Hulu Is a Great Move for DIRECTV

DISH Network isn't the only satellite television provider knee deep in a buyout battle. Competitor DIRECTV recently threw its hat in the ring for streaming entertainment service Hulu -- and things are looking good for the premium television provider. This is yet another example of why DIRECTV is a rock star organization, and a compelling long-term investment for investors. Here is what Hulu will do for DIRECTV, and why time may be running out to get a piece of this business at a fair price.

Hulu Hoops
I've written numerous articles laying out the reasons why DIRECTV has been a great investment. On the back of spectacular Latin American subscription growth, and rising average revenue per user stats in its North American business, DIRECTV's stock has experienced substantial gains -- up more than 42% in just 12 months. Especially when compared to its competitor, DISH, DIRECTV offers investors a very easy to understand business model -- subscription-based television, with all of its recurring revenue glory.

One thing I discounted, though, was the need to adapt to the quickly shifting trends in the industry. To stay relevant, DIRECTV needs a streaming-based service. It can build one itself, but it would be incredibly costly, and would subject the company to the same content acquisition issues facing the streaming providers. The far superior move would be to just buy a company that has already gained substantial market share, and offers a leading product. Enter Hulu.

Owned by News Corp , Walt Disney , and Comcast , Hulu is likely to fetch $1 billion-plus from DIRECTV. Why would these other traditional media outlets want to rid themselves of a strong streaming performer? They have other options, whereas DIRECTV has almost zero exposure. Comcast bought NBC Universal and has a full web-based on demand service through xfinity. Disney has struck a deal with Netflix that is worth hundreds of millions.

All three companies have the potential to profit further from a deal with DIRECTV, as they can then charge Hulu for content licensing for their respective properties. When initially shopping the deal last year, Hulu was valued at a 50% premium, but included licensing from ABC, NBC, and Fox.

Hulu currently has 4 million subscribers -- a far cry from Netflix's numbers, but impressive nonetheless.

The winner
For investors, all four parties are winners. The three sellers split the billion dollars, and will likely have yet another streaming partner, while DIRECTV finally catches up to the other providers in ensuring the future relevancy of its business.

Expect the final deal to emerge in the coming weeks.

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Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends DIRECTV and Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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