The recession may be lifting, but the heady days of online video experimentation may be numbered. With traditional broadcast revenues predicted to stall and venture capital in retreat, U.S. heavy hitters are scrambling to find a profitable business model for producing and delivering online video or face a bleak online future with diminutive advertising revenues and wafer-thin margins.

Since the introduction of online video, broadcasting has migrated to the Internet at a breakneck pace. According to TechCrunch, YouTube now streams an estimated 1.2 billion videos per day worldwide. At this summer’s OMMA Online Video conference in New York, Eileen Naughton, director, media platforms for Google, described YouTube as the largest entertainment platform on earth.

Despite its success in capturing eyeballs, YouTube has yet to turn a profit. Credit Suisse predicts the video juggernaut will lose a hefty $450 million in 2009.

‘YouTube and Google,’ says Naughton, ‘are taking the strategic long view.’

Other online aggregators like Joost and Veoh, once fuelled by generous venture capital, have been forced to abandon the consumer online video market altogether.

Traditional American broadcasters aren’t faring much better. U.S. media moguls embraced online video early, attracting premium advertisers with professional full-length programming, and the results are dramatic. Today broadcaster sites account for over half of all U.S. online TV advertising revenues. Nevertheless, generating profits from advertising has proved extremely difficult. The broadcaster-backed video portal Hulu, despite being the fifth most popular video site in the U.S. (comScore), produces razor-thin profits, and generates just a fraction of traditional advertising revenue.

At the same time, original online production is undergoing wrenching change as top Hollywood-backed start-ups shutter operations or radically regroup in the face of dwindling revenues. ABC’s digital studio Stage 9 and United Talent Agency’s 60Frames have closed their doors, while Lonelygirl15 producer EQAL is focusing on producing for established television brands.

Online players old and new are facing the hard reality that the business of free streaming video has sorely underperformed and is not likely to succeed without a major overhaul. At one time it seemed logical to replicate the conventional television model online, counting on advertising to deliver healthy revenues. A number of factors have made ad-supported streaming challenging, including substantial bandwidth and storage costs, low in-video ad ratios and the small audiences indicative of a hyper-niche medium.

For a time, online video has been seen largely as an experimental medium. But the recession, along with systemic shifts in the market, have hit traditional television ad revenues hard, and some market watchers predict little or no U.S. television advertising growth for the next five years.

Under mounting pressure to replace lost revenues, broadcasters are determined to make online video profitable. Likewise, today’s online start-ups – many without the benefit of venture capital backing – are radically rethinking their business models.

Players are beginning to take a hard look at offering content at a price. Paid download sites like iTunes and subscriptions to streaming video, once ignored, are growing. According to Strategy Analytics, the global paid video segment is set to exceed the free online sector and continue to grow faster than advertising-supported streaming.

Canada’s MoboVivo has built a thriving business offering high-quality online content for downloading at a price. Founder and CEO Trevor Doerksen saw the pitfalls of hosting free streaming video early. ‘The free vs. paid debate is obsolete,’ says Doerksen. ‘Cable, satellite, DVDs, magazines and newspapers aren’t free. Covering the substantial distribution costs for things like streaming video is impossible for the most successful companies of the day. It isn’t always something the industry likes to talk about, but paid downloadable content is successful, despite not being free.’

On the other hand, cable companies and broadcasters in the U.S. and Canada are experimenting with another tried-and-true television model – subscription. Time Warner and Comcast have recently signed a slate of U.S. television networks including CBS and HBO to test On Demand Online, a new authentication service offering full-length television and movies exclusively to paid cable subscribers. While the service is free in its test phase, many predict that in the future, at least some premium content will require a subscription or pay-per-view.

Here at home, Rogers is gearing up to launch a similar online portal with exclusive television content for its cable customers.

U.S. cable service ESPN has long resisted the trend to free, charging ISPs for the right to offer ESPN360, its online premium service, to their customers. Once dismissed by industry watchers, ESPN360 is now available in 41 million U.S. homes. It has even been reported that Hulu, one of the industry’s few free success stories, is considering charging subscribers for premium content.

In-video advertising itself will see a major overhaul in the months ahead. Viewers can look forward to multiple in-video ads, product placement and far more branded content as broadcasters test online audience tolerance for full television-style commercial loads and sponsor-driven programming.

Meanwhile, today’s online producers are re-inventing program financing and advertising along with it. In order to secure full-scale investment upfront, producers are wooing brand sponsors with original content created specifically for their niche demographic and guaranteed viewership through controlled online syndication of their shows.

Alloy Media, the partners behind television’s Gossip Girl, see this approach as the future of online original entertainment.

Speaking at the OMMA conference, James Elden, VP, interactive and print for Alloy, drew a sharp contrast between the old days of ‘making a lot of content, throwing it out there and hoping something comes back in terms of monetizing it’ and offering a ‘controlled, quantifiable investment for all parties.’

Disney is perhaps the most ambitious, betting an ultra-niche future with multiple revenue streams, mined from a rich database of loyal audiences. Plans are in the works to create an integrated online Disney club where subscribers can access television and movies, play Disney games, buy Disney merchandize and opt-in to other specialized content.

As U.S. content players regroup, there may be a rare opportunity for Canadian content to take center stage. With access to public financing through the Canada Media Fund, the Bell Broadcast and New Media Fund and generous tax credits in many provinces, Canadian producers may actually be better positioned to produce and distribute high-quality online video. However, independent producers may find it increasingly hard to compete in a rapidly consolidating marketplace where large players with solid business plans and innovative revenue strategies become the new online video leaders.

Kate Hanley is president of Digital Theory Media Consulting, a firm that assists traditional players succeed in the digital economy.