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Safety first

An $800 million bid for Hulu is safe, boring, and exactly the right move for Yahoo

Yahoo’s recent acquisition of youth-centric site Tumblr grabbed all the headlines. But for anyone who wants to understand Yahoo’s strategy—and “Web 3.0″ in general—it’s the company’s recent bid for video streaming site Hulu, reportedly worth $600-$800 million, that matters more.

By contrast with Tumblr, there is nothing exciting about buying Hulu. The video site’s current owners are a bunch of utterly traditional media companies that provide much of the video for it, including Walt Disney, Comcast, NBCUniversal and News Corp. (Hulu has been on sale since March, and there are quite a few buyers vying for the company.)

But Hulu has 4 million subscribers—double the number just a year ago—who pay $7.99 per month each. That’s due entirely to Hulu’s ability to strike deals with various US television networks, including ABC, Fox, NBC and CBS for their current shows and/or libraries of old episodes. Throw in advertising revenue, and the site brought in $695 million in 2012. (Tumblr, which has only a limited advertising business, was reported as having made just $13 million last year, and may have made only $5 million.)

By buying Hulu, then, Yahoo CEO Marissa Mayer is acknowledging that, contrary to the notion that the internet remains a hotbed of disruption, parts of it, at least, are quite a mature market. She’s hedging her bets: buying the daring, trendy startup, Tumblr, in the hope that it will turn into a money-spinner, but also a reliable cash cow, Hulu, to guarantee her conglomerate a steady stream of revenue.

The evidence that video streaming is now a mature market is in the kinds of licensing deals being signed. Television networks and movie studios are signing non-exclusive deals to provide their content to Hulu, Netflix, Amazon, Google and anyone else with a few hundred million dollars to spare. Streaming video is becoming a commodity, available everywhere. In response, Netflix has been dumping content that anyone can license and investing in proprietary TV shows that can be watched only on Netflix.

Commoditization doesn’t mean that Hulu is a bad business. But it might mean it’s becoming a low-margin business. In which case the best place for it is inside a larger company, like Yahoo, which can integrate it with its other services. Yahoo already attracts 45 million unique visitors a month to its videos, according to comScore—one-third as many as Google/YouTube (though Yahoo’s users watch far less total video). Hulu has 24 million visitors. Facebook, for comparison, has 63 million video watchers, second only to Google. Putting Yahoo and Hulu together—even if their existing audiences overlap somewhat—makes them a contender for that number two spot. Not so boring after all.

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