In a blog post, CEO Jason Kilar blames the shortfall on a “soft advertising market (economy) in the second half of 2011.”

The numbers: Hulu did $420 million last year, via a combination of ad sales and revenue from its Hulu Plus subscription service. But during the first half of 2011, it had told the world — several times — that it was “on pace to approach” $500 million.

In retrospect, it’s easy to see when sales started softening. In July, when Kilar reported his company’s Q2 numbers, he was still offering the same $500 million revenue guidance. But in early October, when he reported Q3 numbers, the guidance had disappeared from his update.

There are a whole lot of people who would like to report 60 percent annual growth. And the fact that Hulu revenue missed earlier projections by 16 percent  – “overall the Hulu ad business grew aggressively and Hulu Plus materially exceeded our plan,” Kilar notes in his post — isn’t going to be the biggest issue for the service by a long shot.

Hulu’s management and its owners — Providence Equity, Comcast, Disney and News Corp. — need to reach a fundamental agreement about the video site’s direction, and how the site fits into today’s entertainment landscape. (News Corp. also owns this Web site.)

But it’s still worth noting the miss, because Hulu is both a digital ad business and a digital ad business that sells very premium video.

It’s an article of faith among digital ad bulls that the industry will keep growing even if the larger economy takes a hit, because ad dollars will shift from old media, anyway. And advertisers are supposed to be clamoring for the tv shows and movies that Hulu sells — which is one of the reasons Google is trying to shift upmarket from dogs on skateboards, with its “channels” strategy.

We’ll start hearing other reports on the state of last fall’s ad market, and the outlook for the future, over the next couple weeks, when public companies start reporting their Q4 numbers.

And we’ll hear a lot more from Kilar himself, who will be appearing at our D: Dive into Media conference at the end of this month. If you want to see him in person, grab a seat.

It’s important to note upfront that Hulu is paying cash for the programming. While the video site — a joint venture between Disney, News Corp., Comcast and Providence Equity — has discussed bringing in another equity partner, that’s not happening with this particular deal.

I don’t have a price estimate for the deal so far, except that it’s going to be significantly less than the value of the Netflix deal — pegged at perhaps $1 billion (maybe more! maybe less) over an eight-to-12-year period — signed earlier this month.

That’s because Hulu will only have access to a year’s worth of content at any given time, while Netflix will eventually have multiple years’ worth of shows available for its subscribers.

Things to note on a Friday afternoon:

• Hulu’s core value is that it aggregates primetime broadcast shows from its three corporate owners: Disney’s ABC, News Corp.’s Fox and Comcast’s NBC (News Corp. also owns this Web site). But CEO Jason Kilar has pushed hard to expand the site’s appeal beyond programming from that trio. Until now his biggest non-network deal has been a Viacom pact for Comedy Central’s “The Daily Show” and “The Colbert Report.” This one could be bigger, simply because it’s three years longer.
• The fact that Hulu has announced any deal at all is interesting given the flux surrounding the site. Until recently, its owners had it on the block, and now that it’s no longer for sale, the next step is to figure out who’s staying and who’s going — both in terms of owners and management.
• While the deal means more content for Hulu visitors, it’s also another part of the Great Free TV Web Pullback of 2011. That’s because unless you’re paying for Hulu Plus, you’ll have to wait eight days after the shows air to watch them online. You can debate the TV guys’ logic here — in short, they think that holding stuff back increases its value, even though lots of people assume it will make it much more likely to be pirated — but this is increasingly going to be the norm.

THE CW AND HULU SIGN FIVE-YEAR LICENSING AGREEMENT FOR CURRENT SEASON PROGRAMMING In-Season Episodes of The CW’s Drama and Reality Series To Stream on Hulu and Hulu Plus

(October 28, 2011) –The CW Television Network, a joint venture of CBS Corporation and Warner Bros. Entertainment, announced today a five-year licensing agreement with Hulu for the rights to stream in-season episodes of The CW’s programming on the Hulu Plus subscription service and the free, ad-supported Hulu service.

With this agreement, Hulu Plus will be the only online subscription service to carry in-season episodes of The CW’s drama and reality series, with the five most recent episodes of each show available to subscribers the next day after broadcast. Users of the free, ad-supported Hulu service will be able to watch five episodes of current season programming eight days after airing on The CW.

