With or without a sale, can Hulu work?

June 23, 2011, 8:26 PM UTC
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FORTUNE — It must be immensely frustrating to either own or manage Hulu. The viewing public is moving away from cable and satellite toward Internet viewing, but so slowly and uncertainly that programmers can’t simply port all their shows online and be done with it. They have to keep the cable and satellite providers happy because for now, that’s where the money is.

And it’s programmers that own Hulu, though not for long. The Los Angeles Times on Wednesday reported that Hulu is now on the block, no doubt largely because of the confusing morass of conflicts not only with cable and satellite providers, but also with Hulu’s own CEO, Jason Kilar, over how many commercials to show and how much to charge for Hulu Plus, the service’s premium offering that currently costs a paltry $8 a month.

But it’s those same conflicts that could make selling Hulu a big challenge. Hulu can’t be sold — at least not for a decent return — unless it has long-term programming commitments in place from its owners: Disney (DIS), Comcast (CMCSA), and News Corp. (NWSA) (Providence Equity Partners also holds a stake). Making those commitments simply prolongs the headaches the owners are trying to relieve through a sale, but nobody will want to buy Hulu unless it still has fresh, free television shows to offer.

Nevertheless, at least one owner, News Corp., is reportedly close to striking a programming deal with Hulu. The precise terms haven’t been disclosed, but Hulu has apparently agreed to boost the amount of advertising it runs on programs owned by News Corp.’s Fox Broadcasting. Currently, Hulu runs about half the amount of commercials that are run on a typical show on TV. The other owners are expecting to strike deals as well.

Kilar has long insisted that the smaller number of ads is a major driver of viewers to Hulu. The owners aren’t buying it. Or at least, it’s not as important to them to drive viewers to Hulu as it is to maintain the market value of their programming, even as technology is inexorably driving that value down.

According to the Los Angeles Times, the owners are also proposing that Hulu begin demanding the viewers prove that they are cable or satellite subscribers in before they are allowed to watch new programs on Hulu the day after they are shown on TV. Without such proof, viewers would have to wait an additional week before they could watch.

That might do more than packing on ads to discourage viewership, but it would go a long way toward mollifying the cable and satellite providers. And yet, it might also make Hulu much harder to sell. Next-day content is perhaps the chief draw of Hulu — it’s something that even its much-larger rival Netflix doesn’t do.

Another complication: once the owners are no longer also the suppliers of programming, licensing fees will almost certainly shoot up down the road when new agreements are made.

Nevertheless, Bloomberg reports that Hulu might be valued about 50 times earnings, or more than $2 billion.

Given all the uncertainties, it’s hard to know which companies might make a play, but Yahoo (AAPL)  has reportedly already expressed interest, and Amazon (AMZN), which wants to increase its online video offerings, would also be a natural bidder.