COMPARISONS TO OFFLINE MEDIA
A first step to understanding the economic prospects of the online video entertainment industry is to ask how online video either creates or reduces value for consumers in terms of costs or product attributes, including interface characteristics and the quality and variety of the programming itself, relative to offline media.
Clear-cut comparisons are often difficult, in part because established media delivery systems - notably cable TV and other MVPDs7 - are themselves undergoing rapid technological development. We can, however, identify several basic ways in which online video technology may improve upon, or fall short of, offline media:Reduced capacity constraints The basic architectural advantage of the Internet is the virtual elimination of product carriage constraints, thus enabling the famous ‘long tail’ of product variety (see Anderson, 2006). In the video media context, DVD retailers, MVPDs, and other offline media systems face significant marginal costs in adding another DVD or cable channel to their product lines. Online content providers also face marginal costs of capacity to support servers on which videos are stored, but for most suppliers, these are surely very minor.
The most remarkable illustration of the long tail in Internet video is the billions of user-created videos hosted by YouTube, few of which could conceivably generate sufficient demand to be supported by offline media. The long tail is less obvious for online video distributors offering professionally produced content, although Netflix, iTunes, and others offer large selections of lower-demand offerings such as obscure foreign films, for example. YouTube’s limited foray into professionally produced content is an apparent milestone in top-down creation of long tail programs that are ostensibly narrow in appeal (e.g., Tony Hawk’s professional skateboarder channel, Machinima; The Onion; InStyle magazine) and also very inexpensively produced.8
• Cost-effective video delivery: It is difficult to make cost comparisons among media because they involve fixed capital infrastructures and home premises equipment costs, and thus depend on usage rates.
In the case of online video transmission, the Internet also serves many other uses. Several early authors (e.g., Owen, 1999) argued that as a switched network, the Internet is relatively inefficient for live multi-casting of high-quality video. The slow development of live television transmission via the Internet seems to bear out that assessment. The Internet is well designed for asynchronous video transmission, however, and it is heavily utilized for that purpose. In 2011 video and music transfer accounted for 60 percent of peak period downstream Internet traffic (Bazilian, 2011). Netflix alone accounted for 33 percent of peak period North American downstream bandwidth use (Sandvine, 2012, p. 7). Judging from the profusion of video traffic, low prices for video transport, and low consumer prices for broadband access, it is apparent that on-demand video transmission is relatively cost-efficient.9To the consumer’s benefit, cost-efficient delivery implies low consumer prices for video programming as well as broadband access, and thus competitiveness with offline media. As the Internet’s bandwidth capacity has risen, delivery costs have also fallen rapidly.
• Interactivity and computer functionality: For video distribution, perhaps the most remarkable advantage of Internet architecture over offline media is its sophisticated computer-to-computer communications. Consumers have direct control over program selection and time of viewing. MVPDs have long used limited two-way interactivity for VOD systems, which have become progressively more efficient. DVRs have also enabled time-shifting control, but computer-to-computer Internet communication is much more flexible. For example, content providers, rather than the MVPDs alone, can create their own user interfaces and innovative advertising systems.
Interactivity and search are also essential to asynchronous management of the ‘long tail’ of content proliferation on YouTube and other online video services listed in Table 22.1.
Search engines and video sites’ search functions trump offline media in several ways. They enable viewers to search on a variety of dimensions, and tie massive amounts of meta-data to their content, including previous consumers’ ratings and correlations of viewer habits. Through the use of user IDs or cookies, they also record consumers’ previous choices and can then build suggestion profiles customized to each user.10Online interactivity also enables cheap user participation in content creation and distribution. The closest offline substitutes for YouTube and other video sharing sites are clumsy and little-used cable TV local access channels.