Available later this year, programming on Hulu and Hulu Plus will begin with the nine series on The CW’s Fall 2011 schedule, including new series “Ringer,” “Hart of Dixie” and “The Secret Circle,” as well as returning hits “The Vampire Diaries,” “Gossip Girl,” “Supernatural,” “Nikita,” “90210” and “America’s Next Top Model.”

“Our new arrangement with Hulu only affirms the incredible value of The CW’s series, as well as amplifying the immense power of the broadcast network model,” said Mark Pedowitz, President, The CW. “As we increase the amount of year round original programming on The CW, this deal provides our shows with greater exposure on a new platform, helping build even more awareness that will drive viewers back to the network and its affiliates. We see this as a win for everyone involved, the network, the stations, Hulu and ultimately, the viewers.”

“The CW programming is a great example of the kind of in-season content we want to make available on our service – high-quality, engaging, serialized shows that fans passionately love,” said Andy Forssell, SVP of Content for Hulu. “Making these shows available on Hulu and Hulu Plus will allow new and existing fans to get their fix of The CW’s great shows anytime and anywhere.”

The new agreement with Hulu delivers more ways for viewers to catch up with The CW’s serialized dramas and reality series, and provides the network with valuable off-air promotion and marketing to grow its brand, as well as increase awareness for its series. The CW’s content can also be made available online through authenticated cable providers.

The CW, which last year introduced an innovative digital convergence strategy for broadcast and online ad sales, will continue to present its programming on cwtv.com with a full complement of advertising, prior to streaming on the free Hulu service.

That will end the first step of a sales process that began in late June, when the video site hired bankers and started chatting up other media companies. Next up: A more complicated discussion about what, exactly, buyers would be buying.

People familiar with the process think Hulu’s owners — Disney, News Corp., Comcast and Providence Equity — are expecting bids of at least $1.5 billion for the site and its licenses. (News Corp. also owns this Web site).

Hulu’s original investors valued the company at $1 billion back in 2007; bankers floated a $2 billion number when they floated an IPO last year. But the final purchase price could move around, depending on what Hulu ends up selling.

It’s possible, for instance, that some of Hulu’s owners could hang on to their stakes, which could push the purchase price down. Alternately, a buyer could ask the company’s network owners to increase the length of Hulu’s exclusive online license, and end up paying even more for those rights.

News Corp. COO Chase Carey alluded to some of the uncertainty during his company’s earnings call yesterday, when asked about the sale (emphasis added; transcript via Seeking Alpha):

I’m not going to speak too much of the way Hulu’s running the process. We’re obviously partners, so I think probably they are the right ones to speak to. It is obviously ongoing, and I think, progressing largely according to plan, but for us, I think we’ll see where it ultimately ends up. And I think for us, it’s still a decision to see where — what it looks like at the end. Does it make sense to pursue that path or does it make sense for us to stay in an ownership position and continue to have it driven by content owners. But I think it’s on course and on schedule, but I’ll let Hulu speak to it in more detail.

Assuming there is a sale, my hunch is that Yahoo is still the most logical buyer. The list of potential buyers, of course, is a very big one, with everyone from Google to Apple to Amazon taking a look-see. Here’s a rundown of the players from last month.

In a blog post announcing the move, Hulu CEO Jason Kilar doesn’t explain the rationale for the price cut, which comes less than two weeks after the service’s formal launch.* So feel free to make your own guess.

But the announcement highlights the core tension facing Hulu, which is jointly owned by Providence Equity, GE’s NBC, Disney’s ABC and News Corp.’s Fox: The best move for the online service is often at odds with its owners’ strategies for their businesses.

In this case, Kilar has been pushing for a price cut while the networks have been trying to effectively establish higher prices for their programming, in the form of new fees they’re demanding from cable providers (see: Fox. v. Cablevision, etc).

The new $7.99 per month price should make Hulu Plus more competitive with Netflix, which offers DVD rentals along with all-you-can-eat streaming for $8.99. So will another move to add more programming from NBC Universal, which Netflix got access to in September.

Hulu Plus is supposed to appeal to customers who want access to a deeper catalog than Hulu’s free service, and who want to watch the shows via devices like Apple’s iPad and Microsoft’s Xbox 360–all of which support Netflix.

