Streaming Video Economics

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Streaming Video Economics

  1. 1. Intel Solutions Enabling Group Streaming Video Economics David Hackson July 2000
  2. 2. Table of Contents Executive Summary .................................................................................................................................3 Introduction ..................................................................................................................................................4 Current Market Analysis ........................................................................................................................5 Streaming Video Technology Today.........................................................................................................5 Broadband Growth Projections.................................................................................................................6 Business Models .......................................................................................................................................8 Costs of Production.....................................................................................................................................8 Content Acquisition ..................................................................................................................................8 Encoding ....................................................................................................................................................8 Hardware....................................................................................................................................................8 Software .....................................................................................................................................................9 Bandwidth (Hosting) ...............................................................................................................................10 Revenue Potentials ....................................................................................................................................12 Online Advertising Today........................................................................................................................12 Next-generation Online Advertising .....................................................................................................13 Advertising Trends...................................................................................................................................13 Subscription and Pay-per-view.............................................................................................................13 Case Studies ..............................................................................................................................................14 A Simple Cost / Revenue Analysis ..........................................................................................................14 Online Resorts Travel Agency ..................................................................................................................14 Scenario A: Simple Video Streaming.......................................................................................................14 Scenario B: Demand Increases and High-quality Video Added .....................................................15 Scenario C: Content Creation Costs ...................................................................................................16 WebCartoons: An Internet Cartoon Channel ........................................................................................17 Television Video on Demand ....................................................................................................................17 Conclusions ................................................................................................................................................19 2 Streaming Video Economics
  3. 3. Executive Summary Streaming video is one of the most exciting emerging Profitability Difficult but Attainable technologies on the Internet today. Visionaries predict Bandwidth usage is the main long-term cost compo- the Internet will enable a multitude of video choices nent of streaming video (excluding content acquisi- for consumers and create the equivalent of 1,000,000 tion). Consequently, low-bit-rate video is very afford- channels of television. This paper analyzes the state able, but the low quality of the video limits its value. of streaming video technology today, the projected High-quality video is very valuable, but also very growth of the streaming video consumer base, the expensive. Current forms of online advertising (ban- costs of streaming video, and potential revenue. ners and buttons) cannot generate enough revenue to support high-quality streaming video. However, new Broadband Enables forms of advertising (video ads, banners in the video Streaming Video window) hold the potential for profitability. It is esti- Streaming video at dial-up modem bit rates offers mated that three 10-second video advertisements and very poor quality, but broadband Internet connectivity banner ads surrounding the video window could prof- enables much higher quality video. With a broadband itably support a 10-minute high-quality video program. bit rate of 300 kilobits per second (kbps), streaming video technology today enables a resolution of Broadcast Television 320x240-pixel video at 30 frames per second (fps). vs. Streaming Video This is still significantly inferior to television quality Streaming video on the Internet will complement (460x480@30 fps), but is approaching VHS-quality rather than conflict with broadcast television. An (300x480@30 fps). While VHS-quality video can be advantage television has over the Internet is that tele- obtained at 500–700 kbps today, it is expected to be vision is a true broadcast medium. For television, the available at ~300 kbps in 12 to 24 months. marginal cost of another viewer is zero. More viewers equate to more revenues but no additional costs. In Broadband Growth Is Strong contrast, streaming video on the Internet has a high During this 12-to-24-month time period, adoption marginal cost. But the Internet has a strong advantage of broadband is expected to grow from 5 percent of over television in that the Internet allows each user total residential households to more than 20 percent. to have a customized experience. Streaming video Furthermore, because broadband users are online providers will build on this strength, and offer users significantly more than dial-up modem users, broad- the choice of pay-per-view, subscription, advertising- band usage is projected to constitute more than 40 supported viewing, or mixtures of these three business percent of total online traffic within two years. models. Customization will also allow streaming video providers to send different advertisements to different viewers and thereby target consumers in ways that tele- vision providers can only dream of. Free trial periods will be the norm, with users required to fill out regis- tration information that will enable the video provider to target advertisements and maximize revenues. 3 Streaming Video Economics
