Can Hulu’s High Prices Hold?

This fall, new episodes of The Office, 30 Rock, and other hit shows will keep millions of online eyeballs glued to Hulu. But some advertisers are reluctant to pay the high rates the online video startup is charging to reach those audiences, and have started weighing their options elsewhere.

Currently, Hulu charges an average of $40 for every thousand views of an ad, according to Philippe Sloan, who buys ad space for clients of New York marketing agency Targetcast tcm. With ad space alongside videos on portal sites like MSN and Yahoo! running at about half that price, and cheaper options becoming available through YouTube and video ad networks, he says some clients are pulling ad dollars from Hulu and testing the effectiveness of other channels. “I think there’s going to be pressure on the site to bring their rates down,” Sloan says.

Hulu, a joint venture of TV networks Fox, NBC Universal, and – since May – ABC, no doubt gives advertisers plenty of bang for their buck. Its impressive library of TV shows and movies attracted over 457 million views in July, according to comScore, making it the fourth most-watched video site. (Google’s YouTube is No. 1, with nearly 9 billion views.) Those viewers spent an average of 6.1 minutes per video – by far the longest on the Web. “Hulu still has more attraction than most sites because of the nature of the content and because it has more long-form content,” says eMarketer’s David Hallerman.

For now, Hulu’s strategy of charging advertisers more and placing fewer ads in each show appears to be paying off: the company has managed to grow revenues each consecutive quarter so far this year, according to a source familiar with its financials. But will the model continue to work if advertisers have a broader range of less expensive choices? According to Sloan, the average cost-per-thousand-ad impressions has already fallen, from a high of close to $50. Hulu declined to comment on what it charges advertisers.

Online video ads are popping up in new places, like casual games, Internet radio, and social media apps, says Tod Sacerdoti, CEO of video ad network Brightroll. He says many clients, like consumer packaged goods giant Reckitt Benckiser, are now having success with campaigns that sprinkle their ads across many parts of the Internet, and sometimes cost less than $10 per thousand views.

As many advertisers look to renew their contracts, Sacerdoti says “either Hulu’s not going to get them or they’re going to drop their price.” Brightroll formerly helped Hulu sell some of its inventory, but that relationship ended as the video site has become reliant on its internal sales force.

Matt Wasserlauf, CEO of competing online video ad network Broadband Enterprises, says he knows of advertisers pulling out of Hulu completely in the past year because of pricing. “Advertisers had been wiling to pay a premium for the comfort and safety [of Hulu], but that is getting challenged in this environment,” he says.

The world’s leading video site, Google’s YouTube, also poses an increasing threat to Hulu. In April, the site unveiled a new design that emphasizes a section for professionally-produced shows and movies. “Hulu’s ability to charge a premium because of inventory scarcity could diminish with steps we saw put in place by other Web sites and other brands,” says Forrester Research analyst Bobby Tulsiani.

Despite the rise in competition, Hulu is still an attractive bet, according to Tracey Scheppach, video innovations director for Starcom MediaVest Group. “We have advertisers that are considering Hulu for the first time. Hulu is a sexy word,” Scheppach says.

Before it's here, it's on the Bloomberg Terminal.