Hulu says it will provide $2 credits to existing Hulu Plus subscribers who signed up during the trial phase this summer, and is also offering a few other promotional bells and whistles to push the service. From Kilar’s post:

• One free week trials for all new subscribers. In addition, current subscribers who joined during the preview period will receive a credit for one week of Hulu Plus toward their next month’s subscription.
• Two free weeks of Hulu Plus for both current subscribers and friends they invite through our referral program. Subscribers can learn more by clicking on the “Referrals” tab on their Hulu profile page.
• 11 weeks ($20 worth) of free Hulu Plus with the purchase of a Sony BRAVIA connected TV or Blu-ray player through January 31, 2011. (See sony.com/huluplus.)
• One free month of Hulu Plus with the purchase of a Roku device through December 15, 2010. (See roku.com/hulu.)

*Hulu points out that Hulu Plus only formally came out of beta today; two weeks ago it dropped the invite-only requirement for the service.

Yes, say sources talking to the New York Times who imagine the video site launching an IPO “as soon as this fall.”

And it’s not the first time we’ve heard the idea: Some of Hulu’s network owners have been murmuring privately about an IPO for a while. Kara Swisher even got Hulu CEO Jason Kilar to acknowledge the possibility in an interview last month.

Okay. But really?

For argument’s sake, let’s take Hulu executives at their word. They say the site will turn a profit on revenues of more than $200 million this year–even though the majority of its revenues for its big shows go back to its network owners.

Even with those numbers, a Hulu IPO faces a fundamental challenge: Convincing investors that its three network co-owners are committed to making the thing a success.

The Times’ sources float a $2 billion valuation for Hulu. And that ought to be all the motivation that its network owners–GE’s (GE) NBC, Disney’s (DIS) ABC and News Corp.’s (NWS) Fox–and co-owner, Providence Equity, should need.

But Hulu’s primary business model–streaming TV shows on the Web, for free, while competing with the networks’ own sites, which do the same thing–seems a lot more problematic now than it did back in 2007. At the time, the networks were primarily concerned with creating a credible competitor to Apple’s (AAPL) iTunes and Google’s (GOOG) YouTube.

Now Hulu’s owners, who are primarily focused on wringing extra dollars out of the cable business, are consistently sending mixed signals about what they want to do with the site.

For instance: This spring, ABC launched its own free iPad app, which competes with Hulu’s $9.99/month paid service. This month, News Corp. CEO Rupert Murdoch was asked about Hulu during his quarterly earnings call, and he declined to say much at all. Meanwhile, NBC is slated to be a unit of Comcast (CMCSA), which has real problems with Hulu (though I think the cable guys will be hands-off the JV for the near future).

Of course, there’s a circular logic to this. If Hulu’s network owners can really convince Wall Street to assign an eye-popping value to their site, then Hulu’s network owners will have a reason to stick around. And maybe this show will have a happy ending, after all. I’ll be happy to watch, either way.

First impression: There is a lot of past tense in these bios. As in Richard Dalzell, who used to be chief information officer at Amazon (AMZN), and Fred Reynolds, who used to be chief financial officer at CBS (CBS). Etc.

My gut here is that Armstrong, or his employers at Time Warner (TWX), want to bump the age/gravitas quotient, since Armstrong and most of his lieutenants are whippersnappers under 40.

Here’s the abbreviated list of elder statesmen:

Richard Dalzell: Amazon exec from 1997-2007

Karen Dykstra: Partner at Plainfield Asset Management; former CFO of Automatic Data Processing

Bill Hambrecht:  Founder, Hambrecht & Quist; IPO’d Apple (AAPL), Amazon, Adobe (ADBE), etc.