  4. 4. Introduction A few years ago a lot of people were talking about Benefits of Streaming Video the coming 500-channel cable system. While digital The traditional method of viewing video over the technology has technically enabled this possibility, Internet used to be downloading an entire video file economic realities have slowed its deployment. Now, before being able to watch it. A user would have to wait the rise of the Internet and streaming video technology 10 minutes to download a 10-minute video. The draw- has spawned visions of a 1,000,000-channel universe. back is obvious—only after a video has downloaded Too frequently, papers and presentations focus on can a user determine whether the content or quality of technical capabilities without including the current the video makes it worth watching. The experience is economic environment. It may be possible to do completely lacking in instant gratification. something, but is it worth the cost? When, if ever, can Streaming video means displaying the video as it is we expect to see that 1,000,000-channel universe? being delivered. This is hardly a revolutionary concept This paper examines both the state of streaming video —it is exactly how television functions. However, the technology and the current economic environment. technology behind streaming video on the Internet is By analyzing costs in addition to technology, we are very different from that of television. able to predict what applications of streaming video The Internet transfers information as small packets are likely to appear in the near future. Ultimately, the of data. The quality of the video displayed is tied goal of this paper is to discover profitable business directly to the rate at which the data can be trans- models for streaming video. Hypothetical case studies ferred. Advanced compression techniques are used to are included to illustrate how streaming video can maximize quality while minimizing the transmission best be applied to companies today. rate (bandwidth) required. Recent advances in these compression technologies have created the opportunity for streaming video on the Internet. 4 Streaming Video Economics
  5. 5. Current Market Analysis Streaming media, comprising video and/or audio, Dial-up Internet Access is one of today’s hottest Internet technologies. (56 kbps and less) International Data Corporation1 estimates that there If television requires 4 million bits per second, how are 10 million consumers who view streaming video can we expect to view video at less than 56 thousand at least once per week. Of these, roughly 4 million bits per second? It is amazing that streaming video view streaming video five or more days a week. can, in fact, work at these low bit rates. In fact, Some 41 of 45 major cable and broadcast networks streaming video is shown on the Internet at bit rates are Webcasting (broadcasting on the Web/Internet) and as low as 24 kilobits per second (kbps). How is this more than 2,500 radio and television stations have a possible? The simple answer is by making the video streaming-media presence. RealNetworks, a leading much smaller, and more blurry. vendor of streaming media products, estimates2 that there are more than 500,000 hours of new live content The Three Fundamental Variables every week. To put that into perspective, this is the 1. Bit rate – The rate at which data is transferred. equivalent of roughly 3000 channels broadcasting 2. Frame Rate – The number of frames per second 24 hours a day, 7 days a week. (fps) that are displayed. Radio stations, however, stream a majority of the 3. Resolution – The amount of horizontal and vertical 500,000 hours of new weekly streaming media in the data in each frame (picture) of the video. form of audio broadcasts. To understand why this is Each of these variables can be changed in a tradeoff the case, let us look at how streaming video quality against the others. is affected by transmission rates. For example, a particular video stream may be encoded at 100 kilobits per second (kbps) and have Streaming Video Technology Today a resolution of 200x150 pixels and a frame rate of 15 fps. This same volume of information could also be Television packaged at approximately 70 kbps, 180x135 pixels, Broadcast television is an analog technology and as and 12 fps. such is not directly comparable to streaming video on the Internet. However, the advent of digital television In our example of 24 kbps video, the resolution of the gives us a usable benchmark. Television is being broad- video is roughly 160 by 120 pixels, and the frame rate cast digitally today in most major markets (even though is a sluggish 5 frames per second (fps). The experi- few digital televisions have been purchased) as well ence is like viewing a staccato series of blurry images as by satellite television providers (DIRECTV and shown on a postage stamp. At 36 kbps, the video reso- EchoStar). Digitization allows for compression tech- lution can be improved to 176 by 132 pixels at 10 fps, niques to be applied to the video signal. This compres- but this is still poor quality. sion is what enables multiple (about four) television signals to be sent into the space that currently occupies Video Better at 100 kbps a single analog television signal today. Hence, the At 100 kbps, the screen area can be 50% larger feasibility of the much-promised 500-channel cable TV (200 by 150 pixels) and the frame rate increased to providers. Digital television is compressed (encoded) 15 fps. This is much better, although the video is using the MPEG-2 codec.3 Using MPEG-2, television still “jumpy” with blurring occurring when there broadcasts are transferred at data rates that range from is motion. For comparison, broadcast television is 3–4 million bits per second (Mbps). Now let’s see what approximately 460x480 shown at 30 frames per can be done with video on the Internet. second. So, 100 kbps streaming video is still quite an inferior experience as compared to television. 1. International Data Corporation, Metrics, Drivers and Barriers to Consumer Usage of Video Phones, Broadband Services and Streaming Video. December 1999. 2. Paul Thelen, “RealSystem G2 Overview: The Platform and Key Evaluation Criteria When Choosing a Streaming Media System” (paper presented at the RealNetworks® Global Partner Summit, Seattle Washington, February 2000). 3. Codec is a term that is short for “COmpression/DECompression.” 5 Streaming Video Economics
