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Why the Hulu Auction Will Only Get More Complicated

Scott Eelis | Bloomberg | Getty Images

The ongoing auction for video service Hulu is one of the most anticipated sales of the year in the entertainment world. But as Hulu's parent companies—News Corp. and the Walt Disney Co.—are evaluating their options, each passing day creates more problematic uncertainty. (Though Comcast is an equal owner, as part of its deal to acquire NBC Universal, it had to give up its voting stake. Disclosure: NBC Universal is the parent company of CNBC and CNBC.com ). Here is where things stand with the auction in a nutshell:

The Problem

Each passing week of ambiguity is a growing issue for maintaining Hulu's executive team and workforce. Questions are looming about what Hulu would look like under each potential owner—and what its longevity will be once its media giant parents aren't as invested in its future. The company continues to lose top executives and engineers and it's impossible to for the company to hire top talent. To stop the bleeding, and nail down a permanent CEO, the parent companies need to strike a deal.

Many industry sources speculate that it's possible the media parents won't want to take one of these deals--and the media parents themselves have said they're not determined to sell, but rather open to all options. But it is my understanding that with Hulu on the auction block for the second time in two years, not selling is not such a viable option. (Clarification: See below)

Another potential problem, depending on who buys the company, is the culture clash, which could send employees walking. Despite the fact that it's owned by three media giants, Hulu has maintained a "start-up" vibe—its offices have foosball tables, Silicon Valley-style free food, and every employee has desks that can adjust to standing height. If Time Warner Cable, the most traditional of the potential buyers, wins the auction, we can expect more Hulu employees to take off.

The Buyers

Though there have been more bids, sources tell me that there are four buyers that are the most serious, based on the amount of due diligence done: DirecTV, Time Warner Cable, plus the original two bidders, Guggenheim and the Chernin Group (in conjunction with Providence Equity Partners and Qatar). Though others, including Yahoo, have submitted bids, because the bids are non-binding, my sources tell me Yahoo, along with private equity firms Silverlake and KKR, would need to do more work before a deal is final.

Though DirecTV has bid as much as $1 billion, none of the offers are an apples-to-apples comparison. Sources tell me Time Warner Cable just wants to invest, with current owners maintaining a stake. Another complicating factor: Hulu's debt load of $350 million, and how the new owner chooses to handle it.

Deep Pockets Needed

Hulu is a big investment. Sources close to the deal tell me it breaks down to the following: $300 to $600 million to buy Hulu's equity, the $350 million to retire Hulu's debt, plus at least $250 million annually to strike content deals to stay competitive with the likes of Netflix and Amazon. And though the buyer is paying the parent companies for their equity stakes, Hulu will continue to deliver to the media companies a share of advertising revenue.

Sticking Points

Perhaps Hulu's most intriguing asset is its subscription service Hulu Plus. And the most hotly debated issue is the deal for compensating the parent companies for Hulu Plus revenue. The duration of the media owners commitment to deliver content to Hulu Plus is just two to three years—not very long. And the media owners get half of the service's $8 monthly fee, which doesn't leave very much money for a profit after covering the cost of operations and investing in content. Less controversial: the length of the term for content deals for free Hulu—five years. None of the content rights deals with Hulu's parent companies are exclusive.

What Disney and News Corp. Are Evaluating

This isn't a situation where the highest bidder will necessarily win. There are a number of complicating factors. Disney and News Corp. have longstanding relationships with DirecTV and Time Warner Cable, which means they want to protect the billions of dollars in revenue they generate for them. On the other hand, they may not want to give the distributors more negotiating leverage. The fact that Guggenheim Digital Media and the Chernin Group are independent could prove an advantage, and the fact that former News Corp. President Peter Chernin has good relationships with all of the media parents could give him an edge

The clock is ticking. Sources tell me that at best, this will be resolved in a month.

- By CNBC's Julia Boorstin. Follow her on Twitter at @JBoorstin.

- Clarification: An earlier version of this story should have made clear that the owners of Hulu have said they are not determined to sell.

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  • Working from Los Angeles, Boorstin is CNBC's media and entertainment reporter and editor of CNBC.com's Media Money section.