Patricia Mitchell: CEO of Paley Center for Media; former CEO of Public Broadcasting Service

Michael Powell: Providence Equity adviser, former head of the FCC; also known to some as former Secretary of State Colin Powell’s son

Fred Reynolds: 15-year veteran of CBS; retired this year

Jim Stengel: 25-year veteran of Procter & Gamble (PG), retired 2008; now runs consulting company

Jim Wiatt: Ran William Morris agency until forced out this year; last seen chatting up Google CEO Eric Schmidt about working with YouTube

Here’s the press release. More in a bit:

AOL NAMES ITS BOARD OF DIRECTORS

New Board Establishes Strong Foundation in Leadership and Governance with Diverse Range of Talents from Internet, Media, Marketing, Entertainment and Finance

NEW YORK, NY – October 26, 2009 – AOL today named nine members to serve on its Board of Directors, drawing on leaders with expertise in Internet, Media, Entertainment and Marketing, as well as Finance. Among the directors named are: Richard Dalzell, Karen Dykstra, William Hambrecht, Patricia Mitchell, Michael Powell, Fredric Reynolds, James Stengel and Jim Wiatt. They will join the AOL Board when the separation from Time Warner is complete, with AOL CEO Tim Armstrong serving as Chairman of the Board.

“AOL is very fortunate to have an exceptional group of proven leaders to serve on our board of directors. AOL is on a mission to help create the future of media and content and the AOL Board will play a central part in helping us focus the strategy and also operate the company with the highest ethical standards,” said Armstrong. “These individuals bring independent judgment and a dedication to building shareholder value, and they will be a tremendous resource for our company, our employees, and our future.”

Board members named to date:

Richard L. Dalzell

Richard Dalzell was Senior Vice President and Chief Information Officer of Amazon.com, Inc., until 2007. Previously, Dalzell served in numerous other positions at Amazon, including Senior Vice President of Worldwide Architecture and Platform Software and Chief Information Officer from 2001 to 2007, Senior Vice President and Chief Information Officer from 2000 to 2001 and Vice President and Chief Information Officer from 1997 to 2000. Prior to Amazon, Dalzell was Vice President of the Information Systems Division at Wal-Mart from 1994 to 1997. Dalzell holds a B.S. in engineering from the United States Military Academy, West Point.

Karen E. Dykstra

Karen Dykstra is a partner at Plainfield Asset Management LLC, and has been Chief Operating Officer and Chief Financial Officer of Plainfield Direct Inc. since 2006. Plainfield Asset Management LLC manages investment capital for institutions and high net worth individuals based in the United States and abroad. Plainfield Direct Inc. is a business development company managed by Plainfield Asset Management. Prior to joining Plainfield, Dykstra was the Chief Financial Officer of Automatic Data Processing, Inc., a provider of transaction processing and information-based business solutions, from 2003 to 2006. Dykstra serves on the boards of Plainfield Direct Inc., Gartner, Inc. and Crane Co. She received a B.S. in accounting from Rider University and a M.B.A. from Fairleigh Dickinson University.

William R. Hambrecht

Bill Hambrecht founded and has been Chairman and Chief Executive Officer of WR Hambrecht + Co since 1998. WR Hambrecht + Co is a financial services firm specializing in Internet and auction processes and providing underwriting and advisory services for technology and emerging-growth companies. Before that, Hambrecht co-founded Hambrecht & Quist. In 2007, Hambrecht co-founded the United Football League, which premiered in October 2009. Hambrecht has served as a director of numerous private and public companies and currently serves on the board of Motorola, Inc. He graduated from Princeton University.

Patricia E. Mitchell

Patricia Mitchell has served as President and Chief Executive Officer of The Paley Center for Media, a global non-profit cultural institution dedicated to the discussion of the cultural, creative and social significance of television, radio and emerging platforms, since 2006. The Center also convenes executives of global media companies on business issues and subjects of mutual interest, providing a neutral non-competitive forum. Before that, Mitchell was President and CEO of the Public Broadcasting Service from 2000 to 2006, where she oversaw the digital conversion of 359 public television stations and development of a system-wide digital content initiative. For more than two decades, she was an award-winning journalist and producer, serving as reporter, anchor, talk show host, producer and executive for three broadcast networks and several cable channels. She has served as President of Time Inc. Television and CNN Productions, and was a partner in an independent production company which focused on women’s programming. Mitchell serves on the board of Sun Microsystems, Inc. She holds a B.A. in English/drama and a M.A. in English literature from the University of Georgia.

