded app on CE and mobile devices; a pretty good ad-targeting system; about $500 million in current revenue, and a perishable window of opportunity to leverage its access to current-season TV content to carve out a viable niche alongside (but not directly competitive with) Netflix.

For most of the potential buyers that have surfaced thus far, one or more of Hulu’s assets either conflicts with at least some of what they already do, or merely duplicates it, in which case, why pay for it again? Those with the fewest internal conflicts with Hulu present strategic or regulatory problems for the sellers.

I’ve long believed that Hulu needs to be a standalone entity if it’s ever to grow up. It has been trying to compete with one hand and a leg tied behind its back, due to the conflicting strategic priorities of its parent companies. Selling it to another existing distributor would merely recreate many of the same conflicts that hobble it now.

Hulu is a programming service. It needs to find a way to make itself valuable to consumers, advertisers and platform providers simultaneously, to extract maximum value from each. The best way for it to do that is to be unencumbered by other strategic priorities. I don’t know finance well enough to say what the best to capitalize it as a standalone entity would be, whether through the sale of equity on the public market or through private investment. But in terms of its organizational structure it needs to be free of the nest.

After its parent companies have tried everything else, there’s always the option of doing the right thing by Hulu.