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Hulu's Tough Choices

Viewers love the site's free shows, but it's losing a bundle and may soon have to start charging

Since its launch in late 2007, Hulu has pretty much defined the Old Media vision of video on the Web. Each month the site's 1,700-title catalog of TV shows and movies attracts nearly 40 million viewers—people who will endure a couple of commercials per sitcom (vs. eight or more on TV) in exchange for the luxury of being able to watch a show for free, just one day after it airs on network TV.

Those days may now be coming to an end. NBC (GE), Fox (NWS), and ABC (DIS), the broadcasters that control Hulu, are warming to the idea of charging for at least some content. Hulu is expected to start testing subscription tiers for its programs in the new year, according to those who have worked with the Los Angeles company. And BusinessWeek has learned that Hulu is in early-stage talks with cable operators, including Comcast (CMCSA) and Time Warner (TWX), to limit access to those viewers who can prove they already pay for a cable subscription. That would be a big concession to the cable companies, which worry that sites offering free TV shows and movies will prompt folks to drop their cable subscriptions. A Hulu spokeswoman declined to comment on the talks.

It's not hard to see why Hulu's owners are willing to risk sacrificing their baby's explosive growth in eyeballs. The site may be No.2 after YouTube (GOOG) in number of videos streamed, according to comScore (SCOR), but analysts expect Hulu to lose $33 million this year. "Hulu was a great way to explore and learn about what was happening with video online," says Mark Cuban, who owns the cable channel HDNet. "But it has run its course."

Disney's Cut

The betting among analysts is that sooner or later Hulu will ditch its open model in favor of a closed one. Most likely, they say, the site will be made available only to paying cable and satellite subscribers under a model the industry has dubbed TV Everywhere. Comcast intends to roll out a version of such a service by Jan.1 for all its 24million subscribers. Called On Demand Online, it will allow subscribers to view shows online by entering a password, and several cable channels have signed up to provide programming. But so far just one broadcaster, CBS (CBS), has come on board—and only for a test of how the service's authentication technology would work.

At least one Hulu partner would like things to stay the way they are. That's Robert A. Iger, CEO of Walt Disney, which became an investor in Hulu in May. Disney, which is ABC's parent, wants to keep letting people watch the network's shows for free on Hulu. Yet if cable companies want to offer ABC's programming through online services such as Comcast's On Demand Online, Disney wants its cut, Iger says. "When you provide more convenience, you should be able to charge for that—and charge an appropriate amount," he recently told analysts.

As Hulu's partners struggle with their differences over business models, Jason Kilar, the site's CEO, has been exploring a variety of options for boosting revenue. "There is no single silver bullet," he said in an August interview. But, as failed online sites have learned, charging for what was once free can cause online traffic to dive. "The issue," says analyst David Joyce of Miller Tabak, a securities trading firm, "is how Hulu [will] put the genie back in the bottle after consumers have enjoyed getting TV shows for free."

Grover covers the media and entertainment industry for Bloomberg Businessweek in Los Angeles.

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