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ANALYSIS: All Eyes on CBS Digital Strategy

With three of the four big networks now partners in online video hub Hulu, CBS is now distinctly under pressure to either get on board or make its own strategy pay off.

On Thursday, Disney confirmed it would become a full equity partner in Hulu, which is owned by News Corp., NBC Universal and Providence Equity Partners. ABC’s hit shows will now join those of NBC, Fox and many other providers at the site.  Some Disney cable content will also be part of the deal.

So more focus will now fall on CBS, both as the lone Hulu holdout among the big four networks and because of the $1.8 billion it paid for CNET.

“My guess is that CBS is going to feel their digital strategy needs to deliver this year because of their CNET acquisitions,” says Dennis Miller, general partner at venture capital firm Spark Capital. “Their individuals are going to be under pressure. We’re just in the first inning of what’s going to be relatively long game.”

CBS, which has held on-again, off-again talks to become part of Hulu, issued a statement following the Disney announcement maintaining its commitment to pursuing its own non-exclusive content partnerships.

"CBS has long employed open, non-exclusive content partnerships that allow fans across the internet to engage with our programming in such a way that we control our distribution, sales and profit. We continue to discuss similar arrangements with additional partners as we grow our online audience based on the strength of our content, and the passion of the communities it creates. The company also believes that controlling our own rights for that content --in all media--preserves its value in a multi-platform business system."

CBS points to the growth of its own and the success of March Madness On Demand, which can be accessed from all over the Web, as examples of its successes. CBS insiders, though, quietly admit the pressure is on, not just as a result of game changing deals such as Disney’s, but the need by everyone to find a workable business model for free online video content.  

CBS’s older demographics may also mean that the network has less need to put its shows online. While other broadcasters put up hours of current material, CBS is much more cautious, running rigorous daily analytics before deciding whether to hold back a show or make it available online. That process is credited with helping buoy CBS ratings versus its competitors. Disney argues that online viewing helps turn casual viewers into loyal ones.

CBS may ultimately become a partner, but it has other reasons for maintaining a distance; the desire to make cable operators pay for retransmission of CBS network. One executive with knowledge of talks said, “The money is with retrans today. The question is what’s the value of what’s going on with online video. Retrans is very much top of mind.”

Within CBS, and other media companies, the battle lines are drawn between affiliate and digital divisions over what ultimately pans out.

According to observers, online advertising revenue is split 70/30 in favor of the content partner, with the distribution partner receiving the rest. “Hulu is losing money hand over fist,” said one person familiar with online video economics.

But that may be less about Hulu and more about the digital video marketplace, where advertising revenue is currently insufficient for many models. The Internet Advertising Bureau reports that of the $23 billion spent on internet advertising in 2008, just $734 million is spent on digital video.

Spark Capital’s Miller says, “Hulu has both surprised and disappointed at the same time.” He gives it credit for growing the brand and becoming the “first viable portal of professional content.”  But, he adds, “The commercial load and not selling out their inventory has given pause to the studios as to whether it is a sufficiently compelling model to join and proclaim as the market leader.”

Still, the site is the target of many kudos, as well as the hopes of many in the television business.

“They’ve created one of the best user experiences on the internet, not just in the online video world,” says Citi internet analyst Mark Mahaney.  “Part of that is because its management came from Amazon. They’ve showed attention to the consumer and the advertising experience.”

Cable Systems operators such as Comcast and Time Warner, meanwhile, don’t see the Disney-Hulu deal as changing much and don’t see CBS’s involvement or lack of involvement as material. They’re still pressing ahead with their own online ventures.

Comcast’s Fancast, for instance, carries material from all broadcast network partners. One cable systems executive said: “As long as it’s network stuff we don’t care. With cable they have a specialized business model and revenue is generated through subscriptions and advertising, and that’s when it starts to chafe.”

Time Warner Cable sources say the company has been kicking the tires at online video provider Joost, which is said to be going 'for cheap.'