The Hulu CEO insists that his “Hulu Plus” service, which gives subscribers a deep catalog of shows they can watch on their computers or on gadgets like the iPad, isn’t meant to replace cable. Instead, he says, it’s meant to augment cable. Just like your iPhone doesn’t replace your PC.

And he’s right. Hulu Plus is designed explicitly not to threaten the cable business. That’s why it doesn’t offer any news or sports, and why it only offers shows that air on three broadcast networks and almost nothing that runs on cable networks.

To spell it out: Hulu’s network owners–GE’s (GE) NBC, News Corp.’s (NWS) Fox and Disney’s (DIS) ABC–all have corporate cable siblings, and they all make lots of money from cable subscription fees. (And the broadcasters themselves are trying to get the cable guys to pay them for their stuff, too.) So they have no interest in upsetting the likes of Comcast (CMCSA) by creating a real cable competitor.

Doesn’t matter what Kilar says, argue the Web TV optimists/cable cynics. They believe that sooner or later the content guys will want to break free from the cable guys and go “over the top”–by selling their stuff directly to consumers or via rival middlemen like Hulu or perhaps Apple (AAPL).

One day, maybe. But right now the TV industry continues to work very well for its biggest players. A hint of the dollars involved: Yesterday, news broke that Fox, which makes “Modern Family” for ABC, has sold reruns to NBC Universal’s USA network for $1.5 million per episode. USA of course, will pay for the programming with dollars it extracts from cable operators.

Think anyone involved in the above scenario wants to shake things up anytime soon?

I talked with Kilar yesterday about Hulu Plus and its place in the TV ecosystem. Here are edited and condensed excerpts from our chat:

You’ve been working on putting this service together for more than a year. What took so long?

At a macro level, it’s balancing the needs of consumers, advertisers and content owners. And if you talk to any one of those three customer sets in isolation, often times you won’t delight the other two. So the hurdle we faced with Hulu Plus was, how can we thread this needle in a way that delights all three customer sets?

Hulu Plus will cost $10 a month, but will still feature ads. Haven’t Web users been conditioned to expect ads with free stuff, but not with stuff they pay for?

I don’t think that’s [the case]. We’ve done so much research about this, in terms of talking to thousands and thousands of people about the service, in obviously confidential ways that mask the brand name behind this…The vast majority of consumers actually pay for premium content through subscription and get advertising. And by that I’m referring to [cable TV, in the] living room environment. Which is where most of the consumption happens these days.

What we found in our research is that there isn’t this sort of belief of “If I’m paying for this, I must have no ads.” What [we asked] consumers was, “If you had a choice between having it be with no ads and at a higher price, [versus] having it with a relatively modest level of advertising but lower priced, which would you prefer?” They dramatically chose, in large numbers, the latter.

There’s no reason why we couldn’t offer an ad-free version of this. It just would be at a higher price.

There doesn’t seem to be any programming here from cable TV networks. That’s not a coincidence, right?

It’s a broadcast-focused service.

But how do you explain that to customers, who don’t distinguish between broadcast and cable TV–they just know they like TV shows?

When we launched Hulu, everybody was saying, “Oh, this is going to be a substitute for pay TV in the living room.” And I think people may say the same thing here. But it would be wrong. Because when you look at what is in the service versus what is not in the service, it very much is akin to a smartphone relative to a laptop.

The cable and satellite pay TV services have linear, live windows, which are different from the windows that we have in the service. There’s sports, there’s news, there’s cable…this is something different. I believe that as you see this play out, this is something that’s going to be incremental and complimentary to your cable and satellite service. And it’s priced that way.

So this is explicitly not something that should appeal to potential cord-cutters?

I don’t see this as a substitute for cable or satellite service. It’s not a product that can serve that need.

But it could it become that, one day?

I think the relationship between cable and satellite and telco pay TV service providers, and the content industry is a very, very solid one. And I think that is going to persist for quite a long time.

You’ve been able to get Funny or Die clips on YouTube before, of course, but only with some effort–until now, the site has tried to keep views on its site or with its proprietary player.

