At the 2009 Future of Hollywood conference, held at the Roosevelt Hotel in Hollywood, California, Blair Westlake, Corporate Vice President of Microsoft’s Media & Entertainment Group was interviewed by Tom Adams, President of Adams Media Research.

Hulu has been a great consumer success. But it’s not clear how it plays out for the traditional distributors like cable and the content producers.

The traditional distributors are saying hold on, we’re paying to distribute this content and you are giving it away for free online.

The content producers are used to the TV load of advertising revenues which is much higher than the ad load at Hulu. We may not be talking about trading analog dollars for digital pennies, but it may be analog dollars for digital dimes.

If the cost per thousand impressions doesn’t change, it’s a hard to see how things progress quickly. It just doesn’t make economic sense for Madison Avenue.

One of the things that technology allows to do is to target ads much more effectively, which may be a way to increase the digital revenue without the same advertising load. There is some certainty that advertising will remain a major component of the revenue model.

There’s a tendency to lump music, TV and movies into an entertainment bucket. Movies have two primary sources of revenue. Renting a night at the movies which represent about 30% of revenues and then the sales of DVDs and the like representing the bulk of the revenue.

Cloud computing based movie distribution will begin to substitute for DVD’s as rental on demand grows. For example, while DVD sales may be down 30%, Xbox video on demand revenues have roughly doubled.

Looking at TV, before DVRs, TV viewers would watch about 2 out of 4 episodes of shows. With DVRs, that number has increased to the average viewer watching 3 out of 4 episodes. Cloud based access could play a role in further increasing the viewing ratio.

Is the next step the Netflix subscription model? Fewer and fewer movies are being distributed via the ad supported model. The Netflix model is not new. HBO has been around for a long time and is the premier movie channel. Netflix is a different time window than HBO. It’s offering access to the library. One in ten Netflix subscribers use the Xbox Live service to access movies to consume billions of minutes of media.

The two models that seem to make the most sense are subscription and ad supported distribution.

What’s been the impact on the rental market? The VOD market should see strong growth. The average consumer only watches a movie a couple of times which makes rental a sensible alternative.

However, the switch to online will take longer than people expect. It won’t be one model for everyone.

Westlake looks at the audience and see different segments. The older audiences will be stay wedded to the traditional channels. The younger generation will be different. Just like they prefer cell phones, they will be looking at it with a very different set of eyes. They will drive the change.