Hulu-stakeNews is filtering out that Hulu is going to sell a 25% ownership stake to Time Warner Inc. (NYSE: TWX), at a valuation of $5 billion to $6 billion. Why is this happening and what does it mean for streaming media and stocks that play in the space?

Investors first must understand the holistic environment in which streaming media operates. When studios produce content, they want people to pay for it. That means they either are going to provide an exclusive license to a third party, such as Netflix (NASDAQ: NFLX), or a non-exclusive license to an entity such as Amazon.com (NASDAQ: AMZN), or through a captive service, either in exchange for an a la carte fee, or as part of a subscription.

For now, providers like Netflix, Amazon, Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOGL) are the entities with the deepest pockets – although Netflix’s aren’t as deep as they pretend they are. The studios are happy to siphon money away from these entities, which in turn are grateful for the content, for which they can charge viewers a la carte or subscription fees.

Hulu is owned by The Walt Disney Co. (NYSE: DIS), 21st Century Fox (NASDAQ: FOXA) and Comcast (NASDAQ: CMCSA). The idea was to provide the first two with a platform to generate revenue from its own content, and to provide Comcast with a distribution platform beyond its cable systems.

So it makes natural sense that Time Warner wants a Hulu stake, because while it can sell some of its content to the large streaming providers, it can’t sell all of its content. Plus, it has no streaming distribution platform and it needs to be in that game.

Hulu needs the money to continue to grow into a global brand.

There are more nuances here, however. Hulu can’t get too big or it will cannibalize Comcast’s cable revenues, if people decide to cord-cut. That also potentially harms Disney and Fox, because if people cord-cut, then there are fewer viewers for their bundled channels, which means less advertising fees.

Still, we haven’t seen much cord-cutting and some believe that threat to be overblown. Management is likely nimble enough to maintain a good balance and keep the price points for each service reasonable.

What’s Up for Netflix

What does this mean for Netflix? There are numerous cross-currents but in the end, it likely isn’t terribly meaningful. For starters, Netflix is nothing more than a blood bank for the studio vampires. Netflix never has much in the way of free cash flow, and that’s because the studios suck it dry to license their content to it.

That’s another reason Time Warner has climbed aboard. Should Netflix implode, which it very well may considering its lack of free cash flow and very little actual net income, there’s a streaming service that will fill the vacuum.

There is a false narrative that Hulu is necessary to compete with Netflix on the original programming front. The problem with that is subscribers don’t get Netflix for the original content. They get it for all content. Hulu doesn’t need to compete, and clearly isn’t intending to in any big way yet, given that it is only dipping its toes in that pond.

Finally, anyone who thinks that people will cancel Netflix in favor of Hulu is dreaming. Hulu for $12/month (no ads) and Netflix for $8 makes for $20 in total. That’s perfectly reasonable.

Over time, then the only companies that benefit are current owners of Hulu and Time Warner, which can buy into an existing platform at what is probably a long-term bargain price.

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Published by Wyatt Investment Research at