  6. 6. Video Best at 300 kbps Figure 1: Different Screen Sizes At 300 kbps, the screen area can be significantly kbps larger (320 by 240 pixels), and the frame rate can 300 equal television at 30 fps! As you would expect, the experience is significantly better than at 100 kbps. 100 Fig 1 36 This significant jump in quality is a strong reason for 24 considering 300 kbps the threshold for “broadband” (as opposed to 100 kbps). The quality of streaming video at dial-up modem (56 kbps and less) speeds is very poor. The future Internet Congestion of streaming video is at higher bit rates, but higher bit With the advent of residential broadband connectivity, rates require users to have a broadband (cable, digital every broadband-connected user should be able to subscriber line [DSL], satellite) Internet connection. get at least a 300 kbps connection to their Internet Currently only about 7 percent of households have Service Provider (ISP). All of the major broadband transports (cable, DSL, satellite) provide at least 300 a broadband Internet connection. Next, let’s examine kbps connectivity. However, it is very difficult to stream the projections for broadband adoption to measure 300 kbps video today. Internet congestion poses the potential for streaming video. difficulties for ISPs and streaming video providers. Remember, because the bits are displayed as they are Broadband Growth Projections shown (with a few seconds of buffering), any interrup- This section presents statistics on the adoption rates tion in the flow of the bits causes the video to freeze and/or to become jumpy. Lower bit rates are used of residential broadband Internet connectivity for mainly due to Internet congestion. (A bit rate of 100 North America. kbps is common.) To solve this problem, companies Fewer Barriers to Adoption such as Akamai, Digital Island, and iBEAM have Today there are fewer barriers to broadband adoption. emerged that cache video close to ISPs to avoid Internet congestion. The largest barrier to adopting broadband has been the availability of service. Competition has led to increased deployment of broadband. As of January 1, Table 1 summarizes streaming video capabilities at 2000, DSL service is available to over 50 percent of various bit rates. Figure 1 shows a visual comparison the households in North America, and cable broad- of the differing screen sizes.4 band service is available to 33 percent of cable house- holds. Universal Serial Bus (USB) connectivity, split- Table 1: terless DSL that doesn’t require an installation visit, Streaming Video Capabilities at Different Bit Rates and DSL and cable standards such as G.Lite and Speed (kbps) Resolution Frames / second DOCSIS will soon enable modem equipment inter- Horizontal Vertical operability and lower prices. These innovations have DVD 720 480 30 already allowed cable and DSL modems to begin TV 5 460 480 30 penetrating the retail market today. Competition, VHS 300 480 30 lower prices, easier installation, retail penetration, 300 320 240 30 and other factors are the basis for projections of 100 200 150 15 explosive broadband growth. 36 176 132 10 Explosive Broadband Growth 24 160 120 5 DSL is projected to grow by 400 percent in 2000, from 600,000 to 3 million subscribers. Cable is predicted to have a healthy 100 percent growth rate 4. It is important to note that the statistics given are approximations. Video producers can trade from 1.8 to 3.5 million subscribers. Significant draw- characteristics. For example, the frame rate can be increased by reducing the picture resolution and vice versa. backs will minimize residential use of satellites for 5. National Television Standards Committee (NTSC) standard for North America. Internet connectivity. 6 Streaming Video Economics
  7. 7. Table 2: Households with Broadband Internet Access Is this significant? At first glance, you might think (Millions) 1998 1999 2000 2001 2002 not. These percentages appear too small to form criti- Integrated Services cal mass and effect a major change in the market. But Digital Network (ISDN) 0.3 0.5 0.8 0.5 0.3 these figures are a measure of “users,” not “usage.” Satellite 0.02 0.04 0.2 0.4 0.7 Users vs. Usage Digital Subscriber Line (DSL) 0.04 0.6 3.0 6.2 10.3 Is it not logical that broadband users would use the Cable Modem 0.5 1.8 3.5 5.6 8.8 Internet more than narrowband users? A study6 done Dial-up 35.1 41.5 45.4 47.8 48.2 by Intel Corporation and MediaOne indicated that TOTAL 36.0 43.9 53.2 59.6 69.9 broadband users are online approximately four times Note: Statistics are for North America and are based on the author's research derived from the as much as dial-up users are online. Given these statis- following sources: Jupiter Communications, Kinetic Strategies, DSL Prime, the Strategis Group, International Data Corporation, Pioneer Consulting, and Forrester Research. tics, one can compute the percentage of total residen- tial online time attributed to broadband users. First, Table 4: Users vs. Usage Statistics define a unit of time equal to one. Then, to convert (Millions) Users Usage 1999 2000 2001 1999 2000 2001 “users” into “usage” multiply the number of dial-up Broadband 2.4 6.7 12.2 9.6 26.4 48.8 users by one and the number of broadband users by four. Table 4 summarizes the results. Dial-up 41.5 45.4 47.8 41.5 45.4 47.8 TOTAL 43.9 52.1 60.0 51.1 71.8 96.6 As seen in Table 4, the number of broadband users Broadband % 5% 13% 20% 19% 37% 51% is predicted to constitute over one third of residential Internet usage by the end of the current year. Perhaps Table 3: Projected Percentage of Broadband Users even more impressively, broadband usage is expected (Millions) Users to equal narrowband usage in two years. 1999 2000 2001 Without doubt, there is a scarcity of high-quality Broadband 2.4 6.7 12.2 broadband content on the Internet today. As more Dial-up 41.5 45.4 47.8 high-quality broadband content becomes available, TOTAL 43.9 52.1 60.0 broadband users will increase the amount of time they Broadband % 5% 13% 20% spend online. This inevitable trend will only increase the usage statistics presented above. Figure 2: Households with Broadband Internet Access 12 Broadband Growth Summary 10 The reasons to support the industry-wide projections 8 for explosive growth in broadband connectivity are 6 clear. They include competition, low prices, and easy 4 Fig 2 installation. Since consumers with broadband Internet 2 0 connections can receive high-quality streaming video, 1999 2000 2001 2002 we can conclude that the number of high-quality Satellite DSL Cable streaming media-enabled viewers is growing rapidly. The media often states that broadband users constitute This rapid growth indicates that there will be a signifi- only a small percentage of total Internet users and that cantly large installed base of viewers within the next this will remain the case for years to come. The last- 12–24 months. ing impression is that broadband will not be important We have determined that a technical solution for high- in the near term. This perception is wrong. quality streaming video on the Internet exists and that There are more than 2.4 million broadband users there is a fast-growing audience for this content via today. This constitutes 5 percent of total residential this medium. We will now analyze streaming video Internet connections. Conservative projections for the costs and revenue potentials in an effort to predict end of 2000 and 2001 are for the percent of broadband what types of content and business models we can users to grow to 13 percent and 20 percent respectively. expect see in the near future. 6. Ken Anderson, Anne Page McClard, and Ted Kendall, Always On. MediaOne Labs September 1998. 7 Streaming Video Economics
