Why a sale to Yahoo may just be the best bet for Hulu

Maybe it’s fate: Just two months ago, Hulu moved all of its 500 or so Los Angeles-based employees into swanky new offices in the heart of Santa Monica’s tech hive. The complex now housing Hulu is called the Colorado Center, and is also home to HBO and a few other companies at the intersection of media and technology.

But anyone who recalls the Los Angeles tech scene from back in the days of the Web 2.0 boom will still remember the building as part of the former Yahoo (s YHOO) campus. And even if you’re a little rusty on local tech history, you don’t have to go far to find your way to the purple Y. The internet giant still has an outpost next door to Hulu, and another building just around the corner.

Yahoo threw its hat in the ring to buy the video service last week, bidding a reported $600 to $800 million. Yahoo is competing with six other entities that also want to buy Hulu — but I’d argue that Yahoo may just be the best bet for Hulu to survive and thrive (and not just because the two are already neighbors).

A renewed focus on Hulu’s ad business

Hulu’s problem has long been that its corporate owners haven’t been able to agree on its future. News Corp. (s NWS) wants the company to focus on its subscription business, while Disney (s DIS) tends to favor ad-supported videos. Comcast (S CMCSK) has been a kind of third wheel and can’t exert any influence on Hulu due to merger conditions imposed when the company bought NBC Universal.

Of the companies bidding for Hulu, at least two would clearly follow News Corp’s lead: DirecTV (s DTV) and Time Warner Cable are both more interested in subscription revenue than in free videos that would compete with their pay TV offerings. Both companies might even turn Hulu into a kind of TV Everywhere portal and tie all access to a pay TV subscription, which would more or less spell the end of Hulu as we know it.

Yahoo, on the other hand, wants Hulu for its advertising business. CEO Marissa Mayer made as much clear when she tried to buy French video startup Dailymotion earlier this year with the goal of adding more opportunities to sell high-CPM video ads. Hulu and its content (even if some of that were no longer available through the service after an acquisition) would be a better match for brand advertisers trying to reach their target audience than Dailymotion’s mish-mash of user-generated content and semi-adult fare.

And what’s in it for Hulu? An owner that doubles down on ads could help the company refocus and regain some of the viewers it lost, as well as more aggressively roll out free offerings on platforms that have largely been for-pay only. Why not introduce a free tier for TVs and connected devices, for example?

More support for its international ambitions

Another area where Hulu has been held back is its expansion into international markets. Hulu launched a Japanese offshoot two years ago, and the company has been looking to expand to Europe for some years as well, but its owners wanted to focus on its domestic business instead.

Yahoo knows that there is money overseas — the company makes about 25 percent of its ad revenue outside of the U.S., and its investments in Alibaba and Yahoo Japan have paid off handsomely in recent months.

What’s more, by concentrating on international expansion, Yahoo could deal with one possible downside of acquiring Hulu: It’s likely that after an acquisition, Hulu’s U.S. offering would have less content, or at least less exclusive content going forward. International, on the other hand, is still wide open for content licensing, and a growing number of startups has shown that content arbitrage makes a lot of sense for online video services.

A bigger commitment to original content

Speaking of content: Yahoo is one of the few bidders that actually has any experience producing original content for an online audience. The internet giant has attracted some serious star power for its content efforts, and just recently launched new shows with the help of John Stamos, Ed Helms and Morgan Spurlock. Combine that with Hulu’s original content and reach, and you might just land a few hits.

Granted, that all still might not make up for Hulu possibly losing access to some popular broadcast shows. But a Yahoo-owned Hulu could reinvent itself as a more online-focused player, situated somewhere between its traditional TV catch-up offering and the more professional output on YouTube (s GOOG), to become a real force in online video — and not just an experiment with TV content that’s forever at the mercy of traditional programmers.