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Just how much longer should cord-cutters be able to watch episodes from the current seasons of TV shows on Hulu?

That is one question that has emerged in negotiations between media giant Time Warner Inc. and Hulu, which have been heating up lately, according to people familiar with the discussions. The two sides have been in talks since late last year about Time Warner buying into the streaming site as a part-owner.

Hulu, whose current owners include Walt Disney Co., 21st Century Fox and Comcast Corp., offers a smorgasbord of current-season episodes of broadcast shows such as Fox's "Empire" and ABC's "Quantico."

That allows Hulu subscribers to catch up on many new shows from the first episode onward, even late in the season, a key differentiator from its bigger rivals Netflix Inc. and Amazon.com Inc., which typically only offer viewing after the end of the first season, or later.

Time Warner believes that the presence of full, current seasons on Hulu—or anywhere else outside the bounds of pay-TV—is harmful to its owners because it contributes to people dropping their pay-TV subscriptions, or "cutting the cord."

In the discussions about taking a 25% equity stake in Hulu, Time Warner has told the site's owners that it ultimately wants episodes from current seasons off the service, at least in their existing form, although that is not a condition for its investment, according to the people familiar with the discussions.

As a result, the talks between Hulu's owners and Time Warner are highlighting a pressing issue for media companies: how to make their programming available on streaming video services without undercutting the pay-TV business that continues to generate the lion's share of their revenue and profit.

The talks reveal the tension at the heart of Hulu for the media companies who own it: putting their best content on the service will help it grow and compete with Netflix, but that also could lure more cord-cutters from pay TV.

"If everybody in the industry is worried about Netflix driving cord-cutting, shouldn't they be just as worried about Hulu?" asks Nomura Securities analyst Anthony DiClemente, noting that Hulu offers many shows a day after they air.

Time Warner, whose stock price has fallen back to around the level it was at before the company rejected a takeover bid from 21st Century Fox in 2014, is under pressure to show investors it has a plan to thrive in a TV environment where streaming media is on the rise. (Until mid-2013, 21st Century Fox and The Wall Street Journal-owner News Corp were part of the same company.) Time Warner stock closed at $70.36 in New York on Friday.

Hulu's owners don't have plans to remove current seasons for now, according to people familiar with their thinking. But longer term, it is an open question, the people say.

Indeed, Hulu's owners for months have delayed finalizing the agreement that governs how they license current seasons to Hulu, as they debated the issue. A two-year licensing agreement that expired last year required the owners to give Hulu full current seasons of every show produced by an in-house studio that airs on their broadcast networks—ABC, NBC and Fox—with only limited exceptions. The owners have been agreeing to short-term extensions of that agreement.

Several Wall Street analysts believe a significant part of Hulu's value and appeal to consumers is tied to its current-season deals with its owners.

However, Hulu has been adding content beyond those current-season offerings, striking deals for old seasons of shows such as "Seinfeld" and original series such as the comedy "Casual." That has helped reduce the service's reliance on current-season episodes, which today account for less than 25% of streams on Hulu, according to people familiar with the matter.

The content investments helped Hulu increase its subscriber base to about 10 million U.S. subscribers last year, up from 6 million the previous year. Netflix has about 45 million U.S. users.

Time Warner isn't interested in having full, current-seasons of shows from its networks, which include TNT and TBS, appear on Hulu. But the company understands that it would be difficult for Hulu's owners to pivot their strategy on current episodes overnight, according to people familiar with the matter.

Long term, Time Warner wants to reshape the subscription online video marketplace to support pay-television—and, in particular, to send people to video-on-demand services and "TV Everywhere" apps tied to pay-TV subscriptions.

Time Warner Chief Executive Jeff Bewkes told analysts in November that the company was considering holding back the rights to shows on its networks for longer on its own on-demand platforms before selling them to services such as Netflix.

One alternative to Hulu's approach is to place current seasons of shows behind a paywall only accessible to pay TV subscribers. Hulu already does this for some cable shows such as USA's "Suits."

Mr. Bewkes has voiced support for versions of this model of Hulu in the past, according to people familiar with the matter, but it isn't clear if Time Warner has suggested this approach in its continuing talks with Hulu.

(END) Dow Jones Newswires

January 31, 2016 19:25 ET (00:25 GMT)

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