NEW YORK (AdAge.com) -- Hulu is everyone's favorite provider of TV on the web, but it's facing an ideological battle over its future. On one side are its network backers, which would like Hulu to become a paid service. On the other is the advertising community, which would like to keep Hulu free as a test-bed for new targeted-ad formats that can't be skipped.
It's an important issue, because any debate about Hulu is a debate about the future of purely ad-supported TV, which is increasingly becoming an endangered species. Hulu is the No. 2 video site on sheer volume of video views behind YouTube, yet no one is yet making much money from its model: not its network backers, other content partners and least of all Hulu itself, which has a hard time paying for its bandwidth bills.
"[Hulu] does have to move to a premium model," said one network exec. "If you look at the business, it's just not economically feasible to give away programming at low rates."
Hulu won't comment on its economics, but if you consider that it's selling video ads and companion banners together in the $40 CPM range, and it appears to be about 50% sold out, when 70% is paid back to networks, Hulu is netting pennies per viewer per hour, about what it costs to deliver video of that quality.
One caveat, however, is that a significant amount of Hulu inventory is sold by the networks, which can buy back inventory to sell to advertisers. Hulu gets 30% of that CPM without any of the costs. Also, Hulu has ad deals with many TV networks on different terms.
"There's room for an ad-supported model for TV online," said Curt Hecht, president of Publicis innovations unit Vivaki. "Hulu is a great environment with great programming; the onus is on us to help figure out the business model."
Hulu is navigating an increasingly complex web of agendas, not least of which is what will happen when it is partly owned by a cable company after Comcast takes control of NBC Universal. "Ultimately, as a content company, you have to be paid on multiple platforms for multiple eyeballs in multiple ways," said Quincy Smith, partner in Code Advisors and adviser to CBS and web video service Vevo.
When Hulu launched, it was set up as the perfect online distributor for network TV, which was completely ad-supported. But since then, broadcast networks have fought for and won retransmission fees from cable operators, making their model a lot more like cable. The TV business is only 50% ad supported, with $68 billion coming from advertising. When you tally up TV subscriber fees collected by cable, satellite and telcos, it comes to, well, about $68 billion. And the reality is, between cable, satellite and telecom TV offerings, 90% of Americans pay for their TV.
And then there's Hulu.
Increasingly, networks want paid models for their content online, such as Fox's mobile service introduced last week, which will charge users $9.99 for mobile access to programming. Hulu has promised a mobile app for months, which may also be a paid service.
As the networks rely more on subscription fees, pressure is growing on Hulu from its partners -- and from cable providers themselves -- for Hulu to erect a pay wall, which would not only help pay the bills but allow Hulu to get some of the cable programming it covets, such as "The Daily Show" and "Colbert Report," which Viacom pulled off the service last month.
An easy answer would be to increase the ad load, which an array of studies has suggested it could do. Hulu has steadfastly remained at six ads per hour, fewer than CBS is showing online (as many as nine) and far fewer than the more than 20 that the networks show in a typical hour-long drama on TV.
From the agency perspective, it would be better to keep Hulu free but invent new ad formats with precise targeting to demographics and stated interests. The pre-roll "selector" was invented at Hulu. This gives the consumer the chance to choose the ads he wants to watch before a show starts, which also means the viewer is interacting with the ad even before watching it. The format was chosen by Vivaki as a format of choice across Publicis agencies. Those are sold at a much-higher CPM than $40; so too would targeted ads to certain demographics. But would it be enough to support Hulu and pay for the production of content?
"It definitely gets you closer to the answer than just throwing up more ads with no targeting involved," said Tracey Sheppach, innovations director at Vivaki, who worked closely with the company as it tested a variety of digital video ad formats over the past year.