Michael K. Powell

Michael Powell has served as a Senior Advisor to Providence Equity Partners, a private equity firm focused on media, entertainment, communications and information investments, since 2005. Powell is also Chairman of the MK Powell Group, which focuses on strategic advice in the areas of technology, media and communications. Previously, Powell served as Chairman of the Federal Communications Commission from 2001 to 2005. He also served as the Chief of Staff of the Department of Justice’s Antitrust Division and was an associate with the law firm of O’Melveny & Myers LLP. Powell serves on the boards of Cisco Systems, Inc. and Education Management Corporation. He was also named Chairman of NTT DoCoMo’s 5th U.S. Advisory Board. Powell has a B.A. in government from the College of William and Mary and a J.D. from the Georgetown University Law Center.

Fredric G. Reynolds

Fredric Reynolds was with CBS Corporation and its predecessor companies from 1994 until he retired in August 2009. Reynolds was Executive Vice President and Chief Financial Officer of CBS Corporation from 2005 to 2009. He also served as President and Chief Executive Officer of the Viacom Television Stations Group of Viacom, Inc., and President of the CBS Television Stations Division of CBS, Inc. Before that, he was Executive Vice President and Chief Financial Officer of Viacom, Inc., CBS Corporation and Westinghouse Electric Corporation. Reynolds joined Westinghouse from PepsiCo Inc. Reynolds serves on the board of Kraft Foods Inc. A certified public accountant, Reynolds holds a B.B.A. in finance from the University of Miami.

James R. Stengel

James Stengel has been President and Chief Executive Officer of The Jim Stengel Company, LLC, a think tank and consulting firm conducting proprietary research, generating thought leadership and applying a new framework to drive business growth, since 2008. Stengel is also currently an adjunct marketing professor at UCLA’s Anderson School of Management. Stengel worked at Procter & Gamble from 1983 to 2008, holding a variety of positions including Global Marketing Officer from 2001 to 2008. Stengel serves on the board of Motorola, Inc. He holds a B.A. from Franklin & Marshall College and a M.B.A. from Pennsylvania State University’s Smeal School of Business.

James A. Wiatt

Jim Wiatt has been an independent consultant since June 2009. Wiatt served as Chairman and Chief Executive Officer of the William Morris Agency from 1999 until 2009, overseeing all areas of the entertainment company, including motion picture, television, music, publishing, theater, digital, sports marketing, business development, investments and corporate consulting. Before joining WMA, Wiatt was Co-Chairman and Co-CEO of International Creative Management, a talent management company. A graduate of the University of Southern California, Wiatt is a member of the Board of Councilors of the USC School of Cinematic Arts, former Chairman and current member of the Board of the Los Angeles Police Foundation, and on the Board of Directors of the Music Center of Los Angeles.

On May 28, 2009, Time Warner Inc. announced that its Board of Directors had authorized management to proceed with plans for the complete legal and structural separation of AOL from Time Warner. Following the proposed transaction, AOL would be an independent, publicly traded company. Time Warner has indicated that it aims to complete the proposed transaction around the end of this year.

Terms of the deal haven’t been disclosed, but I’m told the transaction values the joint venture at $300 million. Google’s (GOOG) YouTube isn’t an owner in the JV but will share revenue in exchange for lending Vevo its massive distribution platform. The site, which will exist both outside YouTube and within YouTube as a branded channel with its own player, is scheduled to launch later this year.

Vevo has been seeking an outside money source for some time; PaidContent had previously reported the venture was looking for a $300 million valuation.

But the most important part about the outside money is that it’s outside: The investment is designed in large part to allay antitrust issues, given that Vevo’s existing owners represent two of the four major music labels. Providence provided the same cushion to Hulu, which was originally put together by GE’s (GE) NBC Universal and News Corp.’s (NWS) Fox.

Abu Dhabi Media, which is owned by the Abu Dhabi government, has made several forays into Western media, but until now, all of its deals have been focused on Hollywood. Two years ago, for instance, the company announced a $1 billion pact with Time Warner’s (TWX) Warner Brothers to finance movies and build a theme park, though that deal has yet to yield much activity. Earlier this month, it made a much more modest $10 million pledge to back Walter Parkes and Laurie McDonald, the movie producers who once ran DreamWorks studios.

