Time Warner (TWX) is proving the adage "content is king."
By acquiring a 10% stake in Hulu, the subscription-video platform owned by Walt Disney(DIS) - Get Report , 21st Century Fox(FOXA) - Get Report and Comcast's(CMCSA) - Get Report NBCUniversal, Time Warner CEO Jeff Bewkes is making clear that he plans to explore any and all alternative to the traditional pay-TV bundle even as the company relies on cable-and-satellite operators for much of its revenue.
By entering into the Hulu partnership, Time Warner is helping to lay the groundwork for a skinny pay-TV bundle that can appeal to younger viewers less inclined to subscribe to traditional cable television. For years, consumers have complained of overly-large network packages filled with channels they never watch.
The deal, a recent object of speculation, will afford Time Warner the opportunity to include TNT, TBS, CNN, Cartoon Network, Adult Swim, truTV, Boomerang and Turner Classic Movies in Hulu's new live-streaming service, which the company said it expects to start early next year. To remain free to make deals outside of Hulu, Bewkes said Time Warner won't have a seat on the joint-venture's board of directors.
"We think our networks, our brands and our shows should be available in as many places and ways for the consumers to get them with [video-on-demand], etc. as they can," Jeff Bewkes, chairman and CEO of Time Warner said in an investor conference call. "This is an additional way to do that, and it joins all the other distribution methods, and that's a good thing."
Shares of the New York-based media company were jumping 3.5% on news of the Hulu partnership to $78.42. Time Warner has surged 21% this year compared to the S&P 500 Index (^GSPC) which has increased 5.4%.
The announcement heightens expectations that whatever Hulu brings to market as an on-demand service will pose a serious challenge to pay-TV providers such as Charter Communications(CHTR) - Get Report and Verizon(VZ) - Get Report . Additionally, it will put pressure on Dish Networks' (DISH) - Get Report SlingTV and Sony's (SNE) - Get Report Vue offering, both skinny bundles that carry Time Warner channels. Hulu said it will continue to offer both ad-supported and ad-free video offerings.
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Time Warner's decision to enter into Hulu follows a second quarter in which sales of $7 billion narrowly trailed estimates of $7.1 billion largely because of a weaker slate of Warner Bros. films compared to the same period a year ago. Sales fell 5% from the second quarter of 2015. Warner Bros.' revenue tumbled 19% in part because of a decline in home entertainment and television licensing sales.
Earnings per share of $1.29, however, easily surpassed forecasts of $1.20, the average of a survey of analysts compiled by Bloomberg. Net income came in slightly below projections at $952 million. The New York-based media company also raised its full-year adjusted earnings per share forecast by 5 cents to a range of $5.35 to $5.45.
The decline at Warner Bros. was partially offset by higher subscription revenue at Turner Broadcasting, the company's cable-TV group, bolstered by its airing on TBS of the final of the NCAA men's basketball tournament. Sales at HBO also rose as subscription revenue increased at a rate in the "mid-single digit" percentile and higher licensing fees from pay-TV operators outside the U.S. Finance Chief Howard Averill said on the company's investor conference call.
HBO performance underscoring Bewkes' big bet 18 months ago when Time Warner announced the rollout of HBO NOW, its standalone subscription service for the company's premium-movie channel.
When the standalone service was first announced in the fall of 2014, Time Warner was under some pressure to appease investors uncertain about turning down an $85 per share buyout offer from Rupert Murdoch's 21st Century Fox. Additionally, Time Warner needed to do something to challenge Netflix's perch atop the market for video streaming.
Since launching in April 2015, HBO NOW surpassed the one million subscriber mark, underscoring the willingness of consumers to pay for a single service they view as compelling, or in industry jargon, for "must-have TV." HBO NOW is focused on winning over the roughly 12 million broadband-only households-people who don't subscribe to pay-TV service.
In an investor conference call on Thursday, Bewkes said the second quarter for HBO NOW "was its strongest yet."