Analyst Takes Another Look at Discovery’s Hulu Deal

Programmer gets paid more but provided additional  VOD content
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Analyst Todd Juenger of Sanford C. Bernstein has been taking another look at the deal Discovery touted that put more of its networks on Hulu’s live streaming service.

Discovery logo

Earlier this year Discovery acquired Scripps Networks Interactive, which had Food Network, HGTV and Travel Channel on the Hulu Live service. The new deal in September added legacy Discovery channels to Hulu: Discovery Channel, TLC, Investigation Discovery, Animal Planet and Motor Trend.

Related: Hulu Agrees to Carry Additional Programming from Discovery

At the time, the deal was hailed by Discovery because programmers without sport rights have been having trouble getting on virtual MVPDs. With traditional pay TV subs shrinking, programmers not on vMVPDs faced difficulty maintaining their distribution revenue and possibly their ad revenue. 

With the Hulu deal, and another with Sling TV in place, analysts recommended Discovery stock.

Juenger had been wondering why Hulu made the new deal. Then he saw a published interview with Hulu CEO Randy Freer that implied the deal was financially neutral.

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“Discovery dropped the price of content licensed to Hulu SVOD, equally offsetting the cost of the newly added networks," Juenger concluded in a note on Tuesday. ”Bulls can say at least Hulu cared enough about Discovery not to drop them entirely. But the more we learn about the deal, the worse it looks to us.”

Both Discovery and Hulu contested that characterization and conclusion, which might have contributed to Discovery’s stock dropping on what was a bad day for the stock market overall.

“While we have a long-standing policy not to comment on the specifics of any given distribution deal, we feel compelled given this erroneous report to state the facts: There is no mystery here," Discovery said in a statement. “The terms of the deal mentioned were mutually favorable to both Discovery and Hulu, strengthening the base Live platform with eight strong, quality networks and an increase in quality VOD programming that will be reflected in incremental economics for Discovery in 2019 and remain consistent with deals we have negotiated across the industry.”

This is what Hulu said:

“Hulu and Discovery have a longstanding content partnership, based on fair market rates for content and channels, that is mutually beneficial for both organizations. We look forward to expanding that relationship with 8 quality Discovery channels on Hulu with Live TV and thousands of hours of on demand content, and we are confident that our growing partnership will strengthen and deepen the consumer offering for both companies.”

The kerfuffle led The Information, which published the interview with Freer, to issue a clarification, which said: “This story has been updated since publication. Hulu clarified that in its new deal with Discovery it paid market rates for Discovery's live channels and paid more overall, but was able to negotiate for more titles and more exclusivity for on-demand content."

Juenger updated his note Friday morning about mystery surrounding the Discovery-Hulu deal

“What could be a better answer than a direct answer from the CEO, in a reputable publication?

The Information has now revised their story to remove the CEO comment that the total size of the new deal is flat, and include a ‘Clarification,’” Juenger said.

Juenger still doesn’t think the Hulu deal is a great one for Discovery.

“Whether the reduced licensing costs fully subsidize, or only partially subsidize, the cost of the incremental affiliate fees to Hulu is not really the core debate,” the analyst wrote. “The core debate is the merits of the deal for Discovery, and now we can finally frame it. Getting additional distribution on Hulu is good for Discovery. Trading away more on-demand content and exclusivity, for a lower price, is probably not good. Conceding 8 networks left off the service entirely, as a blueprint for the future with all distributors, is probably not good.”

Juenger added that the deal with Hulu would only impact one contract cycle because the next time this carriage deal comes, Hulu will be controlled by The Walt Disney Co., which will also own National Geographic Channel, a key Discovery rival.

Bottom line, Juenger continues to rate Discovery as underperform and has a target price of $21 for the stock.. 

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