Hulu Owners Should Reconsider Sale As Netflix Prepares To Exit Stage Left

| About: Netflix, Inc. (NFLX)

BTIG analyst Richard Greenfield deserves credit for making the case a couple of weeks ago - Hulu's owners should not sell out.

A Tweet from Demand Media (DMD) CEO Richard Rosenblatt turned me onto Greenfield's argument. I replied to Rosenblatt's initial Tweet:

His reply sums things up perfectly:

Well-stated. That's a major reason why I am bullish on Demand Media. Not only does Rosenblatt "get it," but his tendency to consider alternatives to the status quo and work the mind to see the future permeates the company.

Rosenblatt summed up the reason why Hulu's owners would even consider selling.

As I read it, Hulu's old guard media owners - News Corp. (NASDAQ:NWS) (NASDAQ:NWSA) and Disney (NYSE:DIS) - would rather let some Internet/tech/new media/consumer products company license content and take control of the user experience, ad sales and subscription model evolution as opposed to running the show themselves. The old guard has the future in the palm of its hands, yet it refuses to break out of its mold and own the future.

According to Business Insider, six companies remain in the bidding for Hulu. They include Yahoo (NASDAQ:YHOO), (NASDAQ:AMZN) and Google (NASDAQ:GOOG). Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) have apparently dropped out of the race. Hope still exists, however, that the old guard will do the right thing, as BI reporter Nicholas Carlson did note that "There remains a chance that News Corp. and Disney will decide not to sell Hulu. (Comcast (NASDAQ:CMCSA) is also an owner, but it has no vote.)"

As the Netflix (NASDAQ:NFLX) business model continues to crumble, it's high time for the programmers, networks and cable/satellite operators to take matters into their own hands. News Corp. and Disney should ignore the short-term and, if any change in ownership structure takes place, fight to include, as part of Hulu, as many entities from the above-mentioned categories as possible.

Consider what Liberty Starz (LSTZA) said in its press release regarding its decision to cut ties with Netflix:

This decision is a result of our strategy to protect the premium nature of our brand by preserving the appropriate pricing and packaging of our exclusive and highly valuable content. With our current studio rights and growing original programming presence, the network is in an excellent position to evaluate new opportunities and expand its overall business.

In other words, we've seen the future. It's not Netflix. We're tired of content dilution. And there's no reason why we cannot see more success doing this on our own and/or with much better, more trustworthy partners.

Hulu should become the one-stop shop for online (and mobile) viewing of all video content, just like cable and satellite have become, as traditional delivery methods. It would benefit every programmer under the sun to become part owner of Hulu and provide its content to what would be a greatly-enhanced joint effort. And the cable/satellite operators could join on in a cross-promotional effort to keep both traditional and new content delivery systems alive while providing the opportunity to sell prolific advertising packages across platforms.

Handing the keys over to a Google or Amazon benefits Google or Amazon. It does nothing to serve the consumer of video content or the providers and traditional deliverers of video content, other than provide Hulu's owners and some programmers with a short-term revenue kick.

Consider this rough sketch. Visitors to Hulu would receive some free content, primarily the non-exclusive scraps that Netflix presently passes off as a "value" for $8 a month. It could then, much like cable and satellite, offer viewers a wide range of programming package options. These packages would include offerings from programmers ranging from movie studios such as Starz to networks to indie outlets, who could add some bite, not to mention diversity.

Bottom line - the possibilities are endless.

Sadly, the vision (and the will and corporate culture) to pull something of the sort off does not exist within the old guard. And they're probably not about to poach a new media or Internet executive over to their side to get the job done right.

From an investment perspective, it's tough to decide who to go with, given the uncertainty. Based on their core businesses, GOOG and AMZN are relatively safe plays, plus each would nicely integrate Hulu and synergize it with their existing revenue streams. YHOO has proven that it butchers anything it gets its hands on.

Of course, the abrupt price hike, the Liberty Starz announcement and whatever happens with Hulu renders Netflix more and more of a non-factor everyday. While Research in Motion (RIMM) was the short of 2011 - and likely 2012 - NFLX stands clear as the short of the decade.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I may open and close positions in any of the stocks mentioned in this article, often using options, at any time.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Tagged: , Music & Video Stores
Problem with this article? Please tell us. Disagree with this article? .