Disney-Hulu Tie Doesn’t Solve Hulu’s Monetization Challenge

May 4, 2009 – Now that the dust has settled on the Disney Hulu pair-up, the multi-million-dollar question is whether Hulu can begin to do a better job making money on its site.

Hulu is the third-most visited online video destination, behind only YouTube and MySpace, but it’s been thin on ads in recent weeks. The paucity of ads is all the more concerning now that Hulu has landed Disney-owned ABC in a camp that also includes existing corporate owners Fox and NBC Universal. With a site that can boast it carries most of the prime-time broadcast network programming online, Hulu doesn’t appear to be able to sell very much of it. So far in the spring, most of the ad inventory has consisted of public service announcements from the likes of the Ad Council, Foundation Rwanda and One Laptop Per Child.

That may change now that ABC is on board, since ABC has been selling out its inventory on ABC.com and the network is profitable when it comes to streaming episodes online. Disney-ABC will be able to sell some of its ad inventory on Hulu, perhaps rejuvenating what appears to be flagging ad support for the site.

The media company’s online ad philosophy might also rub off on Hulu, resulting in perhaps more ads per show. Earlier this year, Disney-ABC digital chief Albert Cheng said upping the number of ads from four to eight in a 44-minute online show did not impact the audience experience or brand recall, according to ABC’s research.

Another interesting wrinkle from the deal is whether Hulu is better positioned now in comparison to YouTube. In March, Hulu served up 380 million streams to nearly 42 million unique visitors in the United States, with only YouTube and Fox Interactive’s MySpace ahead, according to comScore. YouTube still has a massive lead in views with nearly six billion streams delivered to 100 million users in that timeframe.

At first blush, the Disney-Hulu deal suggests that Hulu is winning the race for premium content by adding ABC to the fold, especially because there is little overlap between the Hulu.com and ABC.com audiences. ABC said only eight percent of ABC.com users visit Hulu, while just 13 percent of Hulu users visit ABC.com regularly.

The deal with Disney also keeps full-length ABC and other Disney shows off of YouTube for at least a year. Under terms of the deal, Disney can’t add any new online distribution partners for some time. While YouTube gets to run short-form videos from Disney per the deal Disney and YouTube struck in late March, the video giant can’t run full episodes from Disney programming for some time.

The battle between Hulu and YouTube is not black-and-white, however. Hulu focuses on premium content, while YouTube, which is bolstering its lineup in that area, is also committed to a broad range of non-premium content. YouTube has said it is exploring ad formats not just for premium shows but these other forms as well.

There’s no guarantee Hulu can maintain its appeal if it does succeed in achieving profitability through advertising, since a significant increase in the volume of ads running in its shows could drive viewers away. “One of the reasons users love Hulu is because it is so light on ads,” notes Will Richmond, analyst and publisher of the enewsletter VideoNuze. “But will Hulu’s traffic flatten or decline when the non-skipppable ad load is 2x, 3x or 4x what it is currently?”

Hulu also should reach out to new advertisers, Richmond says. “The ads on Hulu appear to be the same as seen on-air, suggesting Hulu hasn’t been able to persuade its brand advertisers to invest in custom creative to leverage the Hulu environment.”

Hulu did not respond to requests for comment about its advertising business.