The real reason Broadband TV/IPTV isn’t exploding

There’s a couple of reasons why viewers haven’t turned to online video as a mainstream Television replacement: lack of selection, DRM and restrictive viewing windows among them, but the real reason it’s not taking off is that it is, simply put, grossly overpriced. The networks and studios, on behalf of program producers, are unrealistically pricing themselves out of a market they don’t want to succeed, because it would challenge their existing business.

Putting aside the stupidity of refusing to adapt to changing business conditions, and the inevitable problems that will cause them in the long term, the way that iTunes, NBC, et al are pricing for downloads or rentals, is completely out of whack with the revenues received from existing distribution.

So when NBC complains that Apple wouldn’t let them increase the already usurious $1.99 per TV show (or about 68c for the limited number of shows available with a Multipass that actually discounts from the $1.99 rate) it shows just how out of touch NBC’s Zucker really is.

So what is the “real” pricing? What is a nominally 30 or 60 minute TV show worth? Market economics tells us that it’s worth whatever the market will pay, but as the existing power players are competing with free and the marginal cost of the goods is close to zero, traditional market economics do not come in to play. As I’ve pointed out before NBC has taken $50 million in income from the iTunes store from paying customers, even while every program on the ntwork has been available free via various bittorrent sources. Without commercials. That’s $50 million they would not have had without a relatively simple distribution method like iTunes.

That’s $50 million of over-priced content. At $1.99, based on available information, Apple takes about 20% to cover the iTunes store, payment processing and content delivery leaving $1.60 for the program owner. Or for a 22 minute Multi-pass purchase of The Daily Show at 68c, Comedy Central takes 55c a show. Why is this unreasonable?
If I were to subscribe to Cable or Satellite Comedy Central would get about 60c – $1 per month for my subscription to that service. That’s less than $1 a month for 168 x 4 hours of programming, not one episode of The Daily Show. OK, Comedy Central also get advertising revenue, and they certainly don’t produce 672 hours of original programming a month, but I’ll address both those issues later in this post.

So what is a fair price? First, let’s consider a case study: my TV viewing habits in October. I’m far from typical for two reasons: we watch relatively little Television and we get it all through the Internet. We have no cable connection, no satellite dish and no over-the-air antenna. Walking the talk, so to speak.

In October 2007, we watched 86 shows, including one movie that we haven’t watched before. Because these came via the Internet they were without commercials so the 36.85 hours of actual viewing time, equates to about 50 hours of regular, advertising filled, Television. (I haven’t included the benefit to me in 13 hours extra time in the month, but it has to be substantial, but peripheral to this discussion.)

Looking at the iTunes Store, where most of the programming is available, and interpolating prices where it was not, the “rack rate” would be $155.26. Taking advantage of Multipasses for The Daily Show and The Colbert Report (the only shows that actually gave a discount for multiple show purchases) that drops to $112.55. For less than 2 hours TV viewing a day. This is against a US average of between 4.5 and 8 hours a day (depending on which source you ask). Scaling up the numbers to match the 4.5 hours a day viewing, would make the “best price” replacement cost for cable or satellite a mere $303.27!!!

Compare that with 100 channels for $55 as a previous Dish Networks customer, where (theoretically) I had access to 24 x 7 x 30 hours of content a month should I want it. Buying individual programs is 6x more expensive for an average viewer than a cable or satellite subscription. Something is definitely “out of whack” here for sure.

One way to compare would be to work on an average cost per minute of programming. While some content is definitely premium, and disposable content like The Daily Show probably should be priced at a discount to the average, it would balance out over a month, so a per minute average is, I think, useful.

My ‘best price’ buy averages slightly over 5c a minute based on 2211 minutes and $112.55 cost.

Dish Networks, watched 24/7 would be 0.15c/minute.

Dish Networks watched 1.67 hours a day would be 1.83c/minute. At average viewing of 4.5 hours a day 0.7c/minute.

This is all for content with commercials and calculating with commercials in place. I am prepared to pay a slight premium for no commercials but I’m not prepared to be charged more than 7x the price! We do have another data point in Premium Cable channels that run shows without commercials.

