I’ve been catching up on Lost recently with the HD episodes available from Hulu and ABC. The quality is very good, considering it’s streaming HD Internet video, and having all three seasons of Lost available on demand is great, too.

Their advertising implementation is terrible, though. Here’s why:

• Before you watch the show, you have to watch a pre-roll ad.
• Ads are inserted at fixed intervals through the show, not at the natural ad insertion points. In other words, at the points in the show where there should naturally be ads, there aren’t any, and then in the middle of a scene, there’s an ad.
• The ads don’t pause the video correctly. After the ad is done, the show resumes at an earlier point in the show, making you rewatch scenes.
• The ads that you see are not intelligently inserted – you’ll end up watching the same ads over and over for things that you don’t care about.
• The ads are too long. 30 seconds long enough to switch to another window and check your mail, encouraging people to multitask and ignore the intrusive ads.

Unfortunately, ABC & Hulu’s ad technology is the rule, rather than the exception, and it’s holding back adoption of Internet video.

According to research by media firm Burst, my experience isn’t unique. People are really interested in on-demand Internet TV, but they are turned off by the way advertising is being implemented.

“Consumers are leery of in-stream advertising in video content – many abandon ad-fronted videos altogether,” according to Burst’s report.

Online Video Content is Sought Out Widely and Frequently

Online video is in demand:

• Seven out of ten (72.1%) respondents view online video content.
• Men are more likely than women to view online video, 76.6% versus 67.7% respectively.
• A majority of all age segments watch online videos  –  including over half (58.6%) of respondents 65 years and older.

People Hate Badly Implemented Advertising In Internet Video

While people are very interested in on-demand Internet TV, they are turned off by badly implemented advertising:

• Three quarters (78.4%) of respondents say in-stream advertisements in online video are intrusive.
• One-half (50.4%) say advertisements in video content disrupts their web surfing experience.
• One-half (50.7%) stop watching an online video once they encounter an in-stream advertisement. Two out of five (43.2%) respondents stay to watch the ad and remaining video content.
• 15.3% of respondents immediately leave the website once they encounter an in-stream advertisement.
• Half (49.7%) of respondents say the presence of in-stream advertising in online video content makes them less likely to view other video content they may encounter online.

The researchers also found that intrusive ads led viewers to turn their minds to other things.

The Opportunity Is Getting On-Demand Video Advertising Right

Given the high level of interest in on-demand video and the general loathing of the way Internet video advertising is being implemented, it’s easy to see that there’s a huge opportunity here for someone to get on-demand Internet video advertising right.

Getting it right means:

• No long pre-roll ad; get viewers sucked into your content first;
• Putting ads in appropriate places. If Lost fades to black, it’s probably the right place to put the commercial;
• Keeping ads very short – more than five seconds or so and viewers are going to check their email; and
• Inserting ads tuned to viewer interest. This is a simple as providing an option to skip over the ad. If I skip over the ad, I’ve just given you useful feedback that should help you tune your ad insertion. Show me something else next time.

Want to be the next Google? Get this right, and do it quickly.

Update: More commentary on this at Paid Content.