  8. 8. Business Models Paul Kagan Associates estimates7 that the total Quantifying the cost of content with a general formula industry revenue for Internet streaming media (video is impossible. The cost of acquiring content obviously and audio) was $277 million in 1999. They predict varies tremendously. An example of the cost of creating the revenue will be $410 million in 2000 and grow content is given in the Travel Agency case study. to more than $11 billion in 2008. This is very fast growth, but is plausible given that revenue for the Encoding broadcast market (TV and radio) was estimated to The price for encoding tools is relatively small. The be $117 billion in 1999. RealNetworks RealProducer Pro* product retails for about $400. (For pricing details, see http://www.real- Growth follows profitability. So how profitable is networks.com/products/servers/professional_pricing. streaming media? Who, if anyone, is making money html?src.) RealNetworks has a basic version of streaming media today? What are the likely business RealProducer that, like the Microsoft Windows* models for streaming media in the years to come? Media* encoder tool, is free. Of course you also This section analyzes both the costs of streaming video need a computer. and potential revenue streams. Detailed hypothetical The main cost associated with encoding is the man- case studies are presented that build on the results. power needed to operate these tools. Table 5 lists current prices for encoding charged by LoudEye: Costs of Production Streaming video production costs can be divided Table 5: Current Encoding into five categories: LoudEye Services LoudEye Charges 1. Content Acquisition Master $5 per master 2. Encoding Trailer $25 per trailer 3. Hardware Copy (Clip) $10 per copy 4. Software Encoding $5-$10 per minute† 5. Bandwidth Source: Data gathered from www.loudeye.com on April 15, 2000. † Encoding fees are more expensive for higher bit rates. Content Acquisition Content acquisition can be the most expensive stage in the production process. A vivid example is the price LoudEye is a leading vendor of encoding services. television broadcast networks are paying for the rights These figures can serve as a reasonable guide for the to broadcast major sports programming. Getting rights costs associated with encoding video whether it is to content will only become more expensive with time. handled in-house or sent out. Historically, the balance of power between media Hardware distribution companies and content creators has been Hardware is largely a fixed cost. It is a simple count heavily tilted in favor of the distributors. Content is of the number of computers needed to serve all of worthless if it cannot reach an audience. Distribution the simultaneous video streams desired by your cus- has been scarce, and therefore, valuable. The digitiza- tomers. Of course, computers do need to be replaced tion of content, combined with the development of over time. A typical amortization period would be various competing data transports (DSL, cable, satel- three to five years. lite, and terrestrial broadcast) is going to make distri- Microsoft has published a report,8 that was verified bution a commodity. The balance of power is going to by ZD Labs, which indicated that Windows Media swing forcefully towards content. “Content is King!” Services was able to stream 9,000 22 kbps streams is the mantra of people who realize this. concurrently. The same configuration was able to stream 2,400 100 kbps streams concurrently. 7. Gregg Makuch, “Media Segment Overview Partner Summit” (statistics in paper presented at the RealNetworks® Global Partner Summit, Seattle, Washington, February 2000). 8. Microsoft Corporation. “Microsoft Challenges Streaming Media Industry to Disclose Scalability and Reliability to Customers.” Microsoft PressPass. http://www.microsoft.com/PressPass/press/2000/may00/ZDPR.asp (22 May 2000). 8 Streaming Video Economics
  9. 9. Table 6 shows the data that can be extrapolated from Table 6: Concurrent Streaming Data these findings. This study was done with a Compaq Stream bit rate in kbps 24 36 100 300 ProLiant* 8500 8-way server using the Intel® Pentium® Maximum number of streams 9,000 6,000 2,400 800 III Xeon™ 700 MHz processors. This system costs approximately $80,000. Table 7 shows the number of Table 7: Estimated Number of Concurrent Streams That a Single concurrent streams that a less expensive single-processor Intel® Pentium® III Processor-based Computer Could Support Running RealNetworks RealServer* 7.0. 700 MHz Intel Pentium III processor-based machine with 512 MB RAM running RealNetworks RealServer* Stream bit rate in kbps 24 36 100 300 Maximum number of streams 1,500 1,000 360 120 7.0 could support at varying stream bit rates. Using this table, we can calculate the number of PCs Table 8: Approximate Costs of Various PC Configurations needed for a given the number of concurrent streams Configuration Approximate Cost and streaming bit rates desired. 700 MHz Intel® Pentium® III processor-based $5,200 computer with 512 MB†RAM NS = number of servers required Microsoft Windows NT* Server 4.0 $800 nvs = maximum number of concurrent video Cost of each server $6,000 streams desired †The RealNetworks Web site (www.realnetworks.com) states that 12KB of RAM is required for br = video stream bit rate each kbps streamed. Using this formula, 36,000 kbps throughput requires 432MB RAM. NS = nvs x br / 36,00 A reasonable PC configuration would be a 700 Mhz Intel Pentium III processor with 512 MB of RAM Examples: running the Microsoft Windows NT* Server 4.0. This Customer A wants to support 500 concurrent configuration can be purchased for around $6000 today. 100 kbps video streams. Solution: (500 streams x 100 kbps/stream) / 36,000 kbps = 1.4 Software Like hardware, software is largely an up-front cost. So customer A would need two computers. This cost varies greatly depending on the number of Customer B wants to be able to simultaneously streams desired and whether the customer is using support 200 20 kbps audio streams, 400 36 kbps video RealNetworks or Microsoft products. Real Networks streams, 100 100 kbps video streams, and 50 300 kbps currently charges a one-time license fee based on the video streams. number of concurrent video streams that the customer Solution: (200x20 + 400x36 + 100x100 + 50x300) / wishes to support, while Microsoft is currently free 36,000 = 1.2 (except for customer support). Table 9 compares Customer B would also need two computers. current Microsoft and RealNetwork. Table 9: Comparison of Current RealNetworks and Microsoft Costs (as of 5/17/00) Concurrent Streams 25 60 100 200 400 1000 2000 RealServer* 7.0† Free $1,995 $5,995 $11,195 $21,595 $39,995 $79,995 Advertising Extension NA NA $2,998 $5,598 $10,798 $19,998 $39,998 Authentication Extension NA NA $1,799 $3,359 $6,479 $11,999 $23,999 Annual Support Contract NA NA $2,398 $2,398 $2,398 $2,398 $2,398 RealServer 7.0 Total Free $1,995 $10,792 $20,152 $38,872 $71,992 $143,992 Microsoft Media* Services 4.1 Free Free Free Free Free Free Free Advertising capability NA NA NA NA NA NA NA Authentication capability (Digital Rights Manager) Free Free Free Free Free Free Free Multicast capability (Media Station service) Free Free Free Free Free Free Free Server support cost‡ ($195 per incident) x 20 - - $3,900 $3,900 $3,900 $3,900 $3,900 Client support cost§ ($35 per incident) x 20 - - $700 $700 $700 $700 $700 Microsoft Media Services 4.1 Total Free Free $4,600 $4,600 $4,600 $4,600 $4,600 † Products for 25, 60, and 100-2000 streams are RealServer* Basic, RealServer Plus, and RealServer Professional respectively. ‡ Server support costs are included (free) in a Microsoft Premiere Support contract. § Client support costs are included (free) in a Microsoft Premiere Support contract. 9 Streaming Video Economics
