What An Apple, Hulu Combo Would Look Like

This morning, the Wall Street Journal reported that Apple AAPL might be in talks to buy Hulu. The Cupertino, Calif.-based company certainly has more than enough cash on the books, at over $76 billion. Hulu's owners, led by Walt Disney Co. DIS, News Corp. NWSA and Comcast Corp. CMCSA's NBC Universal want to sell. Is it a match made in heaven? Some say yes. According to two people close to the situation, Apple is considering a bid, but then there are certainly others who are looking at Hulu, like Google GOOG or Amazon AMZN, perhaps. It could cost Apple, or any suitor for that matter more than $2 billion for the company. The owners are offering any potential buyers a five-year extension of program rights, including two years of exclusive access. If Apple were to buy Hulu, it would transform Apple TV into more than just a "hobby." Steve Jobs likes to think of it as a hobby, but it could transform Apple TV into a living room monster. Apple TV would have its own Netflix NFLX like service with better content and the world's best provider of consumer electronics distributing the content. “Part of the ecosystem of Apple's future is to include more video,” said Scott Sutherland, Wedbush Securities Inc. analyst. Apple has never been known to make big splashes. In fact the last big deal Apple did was to buy Steve Jobs' NeXT Software in 1996. It typically keeps all of its operations close to the vest to squeeze the last bit of margin from every product, and likes to produce a lot of stuff in house. That train of thought may be changing, as the company did pay for patents that used to belong to the now bankrupt Nortel Networks, and is also considering a bid for InterDigital Inc., IDCC for the same reason. An Apple-Hulu combination would be very good for Apple, and very bad for everyone else. The more things change, the more they stay the same. ACTION ITEMS:

Bullish:
Traders who believe that Apple will eventually buy Hulu might want to consider the following trades:

• This could be very bullish for Apple, as it would open up an entirely new line of business for the company. Apple would have a lot of advantages over smaller companies in the video space. Go long Apple, even at these levels.

Bearish:
Traders who believe that Apple will get Hulu may consider alternate positions to take advantage of this trade:

• This is not good news for companies such as Netflix NFLX, and Coinstar CSTR, which is trying to get RedBox from being just a rental service to streaming. For Netflix, this is like being the starting quarterback for a football team and then seeing Tom Brady show up at tryouts. Apple would have many competitive advantages in the online video space if it chooses to enter the market.

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