Assuming 8 hours a week of new content on, say, HBO, and a $12 a month subscription fee for that content, then we’re at around .5c/minute for premium Television content. That’s a long way from 5c/minute.

What’s Fair
Over the time I’ve been running the “Internet TV only” experiment I’ve generated a feel for what I’d be prepared to pay for certain content and it basically works out at an average of a penny a minute: still nearly double what I could get Television for via more conventional means. At that rate my monthly spend would be $23.94 and that would be $23.94 more than the networks and studios are making from me now because I won’t be raped on pricing just to watch TV. (I would prefer to pay this fair price to those creating the content if there was a system available to do that.)

More relevant though, is how this would compare to what the Networks are getting now (and presumably smaller cable networks are getting less). Typical revenues from advertising per viewer per show are between 25 and 65 cents per viewer for the whole show. The absolute best advertising revenue per show is 95c per viewer from this year’s “Big Game” broadcast in early February.

At 25c per viewer for a 22 minute “half hour” show, we’re around that penny-a-minute mark. At 65c per 44 minute show, around 1.5c/minute but that would be for high-value premium content. Lesser shows on smaller networks are probably closer to the 0.5c/minute in advertising revenue per customer.

Long term, I believe the real cost of content will trend toward an average of a penny-a-minute with many shows being priced below that because they have no repeat viewing value, and premium shows that bear repeating slightly above average.

And that would be fair.

11 thoughts on “The real reason Broadband TV/IPTV isn’t exploding”

  1. Hi Phil,
    Nice overview, however, what about the fact that when purchasing video on the net enables you to keep and re-watch the content forever, while watching it on a Cable station is a.. Watch once and be there at the right time.
    We have 2 extra convenience factors with digital download. (You digitally own the content and also get to watch it on your own schedule) And then we knock out one major one for tradition content. The DVD sale.

    This this part of your equations?

    Thanks,
    James

  2. Practically speaking, from the day of the VHS recorder onward there’s been no difference between viewing and keeping. Anything I view on cable or broadcast I can record and keep for ‘time shifting’ purposes.

    Watching TV on my own schedule is not a “benefit” it *is* the future of television. In much the same way that a phone in a motel room, or color TV was advertised on the big billboard out front. Now they’re just expected. Same with Appointment TV: it’s in the process of dying. The only viable future is TV on everyone’s own schedule.

    So, I haven’t drawn any distinction between “download to own” and “viewing” because for at least the last 15 years I’ve owned anything I wanted to that was broadcast.

    Philip

  3. You bring up some good points and you don’t even take into account that your Internet is costing you a monthly subscription.

    Coming from Australia, where we don’t have unlimited plans, if we had to download all our TV shows, we would have to increase our Internet plans to compensate. In saying that, we don’t even have the option to buy TV shows from iTunes.

  4. Good point Sikosis, but in the US almost everyone “pays” for free TV anyway through a cable or satellite service (over 85% of households). So paying for Internet instead of cable is pretty much a wash, and for most people a saving of one service.

    The other issue, of limited bandwidth plans in Australia, is a vexatious one and will leave Australia in the dust in the future. I am also from Australia btw, and horrified by the cost of Internet. In LA we have 10 Mbit down, 1 Mbit Up via cable modem (and we get that most of the time) with unlimited bandwith for around $80 US a month – less than $100 Au these days. We don’t pay for cable or satellite, which would add another $55 for what we used to pay for Dish (think Foxtel with 100 channels) or around $93 for the average US household.

    But there’s a reason for no unlimited plans – the cost that Australian ISPs have to pay American companies for access to the content (at least that’s what I understand is the issue) because more comes from the US to Australia than the other way around and peering isn’t practical.

    Philip

  5. I really like where you’re going with this article. It seems to me that you have a very solid case for dropping the price of content delivered over the web. I think that, spoken to the right people, this is a very feasible plan to implement. Unfortunately, Ill almost bet money the big guys don’t agree. They will find a justification for the cost somehow. But I hope you’re right.

