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The Economics of Internet Video

comcast-fancast-free-internet-tv-videoHere’s the bad news for consumers: There’s no such thing as a free lunch, and Internet video won’t cost nothing forever.

As an analyst from Cowen and Company points out in his coverage of Netflix (link via EngadgetHD), “the more customers stream, the more Netflix (and other streamers) will have to pay studios for the content.” And that equation doesn’t even include the cost of maintaining a broadband infrastructure that can handle mass volumes of content. Ergo, free streaming isn’t a forever deal.

There is good news, though, for both consumers and service providers: The greater the popularity of Internet video, the faster the market will sort out how to deliver converged content (Internet video and traditional broadcast TV) with new revenue models that work. I know, I know, as a consumer that proposition doesn’t sound as good as free, but the reality is that something’s got to cover the costs of studio production and video delivery. What we as consumers trade in fees and/or advertising, we’ll get back in content choice and flexibility – the ability to watch what we want, when and where we want it.

Meanwhile, this all equates to a huge opportunity for service providers, as Comcast clearly realized when it created an Internet beachhead with the Fancast portal. TV providers not only own the broadband pipes, they have the expertise and partnerships in place to merge the best aspects of broadcast and Internet television – high-quality video and raw distribution power with a flexible, customizable TV watching experience. It’s a television holy grail.

5 Responses

  1. I disagree with the analyst at Cowen and suspect that we’ll hear more about this on Netflix’s conference call today. The power of Netflix’s business approach is that they’ve taken a hybrid model to movie delivery. Since DVD is still the mainstream, they’re in a position to develop a relationship with that customer, while weaning them onto digital delivery. If Watch Now wasn’t included as part of the standard monthly benefits, I don’t know that they’d see even a tenth of the adoption that they are getting today. Since Blockbuster is the only legitimate company that can duplicate their hybrid approach, it puts Netflix into a very powerful position as we make this transition. Their approach makes it very difficult for stand alone VOD providers to achieve a critical mass without some kind of a cable relationship. If Watch Now started to become too much of an expense on Netflix, I suspect that they’d sooner increase prices on everyone and maintain their hybrid advantage before they’d be willing to decouple the services. By using the profits from the DVD business, they’re able to subsidize the VOD benefit and until we see mass adoption of digital video, it wouldn’t make sense for Netflix to give up their momentum or advantage.

  2. You think Watch Now is why most folks use Netflix? Hmm- That doesn’t jive with the folks I know. However, I do agree that Netflix has the strength of position potentially to subsidize it’s streaming feature for a while. The larger point is that down the line when streaming video truly hits the mainstream at TV-like levels the business model will have to change. Free TV with limited ads doesn’t pay the bills.

  3. [...] be license a large stable of current Hollywood blockbusters. So, I’m not entirely opposed to the idea. However, $10 a bit steep for this HBO content, especially with many of these shows available on [...]

  4. [...] limited content availability has already made piracy popular. Comcast, on the other hand, has had some success with Fancast – traffic continues to grow – though the Comcast representative admitted that initial expectations [...]

  5. [...] Networks named rights management as the biggest frustration. Mark Taylor from Level 3 talked about monetization lagging behind distribution quality. Tony Fernandez from CBSSports.com cited the need to get more efficient [...]

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