Here’s the release:

VEVO PARTNERS WITH ABU DHABI MEDIA COMPANY

Abu Dhabi Media Company Joins Universal Music Group and Sony Music Entertainment
for World Class Online Premium Music Service

New York, New York, Monday, October 19, 2009…VEVO, the new premium music video and entertainment service powered by YouTube, has received a strategic investment from Abu Dhabi Media Company (ADMC), one of the world’s fastest growing, multi-platform media organizations. The announcement was made today by Doug Morris, Chairman & CEO of Universal Music Group and Co-Chairman/Founder of VEVO, Rolf Schmidt-Holtz, Chief Executive Officer of Sony Music Entertainment & Co-Chairman of VEVO, Rio Caraeff, President & Chief Executive Officer of VEVO, H.E. Mohamed Khalaf Al Mazroui, Chairman of ADMC, and Edward Borgerding, Chief Executive Officer of ADMC. Terms of the agreement were not disclosed.

With this transaction, VEVO is now formed as an independent and fully funded entity with Universal Music Group (UMG), Sony Music Entertainment (SME) and Abu Dhabi Media Company (ADMC) as founding shareholders. Funding from the shareholders will enable VEVO to come to market with an attractive premium music offering for consumers and advertisers alike.

Launching in the United States and Canada later this year with a further international roadmap to be announced, VEVO will be a premium destination and syndication network for the very best in top-notch music video content that will leverage the massive existing traffic of YouTube.

“This global partnership flags Abu Dhabi Media Company’s commitment to establish a leading position in the digital media industry. It is part of an integrated approach to expanding the global digital presence and brand portfolio of Abu Dhabi Media Company, and it illustrates our partnering approach with innovators in digital media services and technologies”, stated H.E. Mohamed Khalaf Al Mazroui, Chairman of ADMC, on joining UMG and SME to create VEVO.

“It’s a credit to the music community, and to the global opportunity that VEVO represents, that we have been able to attract such a solid investment partner with the vision and track record of Abu Dhabi Media Company,” commented Rio Caraeff, President & Chief Executive Officer of VEVO. “Abu Dhabi Media Company brings to the venture important funding support and a team with enormous global media experience and insight, and we look forward to working with them to seize the many opportunities ahead of us.”

“Consumer demand for music video entertainment is growing significantly today and is transforming the digital entertainment market and the music industry by fuelling new media business models. VEVO fits our vision and goals perfectly, as we are expanding our capabilities and continue to build the market for digital entertainment around the world.  VEVO will redefine the way premium music video entertainment is consumed, created and shared in a global community of music audiences,” said Edward Borgerding, Chief Executive Officer of Abu Dhabi Media Company

“We’re now entering a new exciting phase in the digital media industry in the region and we’re determined to be at the forefront of it”, added Ricky Ghai, ADMC’s Executive Director, Digital Group. “With VEVO there’s real opportunity for incredible growth, as both brand advertisers and consumers are looking for new premium video experiences online.”

Squires has spent the past few months convincing other publishers to join a new joint venture aimed at a market that doesn’t really exist yet–magazine-like publications to be delivered via e-readers like Amazon’s Kindle and Apple’s rumored tablet.

The idea: The new company, which will operate independently from the publishers that invest in it, will create a digital storefront where consumers can purchase and manage their subscriptions, which can be delivered to any device. The pitch: Control a direct relationship with consumers while gaining leverage with heavyweights like Apple (AAPL) and Amazon (AMZN).

Industry executives briefed on Squires’s plan say it has been well received by Time Inc.’s peers and that several major publishers, including Hearst and Condé Nast, are expected to sign on for the JV, which isn’t scheduled to debut until 2010. No comment from Hearst, Condé Nast or Time Inc., a unit of Time Warner (TWX).

Many of the venture’s big details have yet to be hammered down. At one point, for instance, Time Inc. had explored the idea of including newspapers in the new company’s offering, sources say. The JV may also want to include a noncontent partner as an investor, as Hulu did with Providence Equity and as Vevo, the “Hulu for music” JV that Universal Music is creating with Google’s (GOOG) YouTube, plans to do. That approach is supposed to appease antitrust regulators’ worries about a group of content companies banding together.

But the rough outlines of Squires’s plan are attractive enough to publishers, who are hopeful that mobile devices like the Kindle will create a new market for them. And if that market does show up, they want to make sure they’re the ones in charge of sales and distribution. That’s been a huge problem for the music industry, whose digital sales are essentially controlled by Apple. And it has already cropped up as a point of contention with Amazon, which currently handles sales for all content delivered via its Kindle reader.

