Hulu’s network drama

Surprised? You shouldn’t be. Since Hulu first helped broadcast programming escape the prison of the TV set five years ago, the Los Angeles-based venture has been on a tear. In fact, it’s managed to hammer out licensing deals and lure paying subscribers at a faster clip than any other video subscription service in the U.S.

Hulu now offers programming — ranging from NBC sitcoms to Criterion Collection art house flicks — from more than 380 content providers. It has distribution agreements with the likes of AOL (AOL), MSN, Yahoo (YHOO), and major cable companies, which all use its player to stream video. As part of a half-billion-dollar pledge to add more content this year, Hulu even coaxed Larry King back under the klieg lights to host an online-only show, which began in July.

All of that translates into impressive figures: Hulu’s revenue soared to $420 million in 2011, up 60% over 2010. It had more than 2 million paying subscribers in the latest quarter, up a third from the end of last year. In May it even managed to rank second behind Google’s YouTube for total number of videos streamed online, according to ComScore. And when it came to advertisements, Hulu was No. 1, streaming 1.67 billion video ads that month alone.

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Hulu’s owners should be crowing about their spectacular success. Instead, they are bickering bitterly, casting the firm’s future into doubt. TV is changing faster than at any time since the introduction of cable. Hulu’s predicament shows just how knotted things have become for media companies trying to profit online.

Hulu’s issues begin with its complex ownership. The joint venture counts Disney (DIS), News Corp. (NWS), and Comcast’s NBCUniversal among its owners. Competing interests have hurt: A proposed 2010 initial public offering never materialized, and a potential sale last summer fizzled. Both failed in part because Hulu’s owners want to maintain control over the licensing of their content. They also want to ensure that their creation doesn’t begin to cannibalize conventional TV ad revenue. “I don’t know if any amount of money would have been enough to get them to give up control,” says Marci Ryvicker, a media analyst at Wells Fargo.

Internal squabbling has been escalating between Hulu’s owners and its chief executive, Jason Kilar, according to people close to the situation. Kilar has butted heads with the company’s owners — for example, opposing the suggested price of its monthly subscription as being too high. In another instance, he uncorked a 2,000-word diatribe on his blog, essentially claiming that old media was dead. The manifesto didn’t sit well with old-media owners. The clashes seem to have done little to dull Kilar’s shine; he recently bowed out of consideration for Yahoo’s top job. Kilar declined to comment for this story. (A memo obtained by Variety seems to show just how deep these fissures run.)

Still, all the turmoil has vexed the company’s fourth owner, private equity giant Providence Equity. Providence, with over $23 billion of capital under management, has made a name for itself as a patient investor in media and entertainment, ranging from Spanish-language TV empire Univision to ZeniMax Media, publisher of one of the year’s most popular videogames. Hulu’s other owners are now testing its tolerance.

Providence acquired a 10% stake in Hulu for $100 million in 2007. A put option to sell that stake back to the company for $200 million becomes exercisable this fall, rekindling questions about what exactly will happen to Hulu. Talks over the put are under way among Providence and the company’s other owners. But a final decision has not been made, according to several people familiar with the situation. “The media owners have an obligation to make as much money as they can from program sales — not just Hulu — and so their interests aren’t 100% aligned with Providence,” says one person with knowledge of the discussions.

If Providence sells its stake, the sale could raise red flags about the company’s outlook. It is not clear whether Kilar will remain as CEO should Providence exit its investment. The outspoken chief’s interests appear more in sync with those of Hulu’s private equity owner. His departure would only add to the cloud of uncertainty hanging over Hulu. “More than a few red lights would go off if this happened,” says Mike McGuire, an analyst at Gartner.

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That leaves the company with few options. An acquisition is still possible. Facebook (FB), for one, might be interested in taking on Hulu to jump-start its video offerings and establish more extensive relationships with the networks. Apple and Yahoo are also rumored to be interested. Any potential buyer would probably insist on ironclad guarantees on the length and pricing of licensing agreements. An IPO is a more likely scenario, experts say, since the owners would be able to maintain control through voting shares. Recent train wrecks on the public markets — Facebook and Zynga (ZNGA), for example — may thwart such plans.

There is, of course, another option. Hulu’s owners may simply continue competing with it themselves. Take NBC owner Comcast’s Xfinity service, which challenges Hulu. To give Xfinity a leg up, Comcast (CMCSA) put a 250-gigabyte cap on the amount of data its subscribers can access from other services, such as Netflix and Hulu, each month. By contrast, movies downloaded through Xfinity are not subject to the cap. (The Justice Department is conducting an antitrust probe into the cap.) Meanwhile, dozens of other companies, from Sony (SNE) to Wal-Mart (WMT), have also jumped into streaming-video services (see chart).

For now, Hulu has an edge in TV programming. But its owners hold all the cards. “They hold the power to determine what content they’re going to make available, to whom, when, and at what price,” says Channing Smith, managing director of equity strategies at Capital Advisors. If they continue to give Hulu earlier access to existing shows than other rivals have, Hulu could outpace giants like Apple (AAPL), Netflix (NFLX), and Google (GOOG). But if its media owners opt instead to feed rivals with similar licensing deals, wringing as much cash as they can from their content, Hulu’s days may very well be numbered.

This story is from the September 3, 2012 issue of Fortune.