Why Apple Would Want to Buy Hulu

There are rumors spreading around that Apple is considering making a $2 billion bid for Hulu. As half of the Internet already knows, Hulu provides a collection of some recent and older episodes of shows from major television networks including FOX, ABC, CBS, and NBC in its streaming web player. Hulu changed the web video watching scene and made catching up with a few episodes of a decent library of shows or finding a rotating array of newer and old episodes easy.

Apple’s iTunes Store offers a much wider selection of episodes from more networks than Hulu does; a practically endless library of everything aired except for the few shows that delay digital release. The key difference between iTunes’ business model and Hulu’s model is that Hulu is ad-based with two different options for distribution: free for a limited array of episodes or a $7.99 Hulu Plus subscription (that features the same amount of short ad breaks at the free option) including most or all of a participating show.

Within the iTunes Store your only choices are to either purchase a show’s entire season at a discounted price or each episode a la carte for typically $2.99 (for the HD version, lower-quality SD is $1.99). Apple also began experimenting with $.99 HD episode rentals, but only a very small fraction of purchasable shows offer rentals. Besides the upcoming iTunes Match that brings music that you already own into the iCloud, Apple has not pursued an iTunes subscription endeavor of any type.

How would Apple benefit from purchasing Hulu? Is there even any business sense in spending $2 billion, which is obviously a significant amount for Apple despite being one of the world’s richest corporations? Well, Apple already has a strong affiliation with more networks than Hulu does, so they have access to content. Apple would have no trouble launching its own new brand name either (iTVS, “S” for subscription, anyone?), thus there is no need to have the Hulu brand in order to propel them high in the free and subscription markets.

Then what is going through the executives’ minds if they really are pondering the acquistion? That part is simple: content licenses. Apple has licenses in place to sell television series for users to download, but not to distribute it through a streaming web player with ads or a Hulu Plus/Netflix-type model. Because of how significant the user base of the iTunes Store is, networks would want to negotiate high prices to launch a service that threatens sales since a tempting subscription would be right alongside a la carte purchasing. Apple may have found that the deals networks requesting were becoming unreasonable. Similarly, it may be cheaper to pay $2 billion for the plethora of licenses that Hulu already has in place.

Sure, a Hulu acquisition from a company that is already a huge, very important player in television series distribution does go behind the networks’ backs but Apple has shown in iCloud negotiations that they like to manage a facade that they are the ones in control. We cannot really expect content to be pulled from two of the biggest moneymakers and distribution centers just because Apple found a cheaper way to experiment with streaming services that Hulu and Netflix, which has 23.6 million subscribers paying at least $7.99/month each, showing that customers (including myself) enjoy subscription services for exploration of new media and watching favorites. (In my opinion, Hulu Plus’s offerings pale in comparison to Netflix’s library, both of which are the same price with only the latter being completely ad-free.)

There is a lot of potential in the subscription market. With Apple’s $76.2 billion pile of cash that the company is waiting for the right opportunities to spend, Hulu could bring Apple into the successful area dominated by it and Netflix then Apple could revamp the service, making better use of the content licenses so that it almost becomes something new and dare I say revolutionary. With Apple’s ascendancy of digital sales and deep pockets, it has access to more feasible content. In one fell swoop, the team of Apple and Hulu could dethrone Netlfix, placing Apple in the #1 position of another highly-desired service in the same way the iTunes Store and App Store did.