Starting in November, Disney, the majority owner of Hulu, can “call” Comcast’s one-third interest in Hulu, that is, require Comcast to sell its interest in the company, at a sale price tied to Hulu’s value as of September 30, 2023. If Disney doesn’t exercise its call, Comcast can “put” its one-third interest to Disney, at the same price.
But what will be the sale price? It will be set via a contractual appraisal process which, given ongoing industry consolidations, will be of interest beyond just Disney and Comcast.
Ultimately, the process will be either orderly or a food fight. Until then, what is Hulu really worth?
Multiple Choice Test
Is Hulu worth:
A. ———-$2 billion?
B. ———$5.83 billion?
C. ———$15 billion?
D. ———$27.5 billion?
E. ———$63 billion?
For my best answer, keep reading.
Valuation Procedure
In a recent SEC filing, Disney publicly disclosed how the valuation will be conducted. Initially, a price is to be negotiated, but failing agreement, a tiebreak procedure will be triggered, in which Disney and Comcast will appoint an appraiser. Then, if the two appraisals aren’t within 10% of each other, the party appraisers will select a third, “umpire” appraiser. Once the umpire appraisal is received, Hulu’s value will be deemed the average of the two closest appraisals. This is a variation on a so-called “baseball arbitration,” a method of setting player salaries.
Appraisal Methodology
In that same SEC filing, Disney also disclosed the appraisal methodology to be used. In broad strokes, the appraisers are to value Hulu “as a going concern,” taking into consideration “Hulu’s historical financial and operating results” as well as “Hulu’s future business prospects and projected financial and operating results[.]” And the appraisers are to assume that Disney will continue to provide “the assets, contract rights and intellectual property used in Hulu’s business . . . consistent with past practice.”
The above statement is pretty conceptual. In practice, how might this work?
Classic Approaches To Valuation
Of the three classic approaches to business valuation – the market, cost, and income approaches – the best starting point would seem to be the market approach, applying metrics widely used for both public and private companies.
Hulu’s Lines Of Business
Like Netflix, MAX, and Disney+, Hulu is a streaming service, with its streaming line of business generating over $7 billion in revenue per year. But unlike other major U.S. based streamers, at present, Hulu operates only in the U.S.
In addition, Hulu has a second line of business. Similar to cable service Charter, and internet services YouTube TV and Sling, Hulu is a type of service provider known as a multi-channel video programming distributor (MVPD), bringing the consumer not one channel, but multiple channels. Hulu’s MVPD line of business, branded “Hulu + Live TV,” drives an additional $4 billion in annual revenue.
Enterprise Value as a Multiple of Revenue
A common tool of financial analysis is the ratio of “enterprise value” – the overall market cap of a business, adjusted for debt and cash on hand – to the business’ annual revenue. This ratio, which is expressed as “EV/R,” can reveal, in some industries at least, useful insights.
For example, over the past year, shares of Netflix have traded at EV/R multiples ranging from 4.5 to 6.25, with the company having an EV (enterprise value), as of this writing, of almost $184 billion. By contrast, over the same time period, shares of Charter, an MVPD (that is, multi-channel video programming distributor), have traded at EV/R multiples of between 2.75 and 3.25, with Charter having an EV, as of this writing, of more than $164 billion.
Applying Netflix and Charter’s 12-month average EV/R multiples to Hulu’s corresponding lines of business, Hulu’s enterprise value is in the range of $42.5 billion to $56.8 billion. Of course, those multiples can be argued, but for now, why argue? For the EV/R portion of the valuation, I’ll use a number roughly in the middle of the range, namely, $50 billion.
Hulu as Part of a Disney+ Bundle
If, as expected, Disney rolls out Hulu globally, fully owned and bundled with Disney+ and/or related services, a number of synergies will come into play. Such bundling will provide Disney+ with increased customer:
- acquisition value, especially through attraction of new sign-ups.
- retention value, in particular, by reducing customer churn.
- engagement value, via enhanced ad metrics.
There’s a threshold question as to just how synergies like these are to be treated in the Hulu appraisal. The above-cited SEC filing is unlikely to comprise the full, agreed methodology. And, if the appraisals are supposed to pick up these kinds of synergies, it may be that they’re not easily captured by traditional valuation methods.
By contrast, media measurement companies like Parrot Analytics, which focus on online consumer behavior, may be able to evaluate customer acquisition, retention and engagement synergies in novel ways. In formulating a value for synergies, I have relied on inputs from data scientist Alejandro Rojas, VP of Applied Analytics at Parrot.1
A Note About Parrot Analytics
Parrot Analytics evaluates content, talent and IP by analyzing data from over two billion consumers globally. In contrast to Nielsen’s use of “Nielsen boxes,” which are deployed in limited media, territories, and households, Parrot measures what it calls “Demand Expressions” on a global basis from sources such as Facebook, Twitter, Google and Wikipedia search, file sharing and piracy data, and the like.2 For example, using its audience data, Parrot says it can project how any given program on Hulu or Disney+ may affect consumer behavior on the other service – that is, programming and service synergies.
Parrot’s Estimates
At my request, Parrot has projected synergies, from the expected full bundling by Hulu and Disney, with respect to Hulu Originals (such as, for example, The Handmaid’s Tale, Only Murders In The Building,and The Bear). These are the current 200 or so titles which have been produced by and, in the U.S., are exclusively released on Hulu. Since these projections don’t extend to Hulu’s full catalog of thousands of titles or to possible synergies with the Hulu + Live TV service, if anything, they underestimate potential synergies from Disney’s expected purchase of Hulu.
