I've been following the rather lengthy debate over the past year and a half or so regarding whether YouTube could
have ever gotten started if their was a "Tiered Internet". People like
Larry Lessig have claimed that start-up little media companies like
YouTube could never get established because they would never be able to
afford to establish the relationships or pay the fees. Despite these
ideas being rather thoroughly refuted by people like Peter Huber, we
still seem to have a rather large debate on the subject (see the Gilder Forbes Conference Debate on it below).
Therefore, I think it is time for us to delve into this in a little more details...
Wholesale Pricing of Direct Distribution
Start-up companies like the YouTubes of over a year ago don't go
directly to the last-mile ISPs to buy their bandwidth or establish a
presence on the Internet. Instead, they rely on a host of smaller
companies like Limelight, to host their content and establish the
highest quality best-effort connections to reach consumers (see the Forbes article here).
In fact, there are a whole host of models for video delivery.
Peer-to-peer (P2P) networks use other people's bandwidth to distribute
their content. In effect, they allow end-user consumers to share the
uplink bandwidth they have with others so that no one has to pay the
expensive and sometimes exorbitant costs for distributing web-based
video. Distribution mechanisms, therefore, can be broadly
categorized into indirect models, like P2P, or direct "Web" Video
models that YouTube, Grid Networks, Move, Limelight, Akamai, InterNAP and others use.
The indirect models face a rather challenging disadvantage. They don't
necessarily offer the consumer the highest quality of experience
because content may not be cached closely to the end-user and they have
a reputation for heavy piracy. It is practically impossible to embed a
video off a P2P network into a web page like has been done in this
blog. Videos cannot be seamlessly hyper-linked, embedded, nor can they
be easily syndicated or sponsored using P2P distribution. We've
outlined strengths and weaknesses about this extensively before.
They face a number of major problems -- at least if you're in the Media
Industry and you want to truly monetize your content. P2P has one
distinct advantage though, it is cheap! It is estimated that P2P
networks can distribute content for on the order of a few pennies per GigaByte (GB) of data transferred.
Content Delivery Networks (CDNs) which represent the highest quality
best-effort service today, on the other hand, have pricing that ranges
north of 25 or 30 cents a GB.
Direct models lack one key component that has not been easy to fix
pervasively using current technology. They are all best-effort
delivery systems. As a best-effort delivery system they cannot offer
the high quality of experience that we've all come to love when watch
our TV. Of course, when the Web and Internet combine to form the "Video
Web", we'll get a whole lot better experience -- especially when its
combined with something like ISTP's guaranteed service delivery.
There will always be intermediaries in the direct distribution model. Because of the shear bread and "long-tail" nature of Internet Video as well as other content, it will be impossible for "Walled Prisons"
(as opposed to "Walled Gardens") to emerge whereby last-mile ISPs can
form business relationships with every individual company wanting to
distribute content over their premium infrastructure. Instead, these
intermediaries must survive and thrive in the world of online video.
The value chain that emerges will probably not be to different from the
one today. It will be a bit deeper and richer with multiple providers,
like YouTube used with Limelight, competing for business and ultimately
leverage economies of scale to lower costs. I've written a bit about that before.
To create those economies of scale, the service provider has to have
lots of settlement free peering as well as points of presence. These
attributes will determine how consolidation in CDN segment of the
industry occurs as well as who ultimately thrives.
Pricing in the Value Chain
As Vint Cerf points out that if some of the big ISPs have their way, high quality
distribution of long-tail content will never occur. Pricing estimates
for revenue split models indicate that some of the IPTV cable replacement
services are pushing to ask for 50% of the revenue stream offered by
the content distributor. If we take this model as an example, we can
see that pricing premium bandwidth more than 15 or 20% above
best-effort prices will not be practical for most content distributors.
Companies like Movielink, NetFlix, and CinemaNow already distribute
this type of content in very high quality and at prices that compete
with neighborhood video stores. As an example, a movie that costs $3.99
to rent from one of these services would have to share half of their
revenue with the ISPs plus pay the Movie Studio. This would leave
them with little to no profit. Television can't fair much better.
Current Cost per Mille (or CPMs) are averaging above $25 today for
primetime shows. One typical hour of television video contains about 16
minutes of advertising for a very popular series. This is up from 12
minutes of advertising just a couple of years ago. If each video
received about 2.5 cents per 30 second spot, this would only provide
about 80 cents per hour of TV at the very maximum. Splitting this
revenue with the ISPs would turn the television business on its ear
since that same hour of video would take about one half a GB of
bandwidth minimum. Therefore, regular CDN best effort distribution
would cost roughly 15 cents, and premium distribution would be around
40 cents. Very few television shows could survive with these economics.
Today, TV get much smaller splits -- on the order
of less than 25% when you include outgoing per subscriber payments by the cable and satellite providers.
What needs to be done by both Little and Big Media...
Obviously, Big Media and Little Media low cost distribution mechanisms.
The industry will consolidate around those companies that effectively
leverage their economies of scale to distribute at the lowest cost. For
low quality video, YouTube and Google appear to be at the forefront of
this economic curve today. Since high quality distribution and a Video
Web may offer a significantly different paradigm, the leaders today
will not likely last. Only those companies who jump on board to a low
cost high quality model will ultimately succeed in the new paradigm.