  10. 10. One should keep in mind that other than support costs, Managed Hosting which are relatively small, the software license fee is a With managed hosting you rent servers from an ISP, one-time charge that can be amortized over the life of and the ISP manages them for you. Start-up costs are the system. Therefore, over time, the software license low, and maintenance is included. fee becomes relatively small when compared to recur- Many of the hosting plans in Table 11 have additional ring costs. charges for streaming video. One company listed above Bandwidth (Hosting) includes 40 concurrent video streams in its plan with Bandwidth refers to the cost to transport bits from additional streams costing $20 (guaranteed) or your server to your customers’ servers. Because this is $4 (shared) per month. a large recurring cost, it is likely to be the determining Comparing Managed vs. In-house Costs factor in the long-term profitability of streaming video When comparing the cost per MB of a T3 line versus services. Let’s analyze this cost element in detail. the cost per MB in a managed hosting plan, keep in Video servers can be hosted in three different ways: mind that the T3 costs assume full usage 24 hours a 1. In-house day, 30 days a month, and the managed hosting band- 2. Managed width charges do not. Managed hosting costs per MB 3. Edge Services have no relationship to when the bandwidth is used. Unlike the T3 estimates, there is no charge associated In-house Hosting with the time you are not using bandwidth, like 2 a.m. This solution means you decide to manage your Sunday morning. servers from your own facility and connect to the Internet via an ISP. Typically, you would purchase a Table 10: Estimated Costs of Raw Bandwidth T1 or fractional T3 line for Internet connectivity. This Bit rate GB / Cost / Cost / is the lowest overall cost solution, but has large start- (Mbps) Month Month MB up costs such as buying servers and equipment, and T1 1.5 486 $1,300 $0.0027 requires a technical staff (IT) to support the system. T3 5 1,620 $7,600 $0.0047 Table 10 shows estimates for the cost of raw band- T3 10 3,240 $9,900 $0.0031 width (support costs not included) for a T1 and T3 T3 15 4,860 $12,300 $0.0025 connection from Pacific Bell. T3 20 6,480 $14,700 $0.0023 T3 30 9,720 $17,800 $0.0018 It is important to recognize that these are theoretical T3 45 14,580 $21,400 $0.0015 minimum values. The values above assume maximum Note: Pacific Bell is a West Coast regional telephone company wholly owned by SBC Corporation. bandwidth is used 24 hours a day, 30 days a month. Data gathered on April 17, 2000. Table 11: Estimated Managed Hosting Costs Bandwidth Hard Disk Storage Plan Price Included Cost Added $ Included Cost Added $ Sites per Per Month in plan (GB) Per MB per MB in plan (MB) Per MB per MB Server Managed Hosting Company A - Plan 1 $50 20 $.0025 $0.05 200 $0.25 $1 Company A - Plan 2 $400 120 $.0033 $0.05 1,000 $0.40 $1 10 Company B - Plan 1 $200 50 $.0040 $0.10 500 $0.40 $0.75 50 Company B - Plan 2 $500 100 $.0050 $.002 9,000 $0.06 1 Company C $100 5 $.0200 $0.10 80 $1.25 Company D $1,100 50 $.0220 9,000 $0.12 1 Colocation Company B $300 0 $0.008 $.002 Company D $520 50 $0.010 $0.10 10 Streaming Video Economics
  11. 11. Assuming the bandwidth utilization shown in Table 12 stream ever falls below 100 kbps, the video pauses, and that the total bandwidth consumed is 80 percent and degrades the quality of the viewing experience. of the amount allocated in the managed plan, the By moving the video content closer to the customer, actual cost per MB bandwidth costs would be as edge caching greatly reduces the probability that net- shown in Table 13. work congestion will interfere with the transmission. You can use these formulas to compute your own Table 14 below lists the prices charged by three lead- expected costs. ing edge service providers. Edge Services Bandwidth Summary These are the caching services provided by companies The solution that is best for you is what you would like Digital Island, Akamai, iBeam and others. These expect. If you are a large organization with an IT staff services are also called “caching services” because and high bandwidth needs, bringing the solution in- they replicate the data in your servers and store (cache) house will save you money in the long run. If you are them at various locations throughout the world. The a small company, managed service with low start-up idea of these services is to get your content as close costs and included support is a good choice. If you to the customer as possible. This does the following: want to stream high-quality video, (200–300 kbps) I Minimizes latency — the time your customer must choose an edge service. wait to start getting your content. For the purposes of cost analyses and case studies, I Minimizes Internet backbone transportation. we will be using a cost per MB range of $.01–$.05. For example, if 10 people in New York want your This is intentionally a little high in an effort to include content and your content is hosted in Los Angeles, some of the ongoing support costs that were not meas- the content must be sent 10 times across the country. ured in our cost estimates. An edge service provider would instead keep two Future Bandwidth Costs copies of your content (one in Los Angeles and The issue of whether bandwidth costs will continue another in New York) and thus your content would to decline or not is hotly debated by industry only need to be sent across the country once. observers. Some predict a bandwidth glut from the Edge services are highly applicable to streaming video thousands of miles of fiber optic cable being laid by because unlike static.html Web pages, streaming video Level 3, Qwest, Williams Communications and other requires a sustained high bit rate. If a 100 kbps video infrastructure providers. Other industry observers Table 12: Estimated Bandwidth Utilization 8:00 am– 12:00pm– 2:00 pm– 6:00pm– 11:00 pm– 1:00 am– 24-hour 12:00 pm 2:00 pm 6:00 pm 11:00pm 1:00 am 8:00 am Average Morning Lunch Afternoon Prime Late Night Owl 50% 80% 60% 70% 20% 2% 42% Table 13: Estimated Bandwidth Cost Table 14: Comparison of Edge Services Charges Hosting Theoretical Cost (MB) Usage factor Actual Cost Charges Company A Company B Company C T3 $0.0025 42% $0.006 Monthly Min. Charge $3,700 $1,500 $2,000 Managed $0.0100 80% $0.012 Storage GB Free 2 1 1.5 Storage $/MB $.040 $.250 $.187 Bandwidth $/MB 0.015 0.010 0.0225 Table 15: Comparison of Bandwidth Solutions Hosting Starting Costs IT Support needed? High Quality Service? Bandwidth Cost ($/MB) Low Med High In-House High Yes No .002 .008 .020 Managed Low No No .006 .015 .100 Edge Service Low No Yes .010 .020 .050 11 Streaming Video Economics