That only worked in limited doses, though, so it makes plenty of sense for the site to expose its videos to a much larger audience. But note that even Funny or Die is trying to preserve a “windowed” approach to video distribution: Its clips will still premiere on the Funny or Die site before moving over to its YouTube channel.

This isn’t nearly as important as deals Google’s (GOOG) site has already struck with providers like CBS (CBS), Disney (DIS), Time Warner’s (TWX) Turner, and Sony (SNE).

But it does provide me with a chance to run a YouTube clip featuring Will Ferrell. Warning–Mark Wahlberg drops a couple F-bombs in the last 30 seconds of this one:

Part of the magic trick will involve cutting costs. That’s hard to see play out in real time, except when we get flare-ups like YouTube’s fight with Warner Music Group (WMG) over new contract terms. The other part of the abracadabra–selling more ads on more videos, particularly “viral” hits–is easier to spot, particularly because YouTube keeps pointing it out.

For instance: Yesterday’s announcement that the site would start attaching ads to many more popular videos submitted by users and share the proceeds with the uploaders.

YouTube was typically vague about how the plan will work, but the most telling news is that it thinks it can increase the number of “partners” it shares ad revenue with from “thousands” to “tens of thousands.”

Translation: All those skateboarding dog videos you make fun of? We’re going to turn them into money machines. Just watch!

I’m going to make an educated guess and posit that for all the effort YouTube has made  to “monetize”–I hate that word, but what can you do?–its gazillions of videos, its most important revenue generator is still its homepage. YouTube’s competitors think a one-day “takeover” there may cost an advertiser as much as $500,000.

There’s not a whole lot of upside left for YouTube in the homepage, though. It’s the gateway to the world’s biggest video site, and the second-biggest search engine, and you either want to advertise on it or you don’t.

But the rest of site remains a big opportunity. YouTube can keep chasing splashy “premium content” deals like the ones it has struck with Sony (SNE), Disney (DIS) and Time Warner (TWX). And at the same time, it can try selling more of the “long tail”–basically, everything that isn’t “premium.”

YouTube’s long-tail efforts sometimes get ignored, especially when the site is compared to Hulu and its array of TV shows and movies. But YouTube executives have insisted for a while that long-tail videos will play a big role in the site’s future, and the new move underscores that.

“I think they are working [the long tail] hard but are not articulating it well,” the head of a competing Web video company told me earlier this month. “It may be because they are worried about how advertisers and agencies will view them, but it may also be that they are not revealing it all until it’s farther along.” Yesterday, YouTube gave us another peek.

YouTube says it’s highlighting the Bill Murray/Dan Akroyd/Sigourney Weaver classic because this summer is the movie’s 25th anniversary.

Which is true! But I’m pretty sure the site is also trying to remind both Hollywood studios and run-of-the-mill YouTube users that the site can and does run more than just short, home-brewed clips–it’s got a bunch of movies, TV shows, and other “premium content,” too.

Not nearly as much as Hulu, of course, but YouTube is still trying to figure out how to change that. One way is by simply creating special sections to highlight movies and TV shows, which is one of the reasons it got Sony’s (SNE) Crackle on board last spring. Another is to offer content owners special incentives to hand over their stuff to the world’s biggest video site.

If you do watch “Ghostbusters,” for instance, note that the traditional YouTube player has been replaced by one from Crackle. YouTube also recently agreed to let Disney’s ESPN.com (ESPN) use its own player as well.

On the other hand, there’s still plenty of other “premium content” on YouTube that doesn’t appear to be sanctioned by the contents’ owners and that doesn’t appear to be generating any revenue or other benefit for them, either. Like this grainy, but still excellent, “Ghostbusters” excerpt:

For YouTube, which has been struggling to monetize the 330 million visitors coming its way each month, this may be the beginning of the business model that has so far eluded it. That said, the company is going to have to offer those visitors a bit more than grainy “MacGyver” reruns if it hopes to prevent them from turning to Hulu for premium long-form video content.

For YouTube, which has been struggling to monetize the 330 million visitors coming its way each month, this may be the beginning of the business model that has so far eluded it. That said, the company is going to have to offer those visitors a bit more than grainy “MacGyver” reruns if it hopes to prevent them from turning to Hulu for premium long-form video content.