The value of exclusivity

Deals How much is Hulu worth? The question hangs over the auction currently being conducted by J.P. Morgan for the video streaming service. It’s a question not just for potential buyers but for the sellers as well. And its a different question — or at least could lead to a different answer — from what someone might be willing to pay for it.

Yahoo is reportedly prepared to pay as much as $2 billion for Hulu, but only if its current network owners guarantee four to five years of exclusive access to their content. The networks are reportedly prepared to offer guaranteed access to their content for four to five years but exclusivity for only two years.

Whether anyone else would be willing to pay as much as Yahoo’s purported offer, even with long-term exclusivity, is debatable. But without that exclusivity, it’s unlikely anyone would pay much more than 1x current revenues, which are expected to be in the range of $500 million this year, which would be 10-12x earnings, which are expected to be around $45 million.

Amazon just paid somewhere between $100 million and $200 million for non-exclusive access to CBS content for either 18 or 24 months, depending on which analyst you believe, roughly comparable to what Netflix reportedly paid CBS back in February. Hulu does not currently have access to CBS content. The ABC, NBC and Fox content it does have might be worth $500 million without exclusivity, and perhaps as much as $1 billion with limited exclusivity. But if you’re going to have to pay that much again anyway in two years when the current exclusives run out, why pay a premium now?

It’s possible Yahoo could decide it needs to do a big deal to excite investors after its desultory recent quarter and might agree to go north of $1 billion for Hulu in exchange for something between 2 years and 5 years of exclusivity. But that’s probably the best the current owners could hope to do without offering a longer exclusivity term.

The real valuation question in the Hulu deal, then, would seem to fall more on the sellers than the buyers. Given the still nascent state of the over-the-top streaming business, what do ABC, NBC and Fox think those rights will be worth on a non-exclusive basis over a five-year period vs. what someone might be willing to pay for exclusivity now? They also need to consider the opportunity risk of locking up those rights with a single buyer for five years at a time of rapid innovation in the streaming market.

Despite Disney CEO Bob Iger’s insistence that Hulu really, truly is for sale, a sale may not be the most effective way to maximize the value of the rights currently held by Hulu.