Online Video Business Model and its Impact on Communications

What is Online Video?

Online video is more commonly referred to as “streaming video” which is “video that plays over the Internet without downloading to the end user’s computer. Think television and radio for your computer. Streaming is different from downloading in that playback starts immediately with just a mouse click for the viewer, and the large file is not saved to the viewer’s computer. This provides a high level of security for original content.

Another description of streaming videos is as follows:

Streaming” videos are digitally encoded video files that are delivered via the Internet, to be opened and viewed on an end user’s computer screen. With one mouse click, a screen appears, and a (often large) video file opens, which the user can watch via a software program, such as Real Player or Media Player, available for free via the Internet. When the video is over, the file closes, without having downloaded to the user’s computer, which protects the security and integrity of the original video file.

Typically, customers view online videos through applications such as.RealNetworks’ RealPlayer or Microsoft’s Media Player.

Currently, Microsoft’s Media Player leads the market. As one industry observer explains:

RealNetworks’ file format was at the top of the Internet streaming video market for a couple of years, until Microsoft’s Windows Media file format came in. RealNetworks charged most of their customers…. Microsoft came up with an inferior product to compete with RealNetworks called “Windows Media,” but offered it to customers for free, bundled with Microsoft Windows. RealNetworks… arrogantly refused to believe that Microsoft could compete with their vastly superior product. Microsoft, however, continually improved the Windows Media format until it had surpassed the Real format in quality. Windows Media, an integral part of Microsoft Windows and still thought of as free, has slowly climbed up to the place where RealNetworks once stood – the top of the market. Now, RealNetworks is forced to open source their software development in an attempt to regain market share.

In addition, Apple also offers the QuickTime Player as an alternative to RealNetworks’ and Microsoft’s applications.

Streaming video can also be streamed via a satellite rather than the Internet, but this technology is fairly new.

Delivery via satellites allows companies to bypass the “congestion” of the World Wide Web. One industry executive explains, “streaming media is the Internet’s key broadband application. As streaming media proliferates across the Internet and consumes ever-increasing amounts of bandwidth, more efficient, broadband distribution methods will be needed to bring content closer to Internet users.”

However, widespread use of such satellite technology is some time away.

The Business Model

The primary business models for streaming video are pay-per-view and subscription models.

While the streaming video industry originally tried an advertising, model (comparable to commercial advertising on television), this model proved unsuccesful.

Originally, “major advertisers [began] looking to streaming media, hoping that its audio and visual capabilities might help them create the emotional connection that many feel is missing from Internet advertising. [the industry believed that streaming video] may be a way to capture traditional branding ad dollars, at a time when the online advertising business is in a slump.”

At the time when the industry was just getting its feet wet with streaming technology, “questions linger[ed] about whether consumers w[ould] buy into a proposition that compensates consumers for looking at ads — earlier startups like AllAdvantage and mValue fizzled out after incentivizing users to receive banner ads.”

But the advertising business model did not work with streaming video, either.

As one example of the failed advertising approach, ABCNEWS.com’s efforts at attracting advertisers for its streaming video were unsuccessful:

Despite the thinking of many that streaming ads would be an easy sell to advertisers already buying TV commercials…. ABCNews.com [was] successful in selling only a “very few” streaming video ads in the site’s free version.

However, ABCNEWS.com, “hasn’t ruled out advertising entirely. In addition to charging a fee for access,… ABCNews.com is experimenting with continuing to place ads in the streams, though currently the company is limiting the amount of advertising it requires subscribers to watch.”

Under the alternative, pay-per view model, customers who pay for online videos generally have a set period of time after payment – for example, 30 days, in which to watch the movie. Once they press “play,” however, they must finish watching the movie within a short period of time, such as 24 hours.

The challenge, say critics, is that people will not want to pay to watch videos online when they can simply watch the same content on their television monitor.

To make matters worse, watching movies online requires that customers have a broadband connection. Currently, for example, only 20% of households in the United States have broadband connections.

One example of the pay-per-view model — also known as “video on demand” — is a service called MovieLink.

It is financially backed by such major industry players as Sony Pictures Entertainment, Warner Brothers, and Paramount Pictures.

Most industry experts, however, say that the video on demand business is still in its infancy, and that it will years for the business model to reach its potential.

An obvious reason for this is the technological barrier- the vast majority of the industry’s would-be customers are not even equipped to use the service.

Fortunately, there are some markets that the industry can tap into until the technology of American households catches up with streaming technology.

For instance, many dormitories across the United States do have broadband connections. Because many of these dormitory rooms may not have televisions, the video on demand service seems ideal for the college market.

