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Online video streaming company Hulu has attracted yet another bidder. This time, AT&T Inc. (T) and Chernin Group have submitted a $1 billion bid for the company.

Owned by Peter Chernin, a co-founder of Hulu, Chernin group had initially submitted a $500 million bid for the company. However, AT&T, which itself is looking to introduce its over-the-top (OTT) offering reinforced the company to submit a higher bid.

AT&T-Chernin Group and DIRECTV (DTV) are now believed to be the strong contenders for Hulu. In Jun 2013, DIRECTV, the largest satellite-TV operator in the U.S., offered $1 billion to acquire the online streaming company.

Since DIRECTV’s initial bid for Hulu, the company has received a bid from Time Warner Cable Inc. (TWC) and a joint bid from Guggenheim Digital and private equity firm, Kohlberg Kravis Roberts & Co. L.P. (KKR). Guggenheim and KKR have since been eliminated from the bidding process. Time Warner Cable, on the other hand, wants to become a stake holder in Hulu. The owners could consider this as an option.

Hulu wants a buyer keen on investing in programming and maintaining its growth momentum. The company boasts a strong subscriber base of more than 4 million and has generated $700 million revenues last year through advertising and monthly subscriptions.

The U.S. pay-TV market is extremely competitive. In addition to the traditional cable TV and satellite TV operators, telecom giants are also offering fiber-based high-speed video services. In contrast, low-cost online video streaming services have also become very popular, especially when the economy is still reeling under fluctuations.

In order to survive, traditional pay-TV operators are diversifying in related fields. AT&T’s major rival, Verizon (VZ), has invested in Redbox Instant, while Comcast Corp (CMCSA) acquired content developer, NBC Universal, and has deployed online video streaming service, Streampix.

AT&T's total U-verse TV subscribers reached 4.8 million at the end of the first quarter of 2013 with a net addition of 731,000 high-speed Internet users. However, growing saturation in the U.S. pay-TV market and increased competition from video streaming companies is affecting AT&T’s market share.

We believe that acquiring Hulu will be profitable for AT&T, as it will be able to counter competition from other OTT companies like Netflix (NFLX) and YouTube. However, it has to be seen how things will shape up for AT&T’s Hulu bid.

Currently, AT&T carries a Zacks Rank #3 (Hold).

 
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