The idea makes enough sense on the surface: If operating one popular streaming service is good, combining two streaming services is even better. And if Walt Disney (NYSE: DIS) CEO Bob Iger has things his way, that’s probably what he’ll do with his upcoming chance to buy the remaining 33% of streaming platform Hulu that Disney doesn’t already own.
Disney’s still-unprofitable streaming division could certainly use whatever help it can get. The matter isn’t quite as simple as that, though. While the company will certainly see some benefit from bundling Hulu with Disney+ into a single service, consumers aren’t necessarily stoked about the prospect. Any investor expecting such a repackaging to be a much-needed panacea for Disney is apt to be disappointed.
But first things first.
What’s the deal with Hulu anyway?
Although Walt Disney owns most of Hulu, the company doesn’t own all of it. Comcast‘s media arm NBCUniversal still owns one-third of the popular streaming platform. That could be changing, however, and sooner than expected.
Comcast and Walt Disney each had the option to force the sale of Comcast’s stake to Disney come January of next year. Now, by mutual agreement, the decision deadline has been moved up to the end of this month.
The only matter that’s undecided is the price. A valuation of around $30 billion for all of Hulu has been batted around, which would put Disney’s net cost (and Comcast’s payday) around $10 billion.
Regardless of that unknown, the sale of this piece of Hulu to Walt Disney is almost inevitable.
And that’s exactly what Iger seems to want. In May, Disney’s CEO announced that the company would soon be offering Hulu and Disney+ as a single service. The two different platforms could still be paid for individually, and he didn’t get into pricing details for the bundle. But the bundle implies (and perhaps even requires) complete ownership of Hulu.
That still doesn’t make it the highly marketable winner Disney needs, though.
Two unavoidable obstacles
There’s no denying Disney helped bring streaming into the mainstream. The industry’s highest-growth days, however, are in the past.
Even Disney is feeling the impact of market saturation. Its flagship streaming service Disney+ has lost domestic subscribers for two consecutive quarters now, from 46.6 million at the end of 2022 to 46 million in early July. Hulu is still growing, but at an anemic pace.
Two massive headwinds are in play. The first is sheer saturation. Nielsen reports that 46% of U.S. consumers feel overwhelmed by the number of different streaming services available to them and the amount of content choice they bring to the table.
On average, people spend about 10 minutes looking for something to watch when they’re ready to do so, with more than 2.7 million distinct shows or movies potentially available. That’s up from 1.9 million just a couple of years back, and part of the reason for stress during the search process. Many are giving up on watching before they even get started, opting to do something besides watching TV at all.
To its credit, Disney does a reasonably good job of organizing and suggesting content, both with Hulu as well as with Disney+. Neither platform completely sidesteps the problem, though. Melding the two services’ content could easily aggravate a tricky problem.
The other headwind working against a combined Hulu and Disney+ is price.
On a dollar-for-dollar basis, all of its choice and flexibility makes streaming a far better value than conventional cable. Disney’s streaming services are no exception.
Consumers don’t quite see it that way, though, particularly after price increases from nearly every major streaming service in just the past year. A recent DirecTV-commissioned survey of 1,000 adults in the United States suggests pricing issues are the top three reasons for canceling a streaming service.
That data echoes similar findings from industry research company Simon-Kucher indicating 40% of U.S. consumers already intend to cancel a streaming service within the next 12 months, while another 16% would consider doing so if prices increased.
Combining Hulu with Disney+ might justify a higher price point. Even if it’s discounted for buying a bundle of both, however, consumers are increasingly struggling to see the value of ever-higher-priced services. Past a certain point, the amount of content doesn’t appear to be much of a factor in gauging the value.
And again, let’s not forget Walt Disney’s streaming business as a whole remains in the red right now.
Not a reason to buy Disney stock
Melding Hulu and Disney+ into a single service might make a difference for the better. Continuing to also offer stand-alone versions of both platforms attracts those consumers who know they only ever want to tune into one or the other. There’s also the obvious net benefit to outright ownership of all of Hulu: being able to manage and market it exactly how Disney sees fit.
If Bob Iger believes 100% ownership of Hulu is Disney’s missing link to direct-to-consumer streaming profits, though, he might want to reconsider — it isn’t. Most consumers are looking to dial back their overall streaming spending by fine-tuning the content they consume. If so, a combination of Disney+ and Hulu is a step in the wrong direction.
The irony? Earlier this year, Iger even conceded as much. In an interview with CNBC’s David Faber back in February, the CEO admitted he was “concerned about undifferentiated general entertainment, particularly in the competitive landscape that we are operating in.”
He was right to be concerned.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.