Google Inc. (NASDAQ: GOOG) was already making cable television providers nervous with its set top box software, Google TV. Now broadcasters should be downright terrified.

According to a report at the Financial Times, the ever-popular, Google-owned video hosting website YouTube will begin offering pay-per-view rentals of major Hollywood films in the near future. The unnamed on-demand service will be rolled out to American Internet users before an international launch. While pricing may change prior to launch, streaming movies will cost $5 per viewing.

And that’s only the beginning.

Today, Google began offering a selection of 400 full-length movies on their homepage. Their streaming video plans have gone from active to downright aggressive.

The announcement comes after Google CEO Eric Schmidt indicated earlier this year that Google was meeting with both professional sport leagues and movie studios to discuss how best to leverage YouTube as a new source of revenue for events and content traditionally restricted to theaters and television broadcasts. Given recent developments, it appears that Google has been going out of their way to provide new Internet-based outlets for television content providers soon to be displaced by an audience that vastly prefers digital and streaming content rather than broadcast or theater viewing. While Google is taking on the streaming movies market with their video services on YouTube, they are also setting their sites on television.

Google has been developing software for television set top boxes called Google TV that will act as both a portal and a search engine for streaming video content. While Google has gotten film studios like Sony Pictures (NYSE: SNE), Lionsgate Entertainment (NYSE: LGF), and MGM to provide content for their free movies YouTube portal (and presumably their pay portal as well), they are having more trouble convincing prospective Google TV partners.

Core broadcast and cable channels are all leery of Google’s streaming video ambitions. First, while they may want access to Google’s massive audience on YouTube and elsewhere, Google is positioning itself as a major competitor to the Disney, News Corp, and GE joint venture Hulu. Hulu began life as an ad-supported video streaming website hosting a modest selection of movies as well as current television programming from its parent companies. It has recently expanded onto other platforms like the Apple Inc. (NASDAQ: AAPL) iPhone and iPad while also launching a paid subscription service called Hulu Plus.

The concern of competition with Hulu highlights Google’s broader problem in the video streaming space. Content providers, both film and television, are worried about Google TV and YouTube cannibalizing their viewership from multiple outlets. All of the content providers listed above currently have deals with paid service Netflix (NASDAQ: NFLX) and numerous cable and satellite TV providers. With Google TV allowing users to search the entire Web for television or movie content, what’s to keep them from searching out the first available free option? Why watch an old Lionsgate film through Netflix if it’s free on YouTube or elsewhere?

Google faces the serious challenge of organizing its multiple streaming video initiatives in a way that maximizes viewership for both television and film studios without seeming to impinge on those creators’ other outlets. This will be a herculean task, especially with the streaming video market getting as crowded as it is. Alongside Hulu and Netflix, Apple Inc. is said to be launching a large scale new streaming video service called iTV.

If they do succeed, though, Google will both control a significant portion of the new video entertainment landscape as well as finally finding a way to make their $1.65 billion investment in YouTube finally pay off.

As of this writing, Anthony Agnello did not own a position in any of the stocks named here.

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