    As for the “download to own” part. I have to agree that since the days of VHS began, we have had access to watch when we want. The emphasis is shifting towards TV on our own schedule in a major way and hopefully network television will go off in the corner and die. (Since there is hardly a thing worth watching on network tv nowadays…)

  6. I agree that big media will try and justify their pricing, but what I expect will happen is that their role will continue to be deprecated. What we need is an open, easy way for producers to connect with viewers without any gatekeeper in between. Where viewers could filter to content they’re actually interested in and are prepared to pay what the producer is asking.

    Stand by, it’s in the works.

    Philip

  7. I’m intrigued by the idea. Almost like an iTunes where the middle man (distributor) is cut out and the end user gets to interact (sort of) with the producers.

    Seems like a revolution waiting to happen…

    hmmm…(scratches chin deep in thought)

  8. Philip –

    Your assumptions treat unicasting with the same cost basis as broadcasting.

    Cablecasting is similar to broadcasting, meaning that one signal is sent out over a portion of the available frequencies and tuned.

    Right now there is a surfeit of bandwidth and the cost is low. That will change. Carriage of internet content will go up as dark fiber gets lit.

  9. Randy, in turn you may be forgetting the enormous electricity costs to running a broadcast tower – millions of dollars a year in most cases.

    I’ve read no independent authority that thinks bandwidth will go up. Dan Rayburn at Streaming Media Mag/.com seems to think there is a long way further down for delivery costs to go. Amazon’s S3 seems to be a “bottom end” point (just about the same as what you’d pay from an Akamai when you’re up in the hundreds TB of delivery each month. Plus increasingly p2p methodology is being used to reduce the cost of delivery even further (and likely opening up questions of Net Neutrality again if it’s popular).

    Cheers

    Philip

  10. RSS feeds to directly link producer and consumer is a great idea, but let’s face it, the bulk of consumers have little technical knowledge how to use RSS, or even know it exists. My experience is that most people over 40 only have rudimentary knowledge of the net – for many it’s limited to email and click to read/watch YouTube/listen.

    So what can be done till tech savvy generation X,Y and the world’s internet infrastructure catches up to new content delivery models which are emerging?

    The third world has mobiles phones, yet it has poor or non existent internet infrastructure. In the future, it’s here where the biggest audience will ultimately be found for new content and library material. Computer net access will be largely bypassed by the third word. They’ll use mobiles. In Japan and Korea it mobiles that consumers use to largley access content on the net. It’s emerging this way in China too.

    Television was the first screen; the net was the second screen. It’s the third screen – mobile phones – which could bridge the content delivery and buying gap whilst RSS finds its feet in the first world. Mobiles may come to be used to preview content or order it for later RSS download by some new whiz bang transparent RSS application. This could overcomes the Ludite’s barrier to using RSS. This was the success of YouTube. It made the technology transparent for the average punter.

    By using mobiles phones, increasingly time poor consumers need not be in front of computers to preview content. They can do it anywhere anytime for later net delivery, or for immediate snack viewing. This can be done now using a video enabled phone’s DTMF keyboard functions to delvier video on demand. In fact, it’s already possible using the IVR ‘Dedication’ functions of Dilithium’s VIVAS CMS applications. You can even buy content for others and send it to them. Viral sales. VIVAS was built for the new Dilithium Video Gateways. The gateway forms a bridge between the net and mobile phones, bypassing the Telco’s walled garden approach to content delivery. This mobile model is inclusive as it caters to those who don’t have access to high technology or even understand it. It also provides a consumer contnet preview and revenue collection model for producers’ latest episode or feature productions. This content can be ordered using DMTF and even delivered to you on the net via RSS. An early example and limited use of the tehnology can be seen at http://www.videoconnect.com.au

    In the meantime, my wife is still coming to grips with iTunes.

  11. Making the technology transparent and simple is indeed crucially important.

    I hear what you’re saying about your wife and iTunes – but even 20 years after the widespread adoption of cable television (in the US) there are people who find the cable box remote control, and how it connects to the TV in the corner, to be challenging. There will always be these kind of transitional problems, and I’m not sure that anything new will be a complete replacement for anything old. Rather that there will continue to be a wider and wider variety of programming available by multiple means.

    Thanks for the information on the mobile use of RSS and the VIVAS CMA application.

    philip

Comments are closed.