So much for the idea that YouTube and Hulu aren’t direct competitors. The New York Times reports that Metro-Goldwyn-Mayer Studios will start posting full length movies from its catalog on the popular video sharing service. The partnership will be announced today, and viewers will immediately be able to watch shows such as “American Gladiators,” full-length movies like “Bulletproof Monk” and “The Magnificent Seven,” as well as clips from popular movies like “Legally Blonde.” MGM’s movies and shows will be free to watch with the only hassle being some ads which will run alongside the videos.

While these movies and shows are hardly the latest blockbusters, it’s an important step forward for YouTube, which obviously wants to shrug the reputation of the place to find short, odd, and poorly filmed user generated videos (although there’s nothing wrong with that), and start offering full length features.

Unfortunately, they still have a long way to go, as even MGM is not ready to move their entire catalog to YouTube. “We will have some long-form videos up on YouTube, but I don’t think that’s the platform to have 30 or 40 movies up at once. I feel much more comfortable doing that on a site like Hulu,” says MGM’s co-president Jim Packer. In other words, this is merely an experiment to see how YouTube’s audience will respond to being able to see full length movies; if YouTube passes this test with flying colors, then maybe, maybe the big studios will start offering more material.

It’s a race against time. YouTube can’t afford to wait until Hulu gets too big; it needs to leverage the fact that it’s the biggest video sharing site around without completely giving in to the (often ludicrous) demands of big Hollywood studios. Winning or at least settling that Viacom lawsuit would definitely help, but whether YouTube will manage to achieve this delicate balance before it’s too late remains to be seen.

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From The Wall Street Journal: “Microsoft said that NBC Universal Inc., Walt Disney Co., Metro-Goldwyn-Mayer Studios Inc. and Showtime Networks Inc. have agreed to contribute entertainment content to the software maker’s Xbox Live and MSN online services. The deals were slated to be announced during a speech by Microsoft Chairman Bill Gates on the opening night of the Consumer Electronics Show.”