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Hulu hopes the Beatles and 'skinny' OTT will finally be its ticket to ride

The Beatles
John Pratt | Keystone | Getty Images
The Beatles

Hulu may be a digital platform, but it wants to be seen on equal footing with TV networks. And, armed with approximately 12 million subscribers, an upcoming Beatles documentary by Oscar-winning director Ron Howard and a new over-the-top service coming in 2017, Hulu may get its wish as it celebrates its 10th year.

"It's just a big period of change for TV as we know it," Hulu's senior vice president of advertising sales, Peter Naylor, told CNBC.

He said consumers are getting fed up with cable and satellite providers, so there is an opportunity for Hulu to provide a viable alternative — and that its owners ABC, NBC and Fox are on board with the idea.

Peter Naylor, SVP of Sales for Hulu
Paul Zimmerman| Hulu | Getty Images
Peter Naylor, SVP of Sales for Hulu

In early May, Hulu held an "upfront" presentation, the name traditionally saved for the annual events where broadcast and cable companies present their upcoming slate of programming to advertisers. Much of the excitement focused on an announcement by Hulu CEO Mike Hopkins that the service plans to offer a "skinny" OTT bundle, including live sports, entertainment and news channels that bypass cable and satellite operators.

The digital platform has released few details about the service, but The Wall Street Journal reported that the service will cost about $40 a month. Hulu already offers subscription tiers for program with fewer or no ads.

"Upstarts like us are looking at every part of the ecosystem as a potential part of the opportunity," Naylor said. "So, why wouldn't we? You aren't going to see us hanging wires from telephone poles, but if it has to do with TV, we're kicking around all sorts of ideas."

Considering Hulu's owners, the announcement could be groundbreaking and a move away from cable and satellite. But it's a necessary move if Hulu wants to be considered as part of the television ad budget, not the digital ones.

In 2017, TV ad spending in the U.S. will total $72.01 billion, according to eMarketer. However, digital ad spending will grow to $77.37 billion, the first time digital will surpass TV.

While expanding digital ad budgets are potentially good news for digital platforms like Hulu, Naylor said it's not as clear cut. He points out that most of that digital ad spending goes to search ads. In his approximation, just 15 percent of the total digital ad budget goes to online video companies like Hulu. There's more to gain from being seen as TV and getting TV money — for now at least.

"We're TV — not linear TV, we're on demand," Naylor said. "That's a change. Just like YouTube has an opportunity, Amazon has an opportunity, that's why Hulu has an opportunity."

Media buyers say Hulu's cost per advertising to 1,000 people (CPM) starts at about $25 to $35 for a broad demographic, while buying CPMs for a primetime broadcast show hovers around $25. One source pointed out that Hulu is more expensive because you can't skip their ads, and there are fewer of them.

Hulu also offers custom-branded program opportunities, with a minimum cost of $250,000. Getting a product integration in one of its top shows is closer to $500,000. But because it is so bespoke to the brand that commissions the project, rates can wildly vary.

The problem is there are a lot of digital companies, and all of them are competing for that 15 percent of the digital budget. If Hulu is considered part of the TV buy, it opens them up to a much larger pot.

The bulk of Hulu's offerings are still reruns from TV, but to compete with subscription-based TV services like Amazon and Netflix, it's investing heavily in original content. While Netflix and Amazon don't offer advertising, the three are often compared because they offer TV and movie-length content on demand.

During its upfront, it unveiled new programming including "Chance" starring Hugh Laurie and a new "Triumph, the Insult Comic Dog" series. It also brought out the stars from its successful shows, like Mindy Kaling, Aaron Paul and Amy Poehler.

In addition to slate of 30-minute comedies and one-hour dramas, Hulu also announced Hulu Documentary Films. First up is the exclusive acquisition of "The Beatles: Eight Days A Week," a new documentary about the Fab Four directed by Howard. Naylor confirmed it will have a limited theatrical run, which is one of the steps toward qualifying for an Oscar.

Insiders say an Oscar and popular shows could bring new level of status to Hulu. It could also backfire.

"Because they are in the originals (TV shows) business, they have placed themselves in a very unique competition," said Charlie Fiordalis, chief digital officer at media agency Media Storm. "That leaves them open to huge losses or huge gains based on the shows they have produced. Look at Yahoo: If (it) had three back-to-back hits, it would be in a very different position."

Hulu's 12 million subscriber base pales in comparison with Netflix, which says it had a little over 81 million subscribers as of Q1 of 2016. It's behind Amazon Prime, which has about 54 million subscribers, according to Consumer Intelligence Research Partners.

And because of this desire for more original programming to stand out, there are more TV shows being produced than ever by digital, broadcast and cable networks, creating more competition. Vulture reports that between 2009 and 2015, the number of scripted shows went from a little over 200 to 409 in 2015.

"They're a fantastic business, but they face a challenge from the likes of Netflix. … The appetite for commissioning original shows is large, which makes it hard to come up against competition sustainably," said Nick Bourne, chief commercial officer at Bigballs Media.

Fiordalis said Media Storm currently places Hulu in a hybrid category, competing against the budgets for video-on-demand advertising and addressable programmatic (or automated) TV ad buys. But he can see the argument that Hulu should be placed in the TV category since it offers the same 15- and 30-second TV spots that broadcast and cable networks have.

Still, Hulu still must prove it has the reach of the traditional networks, Fiordalis pointed out. About 18.4 million people watched AMC's "The Walking Dead" season finale in April. Last year, the most watched television series, "The Big Bang Theory" on CBS averaged over 21 million viewers per episode.

Winning big awards is a step, but it may not help that much at getting TV ad dollars.

"Awards provide clout, but I think commercially successful properties probably drive the most amount of value," said Fiordalis. "I would rather have 'Modern Family' and create that and own that than an indie film that wins an Oscar. It's worth 100 times more."

Disclosure: CNBC's parent company, NBCUniversal, is owned by Comcast.