• Portability: Laptops computers have been available since the launch of the first online video providers and have become increasingly light and efficient. Developments in the late 2000s of portable media players, smartphones, and tablets have increased the convenience of access to online video entertainment. Together with interactivity, portability has brought to practical fruition the ‘anytime, anywhere’ mantra of online video entertainment. Simultaneously, the development of apps and browser-based video platforms used by portable devices for video reception has accelerated.
• More efficient advertising: The ability of Internet content providers to target ads to individuals based on their past browsing, viewing, or purchasing behavior derives from interactivity and has generated a large economic literature that is beyond the scope of this chapter (for recent surveys, see Evans, 2009 and Anderson, 2012).
Advertiser-supported video providers such as Hulu and YouTube take advantage of targeted advertising, including strategic placement of in-program video commercials. DRM controls also make in-program commercials harder to evade. Reportedly, however, user tolerance of video commercials has been lower on the Internet, and other forms of Internet advertising, such as display ads, have proven less effective than offline display ads.
The difficulties experienced by YouTube in monetizing user-generated content with ads have been widely reported and are likely responsible for its segue into offering professionally produced content. Internet advertising is evolving rapidly, but it remains uncertain whether video entertainment providers have to date experienced a net benefit from Internet video ad targeting.• More efficient pricing and bundling: Interactivity and secure payment systems have made direct pricing of online entertainment products very efficient to manage. A great variety of alternative bundles are offered, and cookies potentially enable sellers to practice ‘dynamic’ pricing and product matching to individuals based on browsing and previous purchasing behavior. These features are common to the sale of other products marketed on the Internet, but there are particular advantages for the efficient sale of online video products.
First, efficient Internet pricing and bundling help to enable efficient VOD systems with virtually unlimited product variety. Second, the essentially zero marginal capacity costs of carrying information products have particular implications for efficient bundling and price discrimination on the Internet. Bakos and Brynjolfsson (1999, 2000) showed that due to the essentially zero marginal costs of carrying information products, large bundles of information products (such as those now offered by Netflix, Hulu Plus, and other subscription services) facilitate efficient price discrimination via large-scale value averaging. (See Choi, 2012, for a survey of the economic literature on information product bundling.)
Meanwhile, cable television and other MVPDs have developed efficient systems for direct pricing of the bundles of programming channels they offer, and they maintain increasingly large VOD systems. However, Internet video providers appear to have an advantage over MVPDs in their ability to bundle large quantities of video products, instantaneously change prices, and price their products dynamically.
• More efficient copying and sharing: The basic technology by which a computer file can be downloaded and shared with other users electronically, such as by email or via P2P file sharing, is obviously far cheaper than the alternative of buying a DVD and physically distributing it to friends, or of burning a copy to a blank DVD and sharing it. To the benefit of copyright holders, electronic sharing or DVD burning of legally distributed online videos has been greatly limited by sophisticated DRM controls, which are applied to virtually every product of significant commercial value. 17 USC. § 1201-03 of the DMCA 1998 also makes any action used to defeat DRM encryption into a crime.11
P2P video file sharing, however, has proven far less easy to control, at least in the case of movies; even a single copy of a DVD that is decrypted and illegally posted can end up spreading the movie worldwide. There is some limited statistical evidence that movie file sharing reduces legitimate sales (Waldfogel, 2012). Engineering studies also document high volumes of illegal movie file transfers worldwide (e.g., Mateus and Peha, 2011), and it seems likely that this activity has contributed to a steady decline in DVD sales and rentals that began in about 2005.
Television, on the other hand, does not appear much affected by file sharing. Incentives to pirate most popular TV shows are probably limited because they are already ‘free’ on broadcast, basic cable, or online video streaming, or they are priced cheaply by iTunes and other a la carte program sellers.
In summary, Internet technology for video distribution offers some remarkable improvements upon offline media, but also creates threats to copyright owners and potential bandwidth-capacity challenges. The rapid growth of the industry since about 2005 is testimony to its consumer value, but it has a long way to travel to play as significant a role in the market as offline video distribution.
22.4