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May 1, 2006 12:02 PM, By S. D. Katz

The economics of self-distribution.

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The Internet is rapidly evolving from a text infrastructure to a video infrastructure. For the past decade, since the Web became a mass medium, we have only been fooling around with video and audio. Even first-generation broadband only hinted at the possibility of video over the Web, and while only 25 percent of broadband users may have next-generation, super-fast connections over the next three years, that demographic (early adopters) is the audience most likely to take advantage of IPTV and high-bandwidth entertainment. Your audience.

Right now, the average download speed in the United States for a DSL or cable broadband connection is a paltry 1Mbps to 3Mbps (this is what you actually get, not what your provider claims). This is why movies on the Web are the size of a business card. Arguably, this unimpressive video experience was the sharp point that burst the online entertainment bubble back in 2000. (For more on the second coming of the Internet revolution, see p. 66.) Six years later, telcos and cable companies are rolling out much faster broadband service, providing the opportunity for you to fulfill your destiny — as head of a network. Isn't it about time you greenlit and distributed your own movies, cartoons, short subjects, and news and information programs?

If you want to jump into the fray, what follows is a short introduction to some of the economics of video self-distribution.

On demand

In broadcasting, an antenna atop a tall building can transmit programming from 1,000 to 100,000 viewers, and the cost is approximately the same. Streaming video over the Internet uses a very different economic model — you pay for the quantity of data sent to each customer. So it's closer to making a telephone call — the larger the audience, the higher the costs.

So you want to stream movies from your site and charge per-view admission, a subscription, or some other revenue strategy? If you expect to do this on a grand scale, you will need a hosting service such as Akamai or VitalStream. These and other hosting companies have the bandwidth and infrastructure to handle enormous traffic. They have optimized their networks for video and audio; even with super broadband, you are dependent on the efficiency of servers and hosting infrastructure. There are also smaller hosting companies that service clients expecting only a few thousand, or even a few hundred, viewers a month.

To self-distribute as a business, or even just to cover your costs, you have four concerns: encoding, hosting costs, audience relations, and advertising/marketing.

Encoding is the easy part. If you only have a few short subjects to encode, you can learn to do this yourself. If you have a studio or boutique shop, your IT person can handle the task. However, if you offer several dozen movies online that change every few weeks or months, you might consider having your movies encoded by the hosting company. While good encoding requires experience, it is essentially a commodity service. (For more on network video and codecs, see p. 109.)

Hosting companies such as Akamai provide many services, but their main job is storing and streaming your data. So let's look at how hosting companies charge for these services since this can add up to significant expense.

Hosting companies store your content on servers and you are charged by the megabyte (or gigabyte if you have lots of movies). If you have 10 100MB movies, you need 1GB of storage. But wait, what if you offer your movie in more than one size to account for your audience's varied connection speeds? If you simultaneously provide movies in typical pixel dimensions of 160×120, 320×240, and 460×360, the storage for one title is the sum of the three versions. The 10 titles in our example might actually require 2GBs of storage. But there's more: You may opt to have your movie in more than one player format — for example, QuickTime, Windows Media, or RealPlayer. If you only provide two of these (in three sizes), you have now multiplied your storage needs by four (it's not six times because the movies are not all the same size). The good news is storage prices are nominal.

Streaming is a much bigger expense than storage. This is the cost that increases with the number of viewers. Actually, there are two ways that video is served up: streaming and progressive downloads (PD). In fact, most video online is available as a PD. Both streamed video and PDs typically cache frames before playing — depending on your connection speed, the size (pixel dimension) of the movie, and the encoding rate (amount of compression). The difference between streaming and a PD is that streaming uses a streaming server and a PD can be downloaded from a standard web server. QuickTime allows you to play movies shortly after they have begun downloading, so from the viewer's standpoint, streaming and a PD may seem very similar. As we move to faster broadband connections, progressive downloads will be less necessary, technically speaking, but this could be several years away. From a cost perspective, progressive downloading and streaming are the same. We'll refer to both as “data transfer” from this point on.

The new faster, fiber-optic, and upgraded cable broadband services are promising download speeds in the area of 30Mbps as a base service, but you might actually only get a fraction of that depending on traffic. However, even at 15Mbps, you can download HD movies in MPEG-4, WMV 9, or RealPlayer. These could be 480p, 720p, or 1080p movies. A 1080p movie trailer from the Apple site downloads and plays after just a few seconds on the new Cablevision Optimum Online broadband service (30Mbps). This is the future of the Internet and the reason you're reading this now.

The new connection speeds mean you can show your HD movie online at a very high quality, but quality is not free. Bigger movies mean higher storage and data transfer costs. However, having to provide movies in three sizes may be eliminated, which softens the financial blow. Still, you will probably net out at an overall higher data transfer rate.

Before looking at actual costs, let's look at some basic data download rates (The rates are estimates with the audio stream included.):

• Dial-up 56Kbps (.56Mbps)
• T/1DSL/cable 150Kbps (1.5Mbps)
• DSL/cable 350Kbps (3.5Mbps)
• Next-gen cable 700Kbps-3000Kbps (7Mbps-30Mbps)

Next-gen cable

Something to remember when comparing hosting rates: Often, hosting companies publish data rates for video only. That's because the video and audio streams are separate. The rule of thumb is that audio is 20 percent of the video rate.