  12. 12. predict that demand from new broadband users will ing will be $33 billion in 2004. Table 16 shows the greatly exceed supply. It is clear that both supply and change in Internet advertising expenditures for the top demand will be growing rapidly for the foreseeable spending companies for 1997 and 1998. It is interest- future. It is a fact that wholesale Internet backbone ing how many non-computer related firms increased transfer costs have declined significantly in the past spending by 100% and have catapulted themselves few years. Datamonitor (http://www.datamonitor.com) higher in the rankings. predicts this downward trend on costs will continue, We are particularly interested in advertising because albeit at a slowing rate. business models that are free to the customer have proven themselves to have large audience appeal. Figure 3: Future Bandwidth Costs Advertising-supported television dominates the broad- 100 cast market today. There is no reason to expect any 000's of $ 50 Fig 3 difference in consumer behavior on the Internet. In 0 fact, the almost total failure of Internet subscription 1998 1999 2000 2001 2002 2003 models seems to confirm this. The primary forms of Internet advertising today include: Revenue Potentials I banners In the last section we looked at the costs of streaming I buttons (badges) video. This section investigates the various ways to I popups (Intersticials) generate revenue online. First we will analyze current I email advertising on the Internet. Then we will look at new Banner advertisements (ads) are the most common advertising opportunities made possible by streaming form of Internet advertising. Typical banner sizes video. Lastly, we will briefly analyze pay-per-view are 468x60 (full-size) and 234x60 (half-size). Click and subscription possibilities. through rates (CTRs) for banners continue a down- Online Advertising Today ward trend. Current CTRs are in the range of 0.3–5 Forrester Research (www.forrester.com) predicts9 U.S. percent. We can expect the cost paid for banners to Internet advertising will grow from $2.8 billion in fall along with the CTR. Richer forms of banner ads 1999 to $22 billion in 2004. Global Internet advertis- are now appearing. These ads feature moving cartoon- Table 16: Internet Advertising Expenditures Rank Company 1998† 1997 Percentage Change 1 Microsoft $34,857 $31,860 9 2 IBM $28,519 $17,985 59 3 Compaq $16,196 $6,002 170 4 General Motors $12,702 $6,874 85 5 Excite $12,354 $12,176 1 6 Infoseek $9,307 $7,610 22 7 AT&T $9,285 $6,469 44 8 Hewlett-Packard $8,090 $3,988 103 9 Barnes & Noble $7,606 $2,000 280 10 Datek Securities $7,604 $2,518 202 14 Visa International $6,277 $3,368 86 17 Honda $6,039 $2,863 111 22 Sony $5,401 $2,604 107 24 Ford $5,215 $4,915 6 Source: InterMedia Advertising Solutions, New York in a paper presented by Beth Levine and Neil Sadaranganey, “Enterprise and Education Follow the Money: Industry Trends” (paper presented at the RealNetworks® Global Partner Summit Seattle, Washington, February 2000.) †Dollar figures in thousands. 9. Charlene Li, Internet Advertising Skyrockets. Forrester Research, Inc. August 1999. 12 Streaming Video Economics
  13. 13. like graphics made with tools like Macromedia Flash. * in that they are presented in the video window. The higher quality of these ads is expected to increase This is exactly where the user is focused while CTRs, and thereby, increase banner revenues. waiting for a selected video to play. Buttons, sometimes called “badges,” are also common. Audio Ads Buttons are smaller than banners with typical sizes Like Flash ads, audio ads are low-bandwidth. Audio ranging from 90x30 to 125x125 pixels. Unlike banners, is clearly an underused form of interaction between buttons are usually permanent features on a Web site. users and computers. Popup windows, also called “intersticials,” are win- Video Ads dows that launch when users move between content These ads are just like television commercials. They pages. These are not well-liked by users because they can be shown before, during, or after a normal video are a nuisance and are perceived as causing long presentation. Like banner ads today, video ads can be download times. targeted at individual users. This is the great strength Email is an inexpensive form of advertising and has of the Internet over broadcast television. Whereas historically shown good response rates. everyone who watches a TV program sees the same Table 17: Revenues Currently Received for Common Forms commercials, on the Internet, different viewers can of Online Advertising10 (www.doubleclick.com) be shown different commercials. Targeting advertise- Type of Advertisement CPM ments is the primary way of generating greater adver- Low Median Targeted tising revenues. Banner (standard) 8 20 60 Video advertising is so new that data to measure Button 5 15 50 their value is difficult to find. Not surprisingly, a study11 Popup windows by Millward Brown Interactive showed that streaming video ads are effective. The value of a video ad clearly Next-generation Online Advertising varies with the quality of the video. The next logical step for Internet advertising is the addition of video and audio. RealNetworks has recent- Advertising Trends ly released software enhancements (called advertising The Internet is poised to cause a major upheaval in extensions) to their RealServer* 7.0 product that advertising-company business practices. For the first enables video and audio. Newly enabled advertising time, advertising effectiveness will be measured by such possibilities include video banner ads, Macromedia data as click-through and purchase rates. Advertisers Flash ads, audio ads, and obviously, video ads. are beginning to demand results for their expenditures. Video Banner Ads Advertising companies will be forced to adapt. These are basically half-sized banner ads (234x60 Subscription and Pay-per-view pixels), shown in the video window, and presented Streaming video on the Internet will undoubtedly be above or below the video at all times. Multiple ads can compared to broadcast television. It is important to be rotated at intervals during the presentation. Because note that streaming video on the Internet is not a these ads are part of the video window, the user can- “broadcast” like television, but is something that has not hide them. Since they are displayed directly above been termed a “unicast.” Unicast means that Internet or below the video while the video is playing, they are viewers are each sent their own video stream. In the located exactly where the users’ eyes are focused. broadcast television model, the marginal cost of Macromedia Flash* Ads another viewer is zero. In other words, the broadcaster These are moving cartoon-like ads that have the bene- pays the same amount of money to send its content to fit of requiring very little bandwidth. These ads have 10,000 viewers as to send it to one person. This is a great advantage over today’s rich media banner ads completely different from the Internet where the cost to send video to 10,000 users is 10,000 times more 10. The values given are generalizations. For specific CPMs see the DoubleClick rate card than the cost to send the video to a single user. http://www.doubleclick.net:8080/advertisers/specs/ad_rates_network.htm. 11. Millward Brown Interactive, 800.com, and RealNetworks, Inc. Streaming Media Brand Impact Study. RealNetworks Web site, http://www.realnetworks.com/company/advertising/newsinfo/ mbi_summary.html (March 1999). 13 Streaming Video Economics