The Bundling
While the exact form of Disney’s potential full bundling of Disney+ and Hulu has not yet been announced, imagine that both services will be available globally on the same app or apps, with internal tabs for each, under the Hulu, Disney+ or other Disney brands.
For subscribers, this kind of bundling will potentially offer seamless integration of the two services, keeping the user within the Disney ecosystem and out of competing ecosystems, such as Netflix, Warner Bros. Discovery, Apple+, and so on. The larger walls of the future Disney ecosystem will be a key part of Disney+ and Hulu bundling synergies.
Acquisition Value
Per Parrot’s analysis, Hulu Originals will yield an almost 30% uptick in new sign-ups for Disney services across all international markets. In the last twelve months alone, Disney+ grew its international business by more than a billion dollars. At this expansion rate, Hulu Originals may be expected to contribute an additional $300 million in annual revenue, equivalent to $1.3 to $1.9 billion in additional EV (enterprise value), based on Netflix’s recent range of EV/R multiples.
Retention Value
As part of a Disney+ bundle, Hulu Originals can also be expected to reduce Disney+ subscriber churn across international markets. Parrot projects that Hulu Originals alone may protect (that is, prevent the loss of) close to $1 billion in international at risk revenue. Domestically, Hulu Originals should also help reduce churn among subscribers who are not currently under a bundled Disney+ / Hulu option, saving Disney an additional $500 million. Applying the recent range of EV/R multiples for Netflix, the preservation, worldwide, of a combined $1.5 billion of at risk churn, represents an additional $6.75 billion to $9.4 billion in enterprise value.
Engagement Value
The integration of Hulu Originals within the Disney+ user experience will also drive additional advertising revenue. Hulu currently generates over $3 billion in advertising revenue annually. Parrot projects that, based on demonstrated affinities between Hulu Originals and Disney+ titles, bundled consumers can be expected to spend 20% or more time on a bundled service. At the current rate of advertising monetization, this extra time could generate an additional $750 million in revenue, equivalent to $3.3 billion to $4.7 billion in additional enterprise value.
Overall Accretion To Value
The foregoing analysis suggests that Hulu Originals could contribute in the range of $11.3 billion to $15 billion in synergies, which I’ll average, rounded down, to $13 billion.
How accurate is that number? A skeptic might say that it reflects the application of a magic wand to Parrot’s “Demand Expressions,” which itself is the product of a secret sauce. But I’ve reviewed other, published Parrot valuations, and from what I’ve seen, their valuations are consistent with market valuations.
Moreover, at a recent investor conference, Brian Roberts, Chairman and CEO of Comcast, reportedly valued all synergies around Disney’s full ownership of Hulu at $30 billion, on top of Hulu’s standalone value. So, if anything, Parrot’s partial numbers are not outrageous – at least the way Roberts sees it.
Adding Parrot’s limited estimate of synergies to the value of Hulu’s stand-alone value, Hulu’s post-sale enterprise value could be at least $63 billion.
Multiple Choice Test (Revisited)
Returning to our Multiple Choice Test:
A. Is Hulu now worth $2 billion?
No, that’s the valuation at which, in 2012, early investor Providence Equity Partners sold its 10% ownership interest back to the remaining Hulu partners.
B. ———-Is Hulu worth $5.83 billion?
No, that’s the valuation at which Time Warner bought a 10% interest in Hulu in 2016.
C. ———Is Hulu worth $15 billion?
No, that’s the valuation at which Time Warner sold its interest in Hulu back to the company in 2019.
D. ———-Is Hulu worth $27.5 billion?
No, that’s a guaranteed floor value which Disney and Comcast agreed in 2019. But at the time, that may have been a fallback number regarded, by Comcast at least, as short of the likely value when ultimately determined.
E. ———-Is Hulu worth $63 billion?
Yes, that’s the right answer . . . A Hulu valuation of $62 billion or more seems well supportable.
Confirmation and Caveat
As reported in the Wall Street Journal, in 2021, “[Comcast] executives pegged Hulu’s valuation at north of $70 billion.” By contrast, per a Hollywood Reporter story from February 2023, key independent analysts have valued Hulu at significantly lower numbers, in some cases very close to the $27.5 billion floor in the Disney / Comcast agreement. According to these Wall Street Journal and Hollywood Reporter stories, other factors and disputes are in the mix between these two companies.
Post-Script
I hope that Disney and Hulu will resolve their differences in an orderly way, and well. But if they don’t, and there’s a food fight, will we get to see the secret sauce?
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- Data scientist Alejandro Rojas is VP of Applied Analytics at Parrot Analytics. ↩︎
- Parrot presents a detailed view of its methodologies in this White Paper. As reported in Deadline, absent the kind of robust streaming data that Netflix, Disney+, and other streamers regard as confidential, SAG-AFTRA has instead proposed using Parrot’s tools to allocate residuals. ↩︎
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Ezra Doner is an entertainment and copyright lawyer who focuses on the film, TV and other content sectors. He is based in New York and is admitted to practice in New York and California. He does not represent any of the parties in this matter.
donerlaw.com 