Now let's look at some actual costs. Data transfer rates are measured in fractions of a cent per megabytes (MBs). Most hosting companies have package plans. VitalStream is one of the few companies that provides its rates online: www.vitalstream.com. While this is useful, it presents the cost of the data streams in a way that might at first seem unintuitive. I've boiled this down to a simpler set of numbers that are estimates, but they might give you an idea of business costs more quickly.

For small sites with modest traffic (hundreds of visitors/month), there are plans that provide fixed storage and data transfer rates. A typical plan is 5GB of storage and 150Gb of data transfer for less than $1,000 per month. This means 30 viewers could download your 5GB movie or hundreds of viewers could download your five-minute reel. Anything over the package rate is charged at a very high cost of one cent per MB. This is really a penalty charge. You can have the hosting company alert you if your small site suddenly has a huge jump in traffic, thereby avoiding an overage charge of several thousand dollars for one month.

Here are some estimated rates for the higher-quality streaming speeds listed above.

• DSL/cable 350Kbps (3.5Mbps) = $0.007/min.
• Next-gen cable 700Kbps (7.0Mbps) = $0.014/min.
• Next-gen cable 1100Kbps (1.1Mbps) = $0.024/min.

Based on our chart, a 10-minute movie at 350/Kbps stream costs seven cents to stream. A 10-minute movie at the HD rate of 1100Kbps will cost 24 cents. A one-hour movie would cost a little less than $1.50. As you can see, this is not a trivial expense if you expect to charge $4 for viewers to watch your indie feature online. Now, 1100Kbps is a big stream and some hosting companies will tell you that 700Kbps is all you need for HD. These are people still living in the Internet world, not the video entertainment space. But even at the 700Kbps speed, streaming a 90-minute movie will cost you a hunk of your ticket price.

Storage and streaming aren't your only expenses. I'm assuming readers own their own content, and so production costs are not factored in here. Only the cost of delivery is being considered. So now allocate around 2 percent to 3 percent for a transaction fee to cover PayPal, or up to 10 percent for a more comprehensive transaction service from iBill. Of course, we have not factored in site maintenance or marketing — possibly the most significant cost of all, because all other expenses are irrelevant without site traffic. You will also want to have the hosting company create reports based on viewers' habits. You will also want to sign viewers up to receive news about other content at your site or special deals — anything to encourage viewer loyalty and repeat visits to your site.

Alternatives

Another delivery system is the background download in which a portfolio of movies is downloaded to a hard drive, which is what TiVO and others are doing. The movies change every month, which can be scheduled to happen at the wee hours of the morning. There are many ways the selection of movies can be determined in this model, so this is likely to be a popular option in the future. It takes about 30 minutes to download a DVD movie on Optimum Online's new service, so background downloading makes sense. At the moment, no one is offering this as a turnkey service or opening the floodgates to independent producers as a service, but there are companies that will roll out this option for indie producers by the end of the summer.

Keeping delivery expenses in mind, letting someone else distribute your work has advantages. iTunes and other content retailers online typically offer a 70/30 percent split with artists and content producers with 70 percent going to the artists. In a sense, the artist's share is close to a best-case revenue scenario in a self-distribution model. While your movie/short subject/song is just one of many titles at iTunes, you also benefit from the enormous traffic that goes to the iTunes store. Of course, iTunes is not open to entrepreneurs and new artists without a name, but Google, and soon Amazon, will provide a distribution outlet for anyone with content to sell. Many other substantial user contents sites such as youtube.com are going to come into play; however, this model provides little control over how your work is marketed. There are options halfway between doing everything yourself and sending your movie to Google Video, in which yours is just one of thousands of available titles. Here are a few of those other options:

Maven Networks (maven.net)

This is a solution for indie filmmakers and content owners that use a branded download client. Maven has its own streaming video player, but the company can also deliver to portable media players such as video iPod and Sony PSP.

Multicast Media (multicastmedia.com)

This Atlanta-based firm offers live broadcasting and video on demand for your content. This is basically a 24/7 Internet broadcast channel that provides the backend infrastructure for big players such as Better Homes and Gardens, The Home Depot, and This Old House, but also smaller indie broadcasters.

Next steps

Most of the business models mentioned in this story are untested. Right now, IPTV is just coming into existence. So start building your online presence today. By the time you're ready to get going, the first wave of super broadband customers will be online. In an upcoming article, we'll look at how to drive people to your site. As you can imagine, the new opportunity is open to everyone, and the Internet is already a crowded patchwork of businesses and other diversions. As much as the Internet has affected the way we use our free time, the real change will be over the next five years as the computer becomes a hub for entertainment throughout the home — even if it is simply the entry point for data that is sent wirelessly to a 50in. flat panel in the den. This would be the second coming of indie filmmaking, except I'm not sure there was a first.

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Pipe Dreams

This winter, Verizon and Cablevision rolled out faster online services. Verizon hooked up a Fort Worth, Texas, suburb with a fiber-to-the-home service, providing ultra-fast broadband, while Cablevision launched the first stage of a system-wide upgrade to its Optimum Online service. Cablevision's premium service provides a top download speed of 30Mbps or about 3.75MBps, about five times faster than conventional broadband connections. Even 720p HD movies can be viewed using progressive downloads that begin to play immediately. Although fewer than 5 percent of all broadband homes will have this level of service in 2006, telcos are incentivized to implement faster service to make up for the loss of phone business to cable and satellite services. Verizon, perhaps the most aggressive telco, plans to wire 15 million homes by the end of 2009. Throw in the cable, satellite, and wireless initiatives to roll out super-fast connections, and it's likely that a very large audience of super broadband users will be online in the near future.

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