  14. 14. Because the marginal cost of additional users is zero, advertisements shown over 10 minutes will cover subscription models are perfectly suited to broadcast the cost of a 100 kbps stream if the bandwidth cost television. It makes no difference to HBO whether a is $0.01 per MB. But if the bandwidth cost is $0.05 user watches 5 or 50 hours per month of program- per MB, then 20 banner ads must be shown. ming. To a company that is streaming video on the High-quality streaming video (300 kbps) is very band- Internet, how many hours per month a user watches width-intensive, and therefore, expensive compared video makes a big difference. Streaming video on the to lower streaming bit rates. Thus, the CPM for high- Internet is therefore better suited for a pay-per-view quality video ads needs to be high to make them a model than for a subscription model. viable way to pay for the video. Assuming in a 10- Theory aside, consumers like buffet-style subscription minute video clip we choose to show either one video models. Flat-rate pricing for Internet access ($19.95 ad or five video banner ads, rotated every two minutes, per month) has shown that subscription models can to be equally profitable, the video ad would need to work in situations where marginal costs exist. have a CPM five times that of the banner ads. It is likely that we will see both video ads and video ban- Case Studies ners when viewing high-quality free video content. This case study illustrates the importance of band- Now that we have an understanding of the costs asso- width costs in determining a profitable business model ciated with streaming video and potential revenues for streaming video. Because we have seen in our cost that can be garnered through advertising, we are final- estimates that $0.01-per-MB transfer costs are attain- ly prepared to examine profitable business models. able, we will use a $0.01 to $0.02-per-MB bandwidth Let’s start by looking at a very simple case study. cost range in subsequent case studies. A Simple Cost / Revenue Analysis Online Resorts Travel Agency Table 18 answers the question, “What is the raw Scenario A: Simple Video Streaming bandwidth cost to stream video at various bit rates?” Imagine a fictitious online travel agency, “Online Now let us convert this table into the advertising Resorts,” that wants to add streaming video clips to its CPM (Cost per thousand) needed to cover the cost Web site. Online Resorts wants to have five-minute of streaming at various bit rates. videos of its resorts in such places as Cancun and Table 19 shows how the cost of bandwidth is a major Acapulco, and two-minute videos of its premiere factor in determining whether advertising can cover hotels at each resort. The company has 20 resort the costs of streaming video. Four $20 CPM banner destinations and 10 hotels in every resort. Online Resorts will stream slide shows at 24 kbps and Table 18: Bandwidth Costs at Various Bit Rates video at 36 kbps and 100 kbps. Total storage space Kbps 1 Minute of Cost @ $0.01 Cost @ $0.05 can be computed by multiplying 500 minutes by the Bandwidth (MB) per MB per MB 24 .18 $0.0018 $0.009 Table 20: Online Resorts Video Streaming 36 .27 $0.0027 $0.0135 Minutes per video Total minutes 100 .75 $0.0075 $0.0375 20 resorts 5 100 300 2.25 $0.0225 $0.1125 200 hotels 2 400 Table 19: TOTAL 500 CPM Needed to Cover the Cost of Streaming at Various Bit Rates Kbps CPM ($) Required Table 21: Online Resorts’ Total Storage Space 1 Minute 10 Minutes Kbps KB required per minute X 500 minutes $0.01 / MB $0.05 / MB $0.01 / MB $0.05 / MB 24 180 90 MB 24 1.8 9 18 90 36 2.7 13.5 27 135 36 270 135 MB 100 7.5 37.5 75 375 100 750 375 MB 300 22.5 112.5 225 1125 TOTAL 1200 600 MB 14 Streaming Video Economics
  15. 15. storage space required for each of the three bit rates Scenario A Summary in which the video will be encoded. The total storage This simple example illustrates that it is relatively space is 600 MB. inexpensive to serve a reasonable amount of streaming Online Resorts is a small but growing travel agency video. Online Resorts would be streaming 90,000 that wants to add streaming video to differentiate it video streams for roughly $1000–$2000 per month. from the competition. The company estimates there Start-up costs in this example would be a minimal will be 1,000 views per day of the 24 kbps slide sum of about $500 to establish the hosting. It is rea- shows and 1,000 views per day of the 36 kbps and sonable to expect the few cents paid per stream could 100 kbps videos, respectively. It also estimates that be recouped from the additional sales generated by there will be two hotel videos watched for every resort the improved promotion. (See Table 23.) video; thus, the average video view time will equal In this simplified example we assumed: three minutes [(5+2+2) /3 = 3]. Using these assump- I Free content tions, Table 22 shows the figures for the monthly I Free encoding streaming bandwidth requirements at 36 Gigabytes (GB). I Low-bandwidth streaming Note that by removing the 100 kbps streaming option, The following scenarios remove these simplifications. Online Resorts would reduce the bandwidth required by almost 50 percent (assuming the 100 kbps users Scenario B: Demand Increases would use 36 kbps streams instead). Monthly man- and High-quality Video Added aged hosting costs could be from $1000– $2000 per In this scenario we build upon the “Online Resorts” month ($.01–$.02 /MB) at companies like Concentric travel agency example given in the last section by and Exodus Communications. For reference, this is increasing the user demand and adding high-quality roughly the monthly minimum ($1500–$3000) cost 300 kbps streaming video. to use an edge service like Akamai or Digital Island. Suppose the new Online Resorts Web site becomes If Online Resorts wanted to host the servers locally extremely popular and stream views are 10,000 (in-house), it would cost $1100/month for a dedicated instead of 1,000. One difficulty of maintaining Web T1 line, $3000 to install the T1 line, $3000 for a sites has proven to be gracefully handling unexpected Cisco* router, and $10,000 for two PCs to host the demand. What could Online Resorts do if demand video. We do not have to compute the costs of an IT exceeded expectations? Not scaling to meet demand staff to conclude that Online Resorts would be better would leave customers with the perception that the off using a managed hosting service. Online Resorts has poor service. This is not a viable option for a good business. Table 22: Monthly Streaming Bandwidth Requirements Suppose also that Online Resorts decides to begin Kbps Views / days / MB / Minutes / Total GB streaming high-quality 300 kbps video. For simplicity, day month minute view assume that the 300 kbps video will be viewed as 24 1,000 30 .18 3 16.2 frequently as the other video on the Web site. 36 1,000 30 .27 3 24.3 100 1,000 30 .75 3 67.5 The total bandwidth required, even without the 300 kbps TOTAL 108 video, is now greater than 1000 GB per month. This is beyond most managed hosting plans. Table 23: Estimated Cost Per Stream for Online Resorts It is time for Online Resorts to consider getting a Kbps MB used in three minutes Cost per stream tiered T3 line and bringing the video streaming in- $0.01 / MB $0.02 / MB house, or using an edge service. 24 .54 .0054 $0.011 The costs of a 30 megabits-per-second (mbps) T3 line 36 .81 .0081 $0.016 100 2.25 .0225 $0.045 would be $18,000 per month. The start-up costs would 15 Streaming Video Economics
