(Reuters) -- Hulu, the popular online video service, has taken another step to becoming a full-fledged alternative to cable television by commissioning its first scripted original TV show to go live next month.

The new political documentary-style drama Battleground is set in Wisconsin and executive-produced by JD Walsh, Hagai Shaham and Marc Webb. It follows Hulu's first original documentary series Morgan Spurlock's A Day In The Life.

The majority of Hulu's programming to date has been licensed from its parent companies, News Corp, Walt Disney Co and Comcast Corp's NBC Universal, as well as other program makers.

Andy Forsell, Hulu's programming executive, said Spurlock's show had been a success based on data it collected on its audience, but he declined to reveal the program's view counts.

Spurlock's series is being followed up with a second season and being joined by another six-episode documentary series called Up to Speed by Richard Linklater, who is perhaps best known for movies Dazed and Confused and School of Rock.

The challenge for Hulu is to ensure it can generate a return on investment in expensive content like scripted drama, which is typically more costly than producing a documentary or reality show.

We can make the economics work, I've got a budget for originals but there's not the same pressure as a traditional network since we don't have worry about filling airtime, Forsell said.

The original shows will be available on Hulu's free Web service rather than just to its paying Hulu Plus subscribers as the start-up increases its user base and builds its reputation for original programming. But Hulu Chief Executive Jason Kilar said the dual revenue model of advertising and subscription fees is key to Hulu's future.

At scale, our model allows us to profitably pay content owners approximately 50 percent more in content licensing fees per subscriber when compared to other similarly priced online subscription services, Kilar said in a blog post on Friday.

PAYING SUBSCRIBERS

Hulu said on Friday it had more than 1.5 million paying subscribers at the end of 2011, and revenue grew 60 percent to $420 million.

Early last year, Kilar forecast that Hulu would generate around $500 million in revenue during 2011. The revenue miss was indirectly blamed on a soft advertising market in the second half of the year.

Like other Web companies trying to bring more TV shows and movies online, Hulu is in a race with rival Netflix Inc to buy and develop more content to add to and maintain its subscriber base.

Kilar said the company will spend around $500 million on content in 2012 covering new content acquisition, re-licensing existing content on the service and originals. It is an increase from the $375 million it said it spent last year.

Netflix, which has some 23 million U.S. subscribers, said last March it had secured exclusive rights to the 26-episode television series House of Cards a political thriller starring Kevin Spacey and directed by David Fincher.

It was reported last year that Netflix would spend around $100 million to produce the show.

Services like Netflix are increasingly being recognized as direct competition or replacements for premium cable channels such as Time Warner Inc's HBO and CBS Corp's Showtime.

(Reporting By Yinka Adegoke, editing by Maureen Bavdek)

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