Another potential target market is business travelers. Business travelers, who often travel frequently and constantly seek ways to alleviate boredom while traveling, can simply turn on their laptops and watch a movie while waiting in airports or even while traveling on an airplane. And business travelers are likely to be able to afford the technology necessary to run streaming video applications.

In addition to the pay-per-view model, another business model for streaming video is the subscription model, wherein customers pay a set price for a set period of time for access to a company’s streaming videos.

Some companies have combined the subscription and pay-per-view model. For example, in the summer of 2002 ABCNEWS.com began charging users to view their video clips on the ABCNEWS.com website.

Continuing efforts by media giants to better monetize their Internet investments, ABCNews.com will abandon free, ad-sponsored video and begin charging users who wish to view broadcast clips on its site…. All video content from ABC News… will now be available only to users who cough up $4.95 per month for “ABCNews on Demand.” ABCNEWS on Demand will include live breaking news, as well as time-delayed video from shows such as “Nightline,” “Good Morning America” and “World News Tonight With Peter Jennings.” Users also have the option of paying $3.95 for on-demand viewing of archived “Nightline” shows.

One industry expert notes that, “the launch of ABCNEWS on Demand also follows moves by other media conglomerates, including AOL Time Warner to introduce fees to cover the cost of streaming video. In March, AOL’s CNN.com began offering “CNN NewsPass” monthly subscriptions.”

Online Video’s Impact on Other Communications Media

Streaming video has had and will continue to have a significant effect on other communications media.

For example, the streaming video industry has ventured into the cellphone market.

Cellphone companies have recently become interested in so-called “video phones,” which stream video over a traditional cellphone. Formerly the stuff of science fiction, such technology is now entering the market the world over. One commentator marvelled at the new video-via-cellphone technology, describing the experience this way:

Imagine the possibilities of a device that, not so long ago, existed only in the imaginations of science-fiction writers. If you attach a camera to the video-phone, you can point it at the Statue of Liberty and beam pictures to relatives anywhere in the world. Need advice about what to buy at the supermarket? Well, just scan the produce counter and ask your spouse at home which tomatoes look best.

Samsung’s video cellphone technology, for example, has] the capability to stream video at data-transfer rates of 144 kilobits per second — more than twice as fast as most dial-up modems.

Admittedly, cellphone video is not yet a household technology or one that the majority of American consumers can afford. However, such technology will likely catch on with consumers over the next few years.

Market research has indicated that the public is interested in video-phones. During NTT DoCoMo’s recent trials in Japan, potential customers delighted in downloading cartoons from the Web. And tests conducted in June by Sprint and GEO competitor PacketVideo also demonstrated that “consumers love the experience, even with narrowband,” according to James Carol, PacketVideo’s CEO and co-founder. “This market is developing — and it’s huge,” Carol enthuses.

Streaming video is also affecting the movie industry. Many movie studio executives are considering the use of streaming video as a competitive force to go up against video rental stores and movie theatres. This could prove to be a major shift in business models for the movie industry and for movie viewers.

It is likely that if this technology caught on with consumers, many video rental chains and movie theatres would go out of business.

Online video also has much potential for corporate communications and distance learning.

By enabling companies to use streaming video for internal communications instead of expensive personal meetings, the technology allows companies to save money on training costs and costly business travel expenses. One commentator explains:

Streaming

saves big bucks in corporate communications and distance learning. Mercedes-Benz USA estimates its use of Microsoft Windows Media Technologies to train dealership technicians in its STARMARK service program cut $1.5 million per year. Oracle Corporation estimates that its cross-enterprises use of RealNetworks is saving nearly $20 million a year.

Thus, many corporations will likely begin to use online video to cut costs and cut down on training and development expenses, and they will also likely use the technology to cut down on costly business trips.

Streaming video could also have a major impact on the television industry. The whole idea behind the invention of streaming media was originally that broadcast television could be viewed over the Internet:

The streaming technique would eventually allow users to watch videos without having to download large video files to their computers, which takes up valuable space on hard drives. Streaming and video compression were seen as integral to the convergence of television and the Internet that some thought could result in the airing of broadcast television over the Internet.

Thus, streaming video is likely to have a significant effect on many different types of communications media.

Conclusion

With all of the potential of streaming video, some commentators caution that we should not think of the streaming video industry as a distinct market per se.

Suppliers and customers increasingly understand that streaming is not a “market.” Customers pointed out time and again that streaming is a delivery strategy for content, applications, and services…. A segment of suppliers provides streaming-focused infrastructure, and a separate group provides streaming-related media services. The streaming format, though, is a means to an end, and not a separate market in itself.

This is a word to the wise for companies seeking to enter the streaming video (or audio) industry.

Companies should not stake their future simply on the streaming technology unless they literally focus on simply providing the technology; rather, companies would do well to view streaming video simply as an infrastructure that allows them to offer new and better products and services.

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