Other selling points for the JV: The ability to set standards for mobile content and the ability to integrate advertising into the publications. One thing the company isn’t supposed to do: Create an e-reader itself.

The takeaway, via a Time Inc. presentation that has circulated among publishers: “our destiny with readers, advertisers and distributors … [is] in our hands.”

Of course, there are plenty of hurdles facing the joint venture, starting with the fact that media joint ventures have a checkered record at best (though Hearst and Condé, for instance, have already partnered on Comag, a wholesale distribution company). But there are bigger problems for Squires and company. For instance:

• They’ll have to convince consumers who already have billing relationships with Amazon, Apple and other vendors to sign up with yet another service.
• They’ll  have to convince device makers to play along with the strategy, which runs counter to many of their own plans. Both Amazon and Apple, for instance, have intentionally created closed systems that give them control of both devices and distribution.
• They’ll have to create content consumers want to buy. The new product can’t simply be a digital version of the magazines they’re already printing: That’s already available on the Web, and consumers have shown almost no interest in paying for it, and advertisers haven’t fully embraced it either.

So what exactly will the JV be selling? That’s probably the most difficult question for publishers to answer, made even more difficult because they don’t know what capabilities the e-readers of the future will boast. Apple for instance, refuses to even acknowledge to Time Inc. executives that it plans to produce a tablet device, let alone provide them with specs.

But publishers feel they’ve got nothing to lose by trying. “We know that traditional magazines are going away, and that magazines on the Web don’t work,” says a publishing executive working on the plan. “But this gives us a chance to serve the reader who will pay for content, and provide advertising that really works. Can you think of a better idea?”

Quick answers:

• Do expect a deal with Hulu. The labels have been talking to the joint venture between News Corp.’s (NWS) Fox and GE’s (GE) NBC for a while, and there’s upside for everyone involved. (News Corp is the owner of this Web site.)
• Don’t expect a standalone site. Music videos are popular, but not popular enough to justify creating another property, especially when you can find them all over the Web. And good luck finding someone to fund the project to the tune of $100 million, as Providence Equity did for Hulu.

But here’s what’s not going to happen: A scenario in which the labels end up keeping their videos off the world’s biggest video site.

In case you haven’t noticed, the music labels are desperate for any revenue they can find. They can’t afford not to work with YouTube. And there’s incentive for YouTube to keep them on, too: The video site would like to get serious about selling ads, and music videos are both popular (they dominate the site’s most-viewed list) and ad-friendly inventory. It still doesn’t have much of that.

So the two sides need to get something hammered out. And the best way to do it is to steal a page from MySpace, and ape MySpace Music. YouTube Music has a nice ring to it, doesn’t it?

What would YouTube Music look like? It’s not that important. Maybe in addition to videos, it would offer downloads via Amazon’s (AMZN) digital media store, as MySpace does. Maybe it would have detailed biographies and a spartan design, like that MTV video site that MTV pretends doesn’t really exist yet. Doesn’t matter.

What is important: Like its MySpace predecessor, YouTube Music would take the large audience that already consumes music content throughout the site and assemble it one place. That might have some benefits for the site’s users. But it’s undeniably useful for the site’s ad sales team: Advertisers like clean, well-lit spaces with lots and lots of bodies, and partitioning off music creates just that.

That’s why MySpace Music was able to launch with an array of blue-chip advertisers last fall. And there’s no reason why they wouldn’t pony up for YouTube music too.

Yes, there will be other money issues to resolve. Right now, for instance, the labels get about a half-penny every time someone plays a video on YouTube, and they’d like more. I hear they’re asking for as much as an eighth of a penny. Meanwhile YouTube would like to stop giving out guaranteed payments altogether, and move to a straight revenue share.

It’s also hard to imagine YouTube handing out cash and/or equity in the venture, as MySpace did with its site last year. MySpace Music’s creation was tied to the settlement of a copyright lawsuit filed by Universal Music Group. And the labels don’t have that hammer available to them–they settled with YouTube years ago.

But those are deal points, and there are plenty of people on all sides who want to get a deal done. The good news is that some of them are already playing around with an idea along these lines, I’m told. I wouldn’t expect a deal soon. But this one makes too much sense not to happen. Right?