Copyright law wasn’t written with today’s content consumption in mind. The way online video copyright functions is based on a reading of the 10-year-old Digital Millennium Copyright Act that equates video hosting sites with Internet service providers. That law provides a “safe harbor” for hosts who respond to copyright claims by taking down infringing content “expeditiously.”

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Hollywood and the major record labels have always enjoyed a love-hate relationship with new media, alternating between roses and lawsuits for online entrepreneurs, if you will. Lately, it was looking a little like love was going to win. Hulu, after all, had convinced its detractors that even big dinosaurs can get things right, and record labels had started to embrace services like MySpace Music and Last.fm. But like an alcoholic who just can’t resist that drink, big media looks ready to relapse.

There’s been a lot of bad news out of the so-called Music 2.0 space this week, with Imeem said to be in financial trouble, and Last.fm forcing some of its subscribers to cough up around $4 per month. There’s also a storm brewing in the online video world, where some networks have started to take their most valuable content offline in order to maximize traditional revenue, and platforms like Hulu are being forced to fight any attempt to bring online content to the living room.

Record labels used to be something like the suicidal canary in the coal mine for Hollywood, eagerly moving from one life-threatening disaster to another.

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When NBC Universal and News Corp. created Hulu, they gave the video portal a valuable but short-term asset: exclusive rights to distribute NBC and Fox shows outside of the media giants’ own websites.

From that base of content, Hulu.com has become the fourth-biggest online video distributor by unique visitors in January, behind YouTube, Yahoo and MySpace, according to the latest from Nielsen VideoCensus. In total video streams, it’s No. 3, with 232 million, behind YouTube (5.8 billion) and Yahoo (277 million).

But the exclusive part of that NBC-News Corp. deal lasts only two years, and Hulu knows all too well that the scarcity that helped it establish an audience (and brand) is going away soon. Hulu has never said exactly when the deal expires, but it’s likely within a year after the first anniversary of Hulu’s public launch, in March.

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One way to think about online video is to consider how big a chunk it takes out of our daily lives. The amount of time U.S. Internet users spend watching video is up an impressive 40 percent year over year. Watchers tuned in for 273.1 minutes of online video in the month of November 2008, up from 195 minutes in November 2007, according to comScore (SCOR).

That’s not the only measure that went up. The number of videos viewed increased 34 percent, to 12.7 billion videos, up from 9.5 billion last November. But the number of video viewers is not growing quite as fast; it was up six percent, to 146 million from 138 million. Still, that’s stayed fairly constant since last year at about three-quarters of total U.S. Internet users (which is not in itself a fast-growing category).

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YouTube co-founder Chad Hurley has posted an interesting description of his company’s long-term plans and prospects. YouTube’s (and Google’s) goal is to allow anyone to easily upload video to the ‘Net and make that content available on any device. He also makes a bold prediction that online video will be the “most ubiquitous and accessible form of communication” in 10 years.

I would like to offer a counterpoint to Hurley’s vision. While I don’t dispute the impact of online video and its growing importance to the way people produce and consume media, I believe that online video is limited in several important ways, and will have difficultly competing with emerging graphics technologies that allow better interactivity, customization, and visual appeal.

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There is a lot of money being spent trying to turn Internet video into something it’s not. It’s not TV. It’s certainly not going to be HDTV. What is shocking about the entire attempt to turn the Internet into a TV/HDTV distribution medium is how much people lie to themselves about what is actually happening.

First of all, 100 percent of the Internet video that you see offered on the net as HD is not HD. Plain and simple. What is HD video? HD Video is video you can watch on a screen of ANY size and say … “that looks good, almost as good as it can get.” What is currently being passed as HD [on the Internet] is video that looks pretty good because it’s being played on a small PC or laptop screen–and for the big timers, even a 17-inch screen. Well guess what–everything and anything coded at 2MBS and above is going to look good on a small screen.

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The numbers tell the story of the disconnect between online videos watched and online video ads sold: In December 2007, Americans watched 10 billion online videos, according to comScore. For the entire year of 2007, advertisers spent just $554 million on online video ads, according to Jupiter, while they spent $21 billion on all online ads. So many people are watching online videos, but so few advertisers are trying to reach them.

So what gives? The problem for marketers is that the most popular video site, YouTube, is filled with user-generated content that is too edgy or unprofessional for brand advertising. Many online videos are too short for people to sit through “pre-roll” video ads that play before the content, and people don’t like “overlay ads” that run during videos because they are intrusive. Another barrier for marketers is having to format ads differently for different video-sharing and media sites–not to mention the challenge of gauging how effective the ads actually are.

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It should come as no surprise: Incumbents are beginning to act like incumbents. But while the cable companies are the first ones to jump on the tiered-broadband bandwagon, they won’t be the last. Their argument for limiting bandwidth and data transfers based on price sounds like a good idea, especially as a way to get bargain hunters to buy. In the long run, however, tiered broadband is a terrible idea that will bring the innovation inspired by flat-rate broadband to a screeching halt.

Flat-rate broadband–however cheap or expensive (depending on your point of view) it might be–inspired the formation of Skype, YouTube, Facebook, Apple’s iTunes and MySpace, amongst others. It allowed us to freely experiment, to embrace both the applications and the ideas they represented, such as VoIP, online video, digital downloads and social networking.

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