Disney Finalizing Deal To Put Clips On YouTube; Full-Episode Talks Also Ongoing

This story was written by Staci D. Kramer.

Disney (NYSE: DIS) and YouTube are in the final stages of negotiations to put clips from ESPN, ABC and other Disney assets on YouTube, according to sources familiar with the situation. The two companies would share revenue, with Disney controlling the ad inventory; YouTube and Google could get some inventory to sell. As important, YouTube would refer back to ESPN.com, ABC.com and the other Disney sites. Disney declined comment; a YouTube spokesman said the company does not comment on rumor or speculation.

In addition, the two are discussing a full-episode deala multi-year pay-for-play deal that would put ABC and some other Disney programming on YouTube instead of NBC Universal-News Corp joint venture Hulu. I am told these discussions have gone as high as Disney CEO Bob Iger and Google Chairman and CEO Eric Schmidt but that they are not as far along as the short-form dealor as advanced as Disney's negotiations with Hulu.

Under this scenario, Disney would see an immediate payoff for extending its online video access: Hulu has had massive growth but is still considerably behind YouTube in reach. Neither video service is profitable, so Disney has to decide between the short-term guarantee that would come from a YouTube deal versus the longer-term investment of trading distribution exclusivity for equity in Hulu.

It's also a choice between environments. Hulu CEO Jason Kilar has created a clean user experience combined with a TV-centric atmosphere that draws users looking for traditional media. YouTube is a free-for-all, even when it focuses on channels. As one executive I spoke with put it, it's the difference between putting Grey's Anatomy next to House, or next to "weird things" or having shows disappear amid a vast amount of video. Another executive mentioned the chance with Hulu to take advantage of the interest other TV shows are drawinggetting traction, for instance, from a Tina Fey-Sarah Palin clip from Saturday Night Live. But YouTube accounted for 41 percent of all U.S. video streamed in February, according to comScore (NSDQ: SCOR) Media Metrix, and just under 100 million unique users, compared with Hulu's 2.5 percent and Disney Online's .9 percent.

Some people have raised the idea of possible antitrust accusations if ABC joins NBC and Fox on Hulu. I am told that was discussed when the idea of Hulu first arose two years ago and is not considered a problem.

The discussions with YouTube and the serious negotiations with Hulu are part of Iger's push to accelerate Disney's online video strategy, particularly shifting gears from ABC's player-centric approach, with its highly selective distribution and effort to control the user experience. The discussions with Hulu and Google are being managed by the strategic planning group headed by corporate EVP Kevin Mayer.

The theory: ABC.com has grown as much as it can on its own; increasing revenues from an estimated $40 million or so through online video in 2008 will mean increasing exposure and audience. Deals with AOL.com, which let ABC use its own player, and Veoh haven't pushed the needle much. The strategy, which helped prove that viewers would watch ad-supported full-episode viewing online, has been championed at the Disney-ABC Television Group by Albert Cheng, EVP-digital media, and his boss Anne Sweeney, president of the group and co-chair of Disney Media Networks, but was backed publicly all the way up. At the same time, some people with Disney feel the strategy hasn't received the kind of full on-air promotion and other kinds of support needed from within ABC's own programming side. ABC andother network groups may want more time to prove that maintaining control is the way to go, but Iger has already shown that when he thinks a change is needed, it will happen, as was the case with putting ABC's full episodes on iTunes.

More on Hulu: We first reported the serious discussions between Disney and Hulu Friday. A source familiar with the discussions from the Hulu perspective told me after our story appeared that, despite their first-in status, NBCU and News Corp (NYSE: NWS). expect to be equal partners with Disney should the deal pan out. Disney would be expected to match the marketing and other commitments made by the two existing partners. Each company owns 45 percent now; the result would be a 30 percent share across the board. Providence Equity Partners acquired 10 percent of the equity early on for an investment of $100 million; that investment gave the enterprise a valuation of $1 billion.

Delivering video on YouTube: My understanding is the video clips would be delivered through ESPN's video player, possibly embedded on YouTube pages similar to the way that the Microsoft (NSDQ: MSFT) Silverlight player for NCAA March Madness on Demand has been embedded in a deal with CBSSports.com. A long-form deal with YouTube likely would use an embedded Disney player. Conversely, a deal with Hulu would call for content to be delivered through Hulu's player.

By Staci D. Kramer