  16. 16. Table 24: Online Resorts Costs for Streaming High-quality Video Kbps Streams / day Days / month MB / minute Minutes/ view Total GB Monthly Cost @ Monthly Cost @ Cost $ / Stream $.01 / MB $.02 / MBC (@ $.02) 24 10,000 30 .18 3 162 1,620 3,240 $0.011 36 10,000 30 .27 3 243 2,430 4,860 $0.016 100 10,000 30 .75 3 675 6,250 12,500 $0.045 300 10,000 30 2.25 3 2025 20,250 40,500 $0.135 TOTAL 3105 $40,050 $60,100 be $7000 for the T3 installation, $6000 for a router Table 25: Online Resort Content-creation Costs and router installation, $20,000 for four PCs to host Explanation Cost ($) the video, and about an additional $30,000 to purchase Equipment a 300-concurrent stream license if the company decid- Camera 3,000 ed to deploy RealNetworks technology. This sums to Lighting 1,000 $33,000 start-up costs and $18,000 per month. We Tripod 600 should also figure in the costs of an IT staff. Plane Tickets two people, 20 resorts 20,000 Lodging Complimentary 0 Contrast this with $40,000–$60,000 (see Table 24) per Food $80/day ea, 1 week each resort 22,400 month and low start-up costs for edge-service hosting. Misc. Expenses Taxi, etc. 5,000 The benefits of the edge service are not just low start- Salaries two people, 20 weeks 80,000 up costs but, most importantly reliability and high TOTAL 132,000 quality of service. It is very likely that the 300 kbps Encoding stream views will suffer significant Internet conges- One PC and software 5000 tion interruptions if an edge service is not used. Salaries one person for a month 5000 Scenario B Summary In-house Total 10,000 A large number of streams drove Online Resorts to Outsourced (LoudEye) $5/minute * 500 minutes * 4-bit rates (24, 36, 100, 300) 10,000 decide between moving their streaming servers either in-house or to an edge-services company. The addition of high-bandwidth video causes costs to explode, and Table 26: Online Resorts Costs for Streaming Video for quality-of-service reasons, encourages the company Item Explanation Cost ($) to move to a relatively expensive edge-services solution. Start-up Costs Content Creation 131,000 Scenario C: Content Creation Costs Encoding 10,000 In the previous scenario, Online Resorts was clever Hardware four machines 24,000 enough to convince the hotels to fund the creation Software Microsoft ($2k), Real ($30k) 2,000 and encoding of the video clips. Most companies are TOTAL 167,000 forced to purchase content or create it themselves. Monthly Bandwidth Costs This scenario looks at what it would cost Online Bandwidth 24, 36, 100, 300 kbps streams 62,000 Resorts to create and encode the video itself. Bandwidth No 300 kbps streams 21,600 Online Resorts wants to create 20 five-minute resort videos and 200 two-minute videos. Table 25 enumer- already have an archive of video content, encoding ates the costs associated with creating these videos. it is reasonably inexpensive. Conclusions Table 26 summarizes the start-up costs and shows The point of this section is to illustrate how content- monthly bandwidth charges for comparison. Even creation costs can be large in comparison to other though the content-creation costs are large, monthly costs. Streaming video can be very affordable for bandwidth charges will quickly become the driving small operations that already have content. If you cost component of the service. 16 Streaming Video Economics
  17. 17. WebCartoons: So it would cost somewhere from 22 to 45 cents to An Internet Cartoon Channel stream the 10-minute cartoon. On a pay-per-view basis, WebCartoons is a fictitious company that has a vast the station would need to charge the end-user more than library of cartoons it wants to explore putting on the this to be profitable. How much would consumers be Internet. The company is considering three forms of willing to pay to watch a 10-minute cartoon? generating revenues: Advertisements 1. subscription service WebCartoons believes it will have more viewers if 2. pay-per-view the channel were completely supported by advertising. 3. advertising Can this be accomplished profitably? Subscription Service If a single streaming video advertisement were shown People who subscribe to a service, such as HBO, before the video, the streaming video advertisement probably tend to watch more video than those who would need a $225– $450 CPM. A $100 CPM for a purchase pay-per-view. For example, if pay-per-view 30-second 320x240 video is high but not implausible. films on cable cost $3.95 and an HBO subscription So, showing three or four video adds before each is $12 per month, it is safe to assume that HBO sub- 10-minute cartoon could conceivably be profitable! scribers watch more than three movies per month. Adding two banner ads at the bottom of the video This model does not work well for “metered” viewing. widow that are visible throughout the video presenta- In other words, subscription services work because tion could generate an additional $50-$100 CPM. their broadcast costs are fixed. They are broadcasting Placing some permanent buttons on the Web site that 24 hours of content whether you watch it or not. But linked to cartoon-affiliated e-Commerce sites could Internet broadcasters are charged by the amount of generate additional revenue. data transferred. An Internet “broadcast” is therefore not really a broadcast in the television sense. The Customization One of the greatest strengths of the Internet is that amount of data sent is in direct proportion to the num- it provides a mechanism for customizing user experi- ber of viewers. Hence, the Internet is simply not suit- ence. Since the Internet enables “broadcasters” to give ed to a subscription service model. The appropriate each user a different experience, WebCartoons could model for video distribution on the Internet is one in give viewers a choice of viewing and payment options. which revenues are generated in lockstep with costs— The company might offer viewers a choice of viewing pay-per-view or sponsorship (advertisement) models. cartoons with no commercials for 50 cents per cartoon, Pay-per-view viewing cartoons with some commercials for 10 cents To determine the viability of this model, the first thing per cartoon, or viewing the cartoons for free, but with to do is to compute the cost of streaming the cartoons commercials and rotating banners above and below to a customer. Assuming each cartoon is 10 minutes the video window. long and is encoded at 300 kbps, Table 27 gives a reasonable cost estimate range. Television Video on Demand Video on demand (VoD) via the Internet to consumer Table 27: Streaming Cartoon Video Cost Estimate televisions has been viewed as the Holy Grail for Kbps 10-minute size (MB) Bandwidth cost per cartoon video on the Internet. While the amount of video that Low ($0.01/MB) High ($0.02/MB) users are willing to watch on computers is debated in 300 22.5 $0.225 $0.45 the industry, there can be no doubt about the amount of video people watch on televisions. As we are all aware, VoD has not yet become available on televi- sions. To understand the reasons why VoD has not transpired up to this point, we need only look at current compression and transmission capabilities. 17 Streaming Video Economics

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