Hulu Attracts Crowds but Not Ads

News Corp.-NBC joint venture Hulu has surged in viewership, but advertisers are still leery, and content partners are pulling back

By Douglas MacMillan

In the Super Bowl commercial calling Hulu "an evil plot to destroy the world," 30 Rock star Alec Baldwin intones: "There's nothing you can do to stop it." He's right that viewers can't get enough of the joint venture from NBC Universal (GE) and News Corp. (NWS). In February it had the biggest surge in unique viewers of any online video site in that period, according to comScore (SCOR).

Even Disney (DIS), a media company that has restricted most of its television and film content to its own sites, is negotiating to put videos on Hulu in exchange for an equity stake in the joint venture, according to a source with knowledge of the deal.

But Hulu is facing plenty of roadblocks elsewhere, including among advertisers, partners that provide entertainment content, and even its parent companies concerned that the site might cannibalize their own competing media. Under pressure from content providers, Hulu has gone back on its pledge to allow anyone to syndicate its content anywhere on the Web. At least one analyst says the site is struggling to find ads for many of its videos. And a lengthening list of rivals is rushing to move content online, spurred by the success of Hulu and online video leader YouTube, owned by Google (GOOG).

To News Corp., NBC, and other media companies pinning their hopes on Web video, the speed bumps keep alive concerns over the ability to offset diminished demand for broadcast advertising with revenue from Internet programming.

Ads Aren't Following Eyeballs

Analysts are already revisiting their forecasts for ad spending on Hulu and other online video sites this year. In November, Screen Digest's Arash Amel predicted Hulu would generate $180 million in advertising this year, matching or surpassing YouTube. London-based Amel still expects Hulu to give YouTube a run for its money, but he now thinks each will take in only around $120 million in 2009.

That's up considerably from the estimated $65 million Hulu generated last year but still disappointing considering the traffic surge, Amel says. "What we've seen is rapid growth in consumption, but the advertising isn't keeping up," he says. Based on his studies of Hulu, the site has only sold about 60% of its ad inventory, with much of the remaining space filled with public service announcements, Amel estimates. "I don't think that anyone can say they are impervious to the macroeconomic environment, but we're still hugely optimistic about our ability to monetize the service," says Hulu spokeswoman Christina Lee. Rapid growth in content and viewership make it "more challenging for us to project our future inventory accurately," she adds.

The payoff for advertisers is still far smaller online than with TV programming. A half-hour show that carries about two minutes of advertising on Hulu will have four times as much advertising when it's broadcast on TV. Although online ads can cost more per viewer, TV advertisers spend more because they can reach much larger audiences. Online video has the benefit of targeting certain types of customers and letting marketers include interactive elements, but in the current economic climate many advertisers are unwilling to experiment.