YouTube Racing Hulu For Workable Ad Model

Now that YouTube has reached an agreement with several TV producers and movie studios, including Sony, CBS, MGM, Lionsgate, Starz, and the BBC, to deliver their content on a premium channel, it can get started on the really big challenge: turning Web programming into a viable business.

YouTube allows anyone to post videos to the Web -- those of their own making, as well as copies of television programming and other copyrighted video content -- creating a serious bone of contention between parent company Google and the TV and movie studios. Hulu, a proprietary version of YouTube, was created by NBC Universal and News Corp. as a way to protect their brands while continuing to allow consumers to watch their programming on the Web.

YouTube's deal signals a thaw in the relationship with major content providers, but is also the starting gun of a new race with Hulu for who can come up with the better metrics for a new paradigm.

The new deal also shows that content producers have accepted that consumers are choosing to watch programs online rather than through traditional ad-supported media like television and DVDs. It also shows that they want to keep their options open rather than sticking to branded Web portals like Hulu. But so far, neither YouTube, which may lose close to $500 million this year, nor Hulu, which is also losing buckets of money, have found a way to market a highly fragmented audience in a way that makes them money while creating value for the content producers.

Credit Suisse analysts Spencer Wang and Kenneth Sena noted earlier this month that, "the issue for YouTube going forward is to increase the percentage of its videos that can be monetized (likely through more deals with content companies) and to drive more advertiser demand through standardization of ad formats and improved ad effectiveness."

Kurt Scherf, principal analyst at Parks Associates, told me that the big challenge for Hulu and YouTube, as well as the likes of upstarts Joost and Veoh, is that "it will take some time for [content] owners to get used to a model that's not prime-time TV."

The fact that the online audience is hard to define from a demographic standpoint makes it hard to price ads they consume. Scherf told me Web content service providers will have to come up with new kinds of metrics in order to make money. "It's up to Hulu and YouTube to deliver the content in a way that links ads to users that are more relevant and provide measures of the effectiveness of these ads using things like engagement and interactivity."