INDUSTRY DEVELOPMENT

The history of online video entertainment reflects vibrant industry responses to continu­ously unfolding opportunities that developing technologies, especially in transmission speeds, have made possible.²

In the mid- to late 1990s, before the broadband era, a flurry of now mostly defunct Internet content providers (e.g., Icebox.com, Entertaindom.com, Ifilms.com, Atomfilms.

The dot-com bust in 2000-2001 swept away most of the early experimenters. The sub­sequent recovery in the early 2000s and the promising dawn of mainstream household broadband adoption marked a new phase in online video entertainment. In 2002, a con­sortium of five major Hollywood studios started Movielink.com,³ which offered a selec­tion of recent movies for download or rental. With less fanfare, iTunes began offering recent TV series episodes in 2005 and, soon after, movies for direct sale. The development of secure digital rights management (DRM) encryption systems for Internet Protocol (IP)-delivered commercial video enabled the debuts of Movielink, iTunes’s video library, and other later entrants.

A phenomenal and enduring response to YouTube’s launch in 2005 marked another major technological breakthrough: the seamless uploading of user-generated video. Amid a growing ocean of amateur content on YouTube, users were soon posting full episodes of recent major network series illegally. After an initial period of tolerance, the networks and program suppliers issued ‘takedown’ orders under the 1998 Digital Millennium Copyright Act (DMCA) (see 17 USC. § 512(c)), and were largely successful. With accelerating broadband diffusion and network speed advances enabling seam­less video streaming, professionally produced online video distribution began to take off. Netflix launched its ‘instant streaming’ subscription video service in 2007, relying mostly on older movies and TV programs. In 2008, NBC and Fox (later joined by ABC) launched Hulu.com, and in 2009, CBS started TV.com (later CBS Interactive), prima­rily as outlets for time-delayed, ad-supported exhibition of regular prime time series programs.

Since 2009, entry into online video entertainment has proliferated, with subscription or video on demand (VOD) services developed by Amazon, Sony, and others, or pur­chased and relaunched, like Wal-Mart’s 2010 acquisition of VUDU.com. Several cable operators and other multi-channel video program distributors (MVPDs) also launched ‘TV Everywhere,’ an umbrella concept for services that give offline subscribers free access to a menu of online programming they already receive with their monthly subscription. YouTube made a move toward the top-down professional production model with the financing of 100 ‘channels’ of niche programming in late 2011 (Bond and Szalai, 2011). Though begun experimentally at an early date, multi-cast streaming of live television programming over the Internet has also become increasingly viable as network capacity has expanded, as evidenced by the ESPN3's streaming of specialized sports events after 2007, and the first streaming of the Super Bowl by NBC in 2012.

By the 2010s, the online video industry had transitioned from experimentation to a more stable group of players. The state of the industry as of 2014 is summarized in Table 22.1. The list of providers is not intended to be comprehensive. Rather, it is a snap­shot of a specific point in ‘Internet time’ intended to illustrate the variety of revenue and content models offered by leading industry players.⁴

Notable from the ‘launch date’ column of Table 22.1 is how new the online video entertainment industry is at the time of writing; no significant players in the current market were present before 2005. Sobering comparisons between the usage and the eco­nomic resources of online video and offline television also reflect its novelty. According to Nielsen (2012), the average individual in 2011 watched almost 34 hours of television per week, compared to 30 minutes of ‘watching video on the Internet’ and eight minutes ‘watching video on a mobile phone’, a ratio of offline to online viewing of about 53 to 1.⁵ One industry analyst estimated that about 5 percent of all prime time TV program viewing in the USA in 2010 was online (Convergence Consulting Group, 2012), and another that 8 percent of all US TV viewing was online in that year (Screen Digest, 2011a, p. 210), but these percentages have surely risen since these estimates, and will continue rising in the future.

Online video entertainment revenues are also low but growing. Waterman et al. (2012, p. 15) estimated that online television program revenues from advertising, subscriptions, and VOD accounted for less than 2 percent of television industry revenues in 2010. Though still exceeded by theaters, DVD/Blu-ray, and license fees from offline televi­sion, revenue from online distribution of movies has grown steadily since the mid-2000s,

Table 22.1 Some major players in the US online video entertainment industry, 2014

Note: a.

reportedly accounting for over 7 percent of studio domestic market revenues in 2011 (SNL Kagan Research, 2012a, p. 2).

Table 22.1 also highlights the development of five basic online video business models: a la carte rentals and purchases, or VOD; subscription; ad-supported professional content; ad- supported user-generated content; and MVPD subscription-dependent, bundled content.

In the first four of these segments, a leading or dominant firm has emerged. With 63 percent of the total online movie downloads in the first half of 2011 (Screen Digest, 2011b, p. 294), iTunes is the leader in the VOD category. In the monthly subscription category, Netflix dominates. The bandwidth demands of its 25 million subscribers as of July of 2012 were 18 times greater than those of Amazon, its main apparent com­petitor (Sandvine, 2012, pp. 20-21). In the ad-supported professional content category, Hulu.com is the leading firm, earning the fourth highest comScore ranking for ‘total ad minutes viewed’ during December 2012 (comScore, 2013).⁶ In the ad-supported user­generated segment, YouTube has dominated since its launch, accounting for 33.7 percent of all video ‘minutes per viewer’ recorded by comScore in December 2012, with its com­petitors (e.g., Vimeo and the French website Dailymotion) struggling to achieve even consumer awareness.

In the MVPD subscription-dependent offline/online bundling category, competition is at the local market level, and except for direct broadcast satellite (DBS)-based serv­ices, the mix of competitors varies by market. No information about the performance of these nascent services was available, but it is notable that the websites of many major cable networks, such as HBO GO, also require users to authenticate an offline subscrip­tion to a participating MVPD. An emerging new category, however, is subscription services based on individual cable or broadcast networks, or aggregations of such net­works, independently of an MVPD subscription. HBO, for example, made its streaming package of movies and exclusive series programming available as a standalone service in April, 2015, labelling it HBO Now. Around the same time, Sling TV began offering an aggregation of over 20 cable channels, including ESPN, without any MVPD authentica­tion requirement.

In the following sections, we explore the economic basis for the industry as it has devel­oped thus far. Unsurprisingly, there has been relatively little economic research about the online video entertainment industry itself. We rely primarily on descriptive information we have